Gladstone Investment Corporation 5.00% Notes Due 2026 (GAINN) Q1 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Gladstone Investment Corporation's First Quarter Ended June 30, 2013 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. David Gladstone. Please go ahead, sir.

All right, thank you, Denise, nice introduction. And hello and good morning to all of you out there. This is David Gladstone, Chairman, and this is the quarterly earnings conference call for shareholders and analysts of Gladstone Investment. Common stock trading symbol is GAIN, and we do have some preferred stock that trades under GAINP, and then P for preferred. Thank you all for calling in, we love these moments to talk to shareholders about the company. And I wish it was more often, but we only do it once a quarter. And we hope all of you take the opportunity to visit our website at www.gladstoneinvestment.com where you can sign up for email notices, so you can receive information about us in a timely fashion. And please remember that if you are in the Washington D.C. area, you have an open invitation to come visit us here in McLean, Virginia, it's a suburb just outside of Washington D.C. And please stop in and say hello. You'll see some of the finest people in the business. Now I'm going to read a statement about forward-looking statements. This conference call may include statements that may constitute forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 including statements with regard to the future performance of the company. These forward-looking statements inherently involve certain risk and uncertainties and other factors, even though they are based on our current plans and we believe those plans to be reasonable. Many of these forward-looking statements can be identified by the use of words such as anticipate, believes, expects, intends, will, should, may and similar expressions. There are many factors that may cause our actual results to be materially different from our future results that are expressed or implied in these forward-looking statements, including those risk factors listed under the caption Risk Factors in our 10-K and 10-Q filings and our registration statement that's filed with the Securities and Exchange Commission, all of which can be found on our website at www.gladstoneinvestment.com and all of them are also on the SEC website at www.sec.gov. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise after the date of this conference call. Please note that the past performance or market information is not guarantee of future results. With that out of the way, we can begin with Dave Dullum. He's President and a board member of the company. He'll cover a lot of ground. So Dave Dullum, go ahead.

