Gladstone Investment Corporation
Q3 2016 Earnings Call Transcript

Published: 7 Feb 2017

[Operator:]

Good day ladies and gentlemen. Welcome to Gladstone Investment Corporation's Third Quarter Earnings ended December 31, 2016 conference call and webcast. [Operator Instructions]. I would now like to turn the call over to Mr. David Gladstone. You may begin.

[David Gladstone:]

Thank you, Chelsea, that's a nice introduction, and hello and good morning to all of you out there. This is David Gladstone and this is the quarterly earnings conference call for shareholders and for analysts of Gladstone Investment. The common stock is traded on NASDAQ under the symbol GAIN and we have some preferred stock traded under the symbols GAINO and GAINN and GAINM. We are in good shape here today and we are going to start off by thanking you all for calling in. Always happy to talk to loyal shareholders who call in for these calls and any potential callers on the call and analysts as well. We would like to give an update on the Company and its investments and I would like to give you a view of the business environments out there and we wish we could do this more often. Also, you have an invitation that if you are ever in the Washington DC area we are located just outside of Washington DC in McLean Virginia so please stop by and say hello. There's about 60 people or so here and you will see the finest people in the business. Now I would like to introduce the General Counsel and Secretary, Michael LiCalsi. Michael is also the President of Gladstone Administration which serves as the administrator to all of the Gladstone public funds and related companies. He will make a brief statement regarding forward-looking statements. Michael?

[Michael LiCalsi:]

Good morning, everyone. This conference call may include 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 Company's future performance. These forward looking statements involve certain risks and uncertainties and other factors even though they are based on our current plans which we believe to be reasonable. Many of these forward-looking statements can be identified by words such as anticipates, believes, expects, intends, will, should, may, and similar expressions. There are many factors that may cause our actual results to be materially different from any future results that are expressed or implied by these forward-looking statements, including information listed under the caption risk factors in our form 10-Q and 10K filings and in our Registration Statement that we file with the SEC. All can be found on our website, www.gladstoneinvestment.com, or the SEC's website, www.sec.gov. This Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise except as required by law. Please also note that past performance of market information is not a guarantee of any future results. Please take the opportunity to visit our website, www.gladstoneinvestment.com and sign up for our e-mail notification service. You can also find us on Facebook with keyword the Gladstone Companies and on Twitter at Gladstone Comps. The call today will be an overview of our results through December 31, 2016, so for more detailed information please read our press release issued yesterday and our Form 10-Q for the quarter ended December 31, 2016, which we also filed yesterday with the SEC. You can access the press release and 10-Q on our website, www.gladstoneinvestment.com. Now let's turn to David Dullum, President of Gladstone Investment. He will give you an update on the fund's performance and outlook.

[David Dullum:]

Thanks, Mike. I'm happy to report that we had -- Gladstone Investment -- we had a good third fiscal quarter and the nine months which ended 12/31/16 and leading to hopefully a good outlook for the fiscal year ending 3/31/17. During this period we actually increased our net asset value, or NAV, from $9.65 in the second quarter of the fiscal year to $9.82 in this third quarter, and actually year over year by $1.16 from $8.66 per share to $9.82 a share. We are pleased with that progress. And as a publicly traded business development Company, we are focused, as we all know, on the buyouts of US businesses. Usually with annual earnings, as we define it, before interest, taxes, depreciation, amortization or otherwise known as EBITDA. Generally, the range for us is somewhere between $3 million and $10 million on an annual basis of the companies we look to buy out. And we use a financial structure for funding the buyouts consisting of secured first and second lien debt, which is in combination with a direct equity investment which gives us a generally significant ownership position in the particular portfolio Company. It is this combination of this debt and equity in the individual transactions that actually produces the portfolio of assets which allows us to have a current income for the monthly distributions to our stockholders and then the potential capital gains and some other income that comes from these sales of any one particular company. It is important to just be sure we touch on how we differ from other publicly traded BDCs