Thanks, David, and good morning all. As you all know, Gladstone Investment provides capital for businesses that are being purchased by a management team and other equity investors. These are usually companies with annual sales between $20 million to $100 million, which is what we describe as a lower middle market. We provide subordinated debt and equity and occasionally some senior debt in these transactions. This combination does produce a mix of assets, which is the basis of our strategy for GAIN, where our debt investments provide income to pay and over time grow our dividends, while we expect the equity to appreciate and build your shareholder value. This is a bit different from other public BDCs that are predominantly debt focused, so please keep in mind that the equity portion of our assets are important to the overall value of our company. At June 30, 2013 quarter just ended, on a cost basis 74% of our assets consisted of debt investments or approximately $266 million and 26%, what's roughly $94 million in the equity securities. These, we loop to to produce the capital gains going forward. There are a number of factors that any time that could affect this ratio, which could include loan payoffs, or if we have converted a loan to equity or vice versa. In the quarter, our total interest-bearing debt portfolio had a 12.5% cash yield, which is up slightly from 12.4% in the prior quarter. Interest-bearing debt is our primary source of cash to pay our dividends. Additionally, we often have success fees as a component of our debt investments, success fees are contractually due upon a sale of a portfolio company, although the portfolio company is able to pay it already if they wish. So we recognize these success fees as income only when we receive the cash, and this is very important because even though we did not receive any success fees, we have in the past and we expect to do so in the future. So as of June, approximately 73% of our interest-bearing debt has associated success fees, which has an average contractual rate of about 3.2% per annum. Currently the success fees which is owing to us are approximately $15 million or about $0.57 per share. So we do not accrue these success fees on our balance sheet, therefore we do not take them into income but we do report on them in the written part of our report to shareholders. There is no guarantee that we will be able to collect on these success fees or actually have any control over their timing. Now while the equity securities we own are not producing current cash income on a regular basis, we do expect that equity to appreciate over time and therefore add to the shareholder value. In fact, since mid-2010, we have realized capital gains of about $30 million through the sale of our actual equity ownership or stock ownership in these various portfolio companies. Additionally, our preferred equity investments will periodically generate income through dividends. We actually recognize about $700,000 on preferred shares in December 2012 quarter and $4.1 million in the March 2013 quarter or the previous quarter. So as our portfolio builds, we seek to increase the interest and the dividend income and the dividend payout to our shareholders while our assets should appreciate through growth in the equity value of the stocks that we own. How do we go about doing this? Well, generally we obtain our investment opportunities by partnering with the management teams and of course other sponsors who attempt to purchase a business. Our ability to provide this combination of the debt and equity, as I mentioned, is in our opinion a competitive advantage and it does give the seller a high degree of comfort that the purchase will happen when dealing with us, because, again, we provide both the debt and the equity. So the deal sources that we concentrate on are what we call independent sponsors, middle market investment bankers and middle market private equity firms. So generally, these are the sources that provide these opportunities for us. In addition, we may find opportunities to provide capital directly to a business owner who is not seeking to sell the company outright but would sell a portion of the company and therefore needs and would obtain capital to grow the business through us. In terms of our activity. So for the quarter ended June 30, 2013, we actually closed on 3 new investments which was roughly a total of about $35.5 million, which includes small amount committed under a revolver and that was made up of the following: one, in April, we invested $17.7 million in the company call Jackrabbit Inc., which was a combination of debt and equity. Jackrabbit is a manufacturer of harvesting equipment for almonds and other nut crops located in the California and this was one in which we purchased with an independent sponsor. In May, we invested $8.8 million in the company call Funko, again a combination of debt and equity. Funko is a designer, importer and marketer of pop culture collectibles. This was our actually our first co-investment with our affiliate fund Gladstone Capital Corporation in which we invested on the same terms -- both funds actually invested on the same terms. In June we invested $9 million in a company called Star Seed Inc. again through a combination of debt and equity. Star Seed provide its customers with a variety of specialty seeds related products and cover crop seeds. This is also was a purchase with an independent sponsor. So these 3 investments, one, follow the profile we look forward and also would give us a really good start we believe for the fiscal year which ends March 31, 2014. Also for the quarter ended, we invested $1 million in one existing portfolio company and received $2.3 million in repayment from some of our other portfolio companies. After the quarter ends, so subsequently, we invested about $100,000 and received principal repayments of about $500,000 from a couple of our existing portfolio companies. So as a result of all of these, at the end of the quarter, we had about $360 million invested in portfolio companies at cost. We were able to maintain our dividend to stockholders, so the quarter ended of $0.05 per month per common share and our board also declared a dividend of $0.05 per month per common share for the months of July, August and September. We certainly hope to continue to make favorable dividend payouts in the foreseeable future. So just briefly turning to the portfolio for an update. In general, the majority of the portfolio companies are performing well and while we still have some challenges. So this is why our investment teams work very diligently to limit losses, increase our equity value and preserve cash flow from our portfolio companies. Our philosophy, as I said before, is to get our investments operationally sound, preserve shareholder capital versus, now our lingo, walking away from that portfolio company and/or investment when it gets difficult. So we stick with our portfolio companies. We still have work to do with a couple of our portfolio companies that are currently on non-accrual, though and generally, we believe our overall portfolio is well balanced and in pretty good shape. What's the market and the outlook right now for the types of business we invest in? Well the flow we believe for opportunities for the buyouts in our market space looks very good both in the quantity and the quality that we are seeing. One of the things that helps this is the bank financing that would be available to senior bank financing, and that's pretty well readily available currently from commercial banks. So these help to facilitate these leverage purchases. So as a result, what we're finding are opportunities again where we're able to work with companies where we're paying roughly 6 to 6.5x our multiple of what we call earnings before interest, taxes, depreciation and amortization, or EBITDA, for good companies. Now clearly with the nature of the market, we're also seeing valuations that are higher. We try to avoid these and frankly, in certain cases we have lost out to competition who are willing to pay a higher price frankly than we are able to justify. So we're very active with our marketing and deal generating activity. We recently attracted a new Managing Director to our Chicago office, which will certainly help us expand our capabilities and outreach. We're very excited about this, and we do believe that our marketing efforts are -- and the presence in the marketplace that we have will allow us to continue on this growth trend that we're starting to see. So in summary, our goal for this one, as I said, is to maximize distribution to shareholders while achieving solid growth in both the equity values and the income-producing assets in our portfolio in the slower middle market company by arena. So with that I'll turn it back over to David Gladstone.

Alright, thanks, Dave Dullum. That was a good report, we're excited about the future of this company. It's turned around and now seems to be on the right growth path, but let's hear from our CFO and Treasurer now, David Watson, on the fund's financial performance for the quarter. David Watson.

Sure, thanks. Good morning, everyone. I'll start with our debt capital activity. As I'm sure some of you are aware, we are excited to have substantially increased the size of our line of credit and to have added 2 additional lenders to the bank group. The addition of Everbank and Alostar to the existing lenders of KeyBanc and BB&T provides us with an experienced and diverse group of dedicated lenders that we look forward to working with for a long time. In all, we increased our commitment amount on our line of credit from $60 million to $105 million and we extended the maturity date approximately 6 months to April 30, 2016, or 3 years out. If it is not renewed or extended by the maturity date, all principal and interest will be due and payable on or before April 30, 2017, or 4 years out. In addition, there are 2 1-year extension options to be agreed upon by all parties, which if exercised could in effect push the facility out 6 years and all the other terms shall remain the same. So between the extension and expansion on our line of credit, we feel we are well capitalized, with over $53 million in availability alone on our line of credit today, for the rest of fiscal year to continue making successful investments for our shareholders. Turning to our balance sheet. At the end of the June quarter, we have $353 million in assets, consisting of $308 million in investments at fair value, $36 million in cash and cash equivalents and $9 million in other assets. Included in the cash and cash equivalents is $30 million of U.S. treasury securities purchased through the use of borrowed funds at quarter end to satisfy our assets diversification requirements. We had $122 million in liabilities consisting of $40 million in term preferred stock, $49 million in borrowings outstanding on our 3-year credit facility and $5 million in secured borrowings and $26 million probably the short-term loan and $2 million in other liabilities. In all, as of June 30, 2013, we had $230 million in net assets or $8.70 per share, to less than [ph] 1:1 leverage on our senior secured borrowings. Currently, we have investments at fair value of $308 million, cash of $4.1 million, $42 million in borrowings on our credit facility and $5 million in secured borrowings. So we believe we are well capitalized to grow. Moving over to the income statement. For the June quarter end, total investment income was $7.4 million versus $10.5 million in the prior quarter, while total expenses including credits were $3.4 million or just $4.7 million in the prior quarter, leaving net investment income, which is before appreciation, depreciation, gains or losses of $4 million versus $5.8 million for the prior quarter, a decrease of 31%. This was due to the $4.1 million in dividend income that we received in the prior quarter from the Galaxy recapitalizations, partially offset by the increase of $0.8 million in interest income and a $1.3 million decrease in incentive fee expense in the current quarter when compared to the prior quarter. Removing the effects of the Galaxy dividend income and related incentive fee, our net investment income is actually up over 25% quarter-over-quarter. We think it is important to take a moment to touch on significant steady growth that we've had in our portfolio and income since restarting our origination efforts in late 2010. The year-over-year growth rate since we started our origination efforts in late 2010 in the size of our weighted average interest-bearing assets has been 25.6%. The year-over-year growth rate over the same period in the amount of cash interest income recorded has been 29.9%. In addition, our weighted average yield on our interest-bearing debt investments has increased to 12.5% in the current quarter, up from 11.3% in late 2010. We believe this positive growth in debt investments alone, which resulted in quarter-over-quarter growth in the most recent quarter of interest income by 13.2%, has positioned this company well for the future. In total, our net investment income, which was $0.15 per common share, decreased 31% over the prior quarter of $0.22 per common share. As noted earlier, if one removes the other income event of the Galaxy dividend, our net investment income is up over 25% quarter-over-quarter. Let's turn to realized and unrealized changes in our assets. Realized gains and losses come from actual sales or disposals of investments. Unrealized appreciation and depreciation come from our requirement to mark our investments to fair value on our balance sheet, with a change in fair value from one period to the next recognized in our income statement. Unrealized appreciation and depreciation is a non-cash event. Regarding our realized activity, during the 3 months ended June 30 and March 31, 2013, we recorded minimal realized activity. As for our unrealized activity, the net unrealized depreciation over our entire portfolio for the quarter ended June 30, 2013, was approximately $11.4 million. This unrealized depreciation was primarily due to decreased equity valuations in several of our portfolio companies, generally resulting from decreased portfolio company performance and decreases in certain comparable locals [ph] used to estimate the fair value of our investment. Last quarter, we experienced $10.4 million in unrealized appreciation primarily from Venyu Solutions Inc., which benefited from increased financial and operational performance and market comparables and Galaxy Tool Holdings, which continues to increase its financial and operational performance. Our entire portfolio has had its fair value as a percent of cost decreased over the quarter. For the June quarter end, our entire portfolio was fair valued at 85.7% of cost, down from 87.8% of cost as of March 31, 2013, but up from March 31, 2012 where it was 84.7%. Now let's turn to net decrease, increase in net assets from operations. The term is a combination of net investment income, unrealized net appreciation or depreciation and realized gains and losses. For the June 2013 quarter end, this number was a decrease of $6.5 million or $0.25 per share versus an increase of $15.9 million or $0.60 per share in the March quarter. The quarter-over-quarter change is primarily due to net unrealized depreciation in the current quarter versus a net unrealized appreciation in the prior quarter. While we believe our overall investment portfolio is stable and continues to meet expectations, today's markets move fast and are generally volatile. Investors should expect continued volatility in the aggregate value of our portfolio. All of our portfolio companies are current in payment except for 2, which continue to remain on non-accrual. So regarding our interest rate risk, approximately 82% of our loans have variable rates, but they all have a minimum or floor in the rate charged. So with the low interest rates that we have experienced over the last several years, these floors have minimized the negative impact on our ability to make distributions. The weighted average floor on our variable rate loans is 2.7% with an average margin of 9.8%, resulting in all-in average rate of 12.5%. The remaining 18% of our loans are fixed with an average rate of approximately 12.6% With that, we look forward to maintaining our momentum and hope to continue to increase our income-generating assets to increase our recurring income and to increase distribution to our stockholders. And now I'll turn the call back over to David.

All right, thank you, David Watson. I hope each of our listeners will read our press release and also obtain a copy of our quarterly report called the 10-Q, which has been filed with the SEC, can be accessed on our website at www.gladstoneinvestment.com and also on the SEC's website. And just to note, we have our shareholders meeting coming up, so please vote your shares. It's become so hard and difficult to get people to vote, and we just need you to vote. You can vote by calling the 800 number, it's (800) 690-6903. Your broker can always help you vote your shares if you need to do that. And also for those of you who would like to vote online, you can go to www.proxyvote.com and vote your shares as well, and we would love to have any and all of you come to the shareholders meeting if you can do that. With our quarter ending June 30, the major news for the quarter is that we're very active investing in new portfolio companies, and we think the rest of the fiscal year will continue to be a good one. We have been active obviously in the debt capital marketplace where our treasurer has been able to get some very favorable lines of credit. We've expanded from $60 million to $105 million with the additions of the 2 new lenders and extended through April 2016. So we've got plenty of room under our line of credit to borrow, so we're very active obviously and looking for new deals. And what that's done for us, as David Watson, mentioned is that net investment income is up about 25%. And if we can keep going, obviously that make us a very favorable fund to invest in and I think, I hope all of you will go out and buy some shares. We are looking at still an economy that has some impact on what we do. Our economy is not growing as fast as it should. It's difficult time to invest with so many external things out in the mix. Of course oil prices, we never know which way they're going, although right now and maybe they're going in the right way. For example, our country is still very dependent on countries that don't wish us well and while we have massive oil and gas reserves in the U.S., it is taking some time to get past the government to go out and let businesses develop them. The high gas prices for cars and trucks really hurt all businesses and especially small businesses like the ones we invest in. We are deadly worried about inflation, and the decision by Congress and the President to expand the money supply will ultimately cause very serious inflation. I have always believe it's a bad idea to say we can borrow and spend our way to prosperity. It's not worked in any country that I know of. That theory has been disproven here in the U.S. and also in hundreds of other countries over the last century. The spending by the federal government is still out of control, the government can't continue to borrow and spend as much money as it does. We're now borrowing probably more than 43% of every dollar that they spend, and you just can't continue to borrow forever. The amount of money being spent on the war in Afghanistan, thanks God, is coming down. We've been told it will stop in 2014 and I just hope that's true. The terrible news is that some parts of the government want to raise taxes of all kinds and the middle class was always already paying the bulk of taxes out there anyway, and they'll just hit them again with more taxes and take more disposable income and that hurts the recovery chances that we have in this country. And I always mention every time because it's become so deadly for all of us and that is dealing with China and certain other nations. If China continues to subsidize their industries to the disadvantage of our businesses, this means our companies can't compete with them on the level playing field because they get help from their government. I wish this government that we have today would stop China from doing that kind of cheating. It's just very detrimental to so many businesses here. Stagnation in the housing industry may be coming to an end. That's what we're all hoping. We're going to hear some housing numbers here pretty soon, and I hope those are good numbers that make us all feel good about the housing industry coming back. We see the economic problems in the Eurozone area, thank goodness that most of our companies don't have sales in the Eurozone and so as a result we don't worry as much about Europe, although it always has an impact on what's going on over there. Unemployment in the U.S. is far too high. The numbers used by the government reported in the popular press really don't include those working part-time nor does it include those who are seeking full-time employment, and it doesn't include those who stop looking for work. Most realistically, we're probably in the 14%, 15% range of unemployment which is still way too high. In spite of all those things, we keep seeing some small businesses that are lean and mean and growing, as some of the small business base in U.S. today hasn't been a disaster and they continue to push forward. However, the number of new small businesses that are starting up is lowest in 20 years. So the lingering recession is having an impact on our portfolio companies like all others. And like most companies in the U.S., some of our portfolio companies have not seen increases in revenues or backlog; however, some others are seeing tremendous increases and I think you'll see over time that most small businesses will continue to grow even in an uneven economy like we have today. Our monthly distribution declared by our Board of Directors in July was $0.05 per month for July, August and September, so the run rate is $0.60. I'm hopeful that we can consent to continue to put deals on the books and look at increasing that over the period sometime in the future. And the board next meets in October to consider the dividend for October, November and December. The current distribution rate for the common stock and with the common stock price is about $7.36 yesterday. So the yield is about 8.15%. Our monthly distribution on our preferred stock is 7.125% of our term preferred stock, and it's $1.78 annually more or less and that means the stock trading at $26.25 means that that's yielding 6.78%, which is a great rate for such a solid piece of paper. So please go to the website, sign up for our email notification service. We don't send out junk mail, just news about your company. It's at www.gladstoneinvestment.com, that's the site. You can also follow us on Twitter using the name GladstoneComps, C-O-M-P-S. And you can find us on Facebook under the word, The Gladstone Companies. Again, we have our Shareholders Meeting next week. So please vote your shares. You can do so by phone, by calling (800) 690-6903 and you can also go online and vote by proxy that's at www.proxyvote.com. And for those of you who want to come to the shareholders meeting, we certainly invite you to come over and join us, and we have lots of good questions and answers going on at that time. So hopefully we see a lot of you at the Annual Shareholders' Meeting. Folks, as far as we can see the next 6 months looks pretty good for this one. I think this company has come back very nicely. The economy is not strong though. We're looking for new investments now, we hope to have some very good news for you in the future. So at this point, Denise, if you'll come on and we'll have some questions from the analysts and many of our shareholders out there.

[Operator Instructions] We have a question from Mickey Schleien from Ladenburg.

I have one high level question and then a couple on the portfolio. I was heartened to see the net investment activity in the current quarter, and I was hoping you could give us a little bit more color on what kinds of deals these 3 that you closed were? Did you partner with these sponsors to outright buy these companies? Or were they dividend recaps? Or what was the nature of the deals? And does the upsizing of the line of credit portend another strong quarter for portfolio growth coming up?

Well let's take the first part of that with David Dullum talking to you about the 3 deals that he closed. Go ahead, Dave.

Thank you. So yes, thanks for the question. Yes these fall right within the thrust of what we do and that is indeed looking to acquire these businesses. Generally, we are going to purchase them outright. And as we indicate, usually we are going to do them with someone group like in this group of independent sponsors, as they call. These are good folks that sometime find opportunities, and they need us to bring both the equity and the sub debt. So it's a great opportunity for us. So in all 3 cases, as I mentioned -- well, that's not true -- in 2 of them, they're independent sponsors. And the third one, it is a sponsor that actually had access to some capital but we still provided the majority of the equity. So that's where we really are much more competitive because we can combine that. So outright purchases of the business, we have significant equity ownership in those businesses. And again, it fits the profile that's what we keep looking for.

And Mickey, just to follow up with regard to the line of credit. By having additional equity in the company and looking much stronger, we brought in 2 new banks obviously, and that will give us a chance to ramp up. And I would say over the next 3 to 6 months, we should put that money to work and that should be very accretive to our dividend. Other questions, Mickey?

Yes, I wanted to touch base on Ginsey. Relatively new investment, I think it's only been on the books for 6 months, but you mark down the preferred shares pretty dramatically. Can you talk about that?

Well valuations are always a lot of fun. As you know, we -- these are private companies and the Bernanke bubble that came in right at the time of valuations was not helpful either. Every mark that Standard & Poor's gave us was down for the quarter, never seen that before. But looking at Ginsey, the problem there is always if you have any kind of change in the company, you get up a down draft in whatever is going on. And Dave Dullum or…

Yes, Mickey, just one point of clarification though. We actually closed that deal about a year ago, so we've actually had it for a year. And as David Gladstone suggested and as we've mentioned before, valuations are tricky quarter-to-quarter. Without going in lot of detail, we always take a look back at our trailing 12 on our portfolio companies and apply a multiple, and it's generally based on an index of the multiple that we paid for the company. So it's an ironic thing in that we do a good job I believe in the way in which we purchase companies and multiples we pay, which generally tend to be lower than the market at the time. And so when you index them, sometimes you can find an anomaly in the multiple that we have to apply for the valuation being a bit lower. And then when you do that on a look back, if you have a small -- a couple of hundred thousand dollars, as an example, in the trailing 12 EBITDA times multiple, it's going to give you a net effect that could look like a reduction in valuation. And it's not really the business doing very well, let me put it that way. So it really is more around the valuation methodology, which we feel good about, we've been doing it for many, many, many years, but it just will cause these spikes up and down in the portfolio.

Okay, I understand. And my last question is similar. You have Danco, B-Dry and Noble marked quite low but it's still on accrual status, so wanted to understand how to reconcile that?

Well the good news is, they're on accrual, right? And what that really means is that they are generating cash flow from the business to pay our interest. Each one of them has had over the years, I won't go individually. Each one of them, I'll tell you, that we continue to work each one very, very carefully and somewhat again it's a function of the debt mark that we get. As you know, we use S&P, we give them the information, they use that, and they use that relative to the market and what they're seeing for wherever they get their marks from. So again, those have been affected in part by that, Danco has had -- is one that we did have some decline in performance. I think we've mentioned at previous calls where we actually now have taken that over completely, made some changes that are important. And relative to my earlier comments on the way which we work with our business, I have very good feelings about that one at this point, good management, and we're doing all the right things. So again, nothing specific to tell you about those other than that the good news is we keep them on accrual and they're moving in the right direction.

We have a question from Daniel Furtado from Jefferies & Company.

This is actually Martin Kemnec in for Dan Furtado. I actually have one question for Dave Dullum here, if you could just speak to valuations currently. And I know in your prepared comments you noted that you guys typically look around 6 to 6.5x EBITDA. Interesting article in The Journal this morning about small cap indices and just how they're well above the general market. But maybe you could add some color in on how are you evaluating new opportunities with the kind of the rise in the small cap space and how -- specific to the private companies that are in your portfolio, how you see kind of existing valuation multiples on your portfolio, how those have been trending. And any color you can add there would be helpful.

Right. I try to do the best I can and do it without going into too much gory detail. But regarding for I think the first part of your question, how we look at in valuating deals on new deals that we're doing, we are fairly rigorous in -- I wouldn't say fairly, actually very rigorous in our approach to modeling, looking out in terms of returns that we expect and in terms of also of how we think about the cash flows of the business and we're again very conservative in that regard. So each deal as you might know is individual in terms of the multiple depending somewhat on where it in the industry and so on. But generally, we're not going to pay a price if we do not feel comfortable with, one, the current cash flow that the business will generate to obviously support the debt portion of the investment and then secondarily, the amount of leverage therefore we would apply to that particular company. And then third, and it's really important, we look at the return on the equity component as well. And so we need a good return on equity, we need a good solid current cash flow to provide the current income for the debt portion of the investment. And frankly, as you put all that together and if it comes out and says, "Hey, 6.5 is what works for that particular business on through all that analysis, we'll pay it." And if we're not competitive frankly we really are not going to stretch, we've never really done that and we try very hard not to do that. So I don't know if that helps, but it's more around the rigor of our own internal process, when we do the diligence and do the evaluation from an investment return standpoint. In regards to just generally evaluations again -- without again going into a lot of very detailed discussion, what we're seeing I think the trend generally over the last quarter or so in terms of the listed, the I'll call it bucket of multiples that we look at for the size of companies that we're in, we've seen a very slight uptick but roughly pretty stable quarter-to-quarter. So I think going forward, it's hard to predict obviously but my suspicion would be that we might see a modest move upwards in the multiples that would be applied from a valuation standpoint. But again, until we get the actual data, it's very hard to say.

And Martin, let me just piggyback on that. Because on the one hand when David Dullum is looking at it, he's looking at in terms of long-term value and what it's going to be over the longer term. When we put together our valuation models here internally, we're looking at the short term, what will it be worth over the next 30 to 60 days. And this brings up a huge confusion that goes on in the marketplace for business development companies because mutual funds and close-end funds that most people are familiar with such as the ones that perhaps Jefferies or Janney Montgomery Scott or Fidelity might offer up are generally they're buying and owning publicly traded securities, so determining the net asset value is relatively easy because the stocks are priced every day. BDCs on the other hand are close-end funds, but BDCs, like our company for example, are required by law to own mostly stocks and debt of non-public or private businesses that don't trade on the public exchange. Thus the BDC board and the management when we put our valuations together, we use the generally accepted valuation techniques for determining what the value might be over the next 30 days to 60 days in order to calculate that net asset value. But because of the imprecise nature of valuations of private securities in a BDC portfolio, the relationship of a BDC stock price to the number reported in net asset value is unfortunately always going to be imprecise. And the volatility of the stock of a BDC could close or open that gap between the price on the one hand and the net asset value on the other hand. It could be closed up or opened up at any time. And finally, the net asset value is determined only once a quarter and that number can be stale pretty soon. So buying stock in the BDC, I would encourage everybody not to put too much weight on the net asset value as compared to the price of the shares. I know people get hung up on the discount, but that's really not as relevant as some other statistics. Again, that's a long-winded way of explaining net asset values and how we value things, but just wanted to put that into the record.

Okay great, that's very helpful. And then Mr. Gladstone, maybe a follow-up question. With the move -- the recent move higher in rates here, have you seen any reaction in loan pricing from banks? I assume a lot of your own portfolio floating rate notes are still accruing interest above their LIBOR floors but maybe you can comment on new originations and the recent move we've seen in the 10-year?

Yes, we haven't seen the banks be as active in this marketplace as they were before the recession. I think the government is holding them back still with marking down their portfolio when they do something a little bit outside the normal box. There are plenty of banks that will do -- I'll say asset-based lending banks that will do revolving lines of credit and even to some extent, some term loans. And sure, they push the rate up as quick as they can on anything that's long term. Really the marketplace hasn't changed. It was amazing how Bernanke's little hint that things were going to change changed the whole marketplace all at once, and everything was up by half point and really the long-term rates haven't come down that much since then, but certainly the short term have. So as long as I think we're hooked to the short term, I think we will bounce up and down, but if we have to go to the marketplace and raise long-term debt, we've seen some companies go out and do some what they call baby bond in the BDC marketplace, and those are all over 7%. They are fixed, which is nice, but on the one hand they're -- on the other hand, they're very high rate for our business that tends to be very competitive right now. Don't know if that answers your question or not?

Yes, that's very helpful.

It is J.T. Rogers from Janney Capital Markets.

You guys already touched on this a little bit, but I wondering if you could talk about the general competitive environment both on the debt side guys coming and providing mezzanine and second lien funding and then on the equity side, when you guys are competing for a buyout.

Well, that's one for Dave Dullum. He's out there in the marketplace competing every day. Go ahead.

J.T., keep in mind when we go at a deal, first of all, we are putting both the equity and the debt together, so I can't really answer it in terms of looking at each specific tranche, let's say. Having said that, it is pretty competitive. As you know there are a fair number of options that go on all the time. We by and large are not going to be very competitive in that environment because there you truly can find the pure I'll call it private equity firm that indeed today is getting pretty good leverage by the way from the banks. We actually have seen some fairly aggressive banks in terms of the getting in some cases even up 4x leverage on EBITDA and at rates that are fairly low. So depends on what the -- how we're competing. If we're going in as I mentioned -- and we like to compete where we're really providing both the equity and the debt in the transaction. When we do that, we can be fairly competitive, but other than that, we're not going to compete directly on just pure mezzanine and we certainly are not going to compete just in the case where we do only the equity because of course we do not do that. So again, I don't know if that helps, but we pick our spots carefully and that's what we have to do.

And J.T. just on the debt side because as you know I'm running Gladstone Capital now and we do primarily debt, we are seeing banks come in and do term loans, which is new in the last year. Obviously they are not providing equity and neither do we. So we compete with them and we see the uni-tranches providers coming in, we doing some of that as well. But the competition has floated down from the senior syndicated loan marketplace, the second lien syndicated loan marketplace. Second liens now, which I equate to mezzanine, are doing about 8%, 8.5% over LIBOR and sometimes 8% over LIBOR and are for second liens. And as you probably have read the PIK toggle notes are back full blast as if we never had a recession and of course those were hurt pretty dramatically during the last recession. So, it is competitive, the debt marketplace is competitive. I don't know if that will go lower from where it is now, but it is competitive marketplace.

That's great detail, directly answered what I was trying to ask. I guess the other question, I guess you guys are talking about generally companies are moving in the right direction. It seems to be the one company that would -- that doesn't necessarily fall in that trend is B-Dry. We've seen for the past 3 quarters, valuation to continue to decline there. I was wondering if you could provide any more detail just specifically on that one investment.

J.T., I'll tell you real quick, one of the good news, bad news about B-Dry frankly is it's somewhat -- it's neither seasonal nor cyclical, it's a function of sort of rainfall to some degree. And we've actually frankly, just recently seen a fairly good uptick by the way in that. So again, its EBITDA will wane up and down, and when that happens obviously that does have an impact based on our valuation methodology on the equity portion of that investment, even though it's really small, but it has maintained current pay, where we continue to work on it some things that are we're doing with it that could be good. So all in all, it's in pretty decent shape. And again, I can't give you a better answer than that frankly, but I'll tell you that right now we're seeing good response in terms of demand for its products because of the rainfall situation.

[Operator Instructions]

Okay, Denise. It sounds like we're at the end of this one, and we appreciate everybody calling in. And so with that, we will close this one up and look forward to doing one tomorrow. Which one are we doing tomorrow?

REIT.

We are doing our REIT tomorrow. So hopefully those of you who like REITs will be on the call tomorrow. Thanks again for tuning in and see you next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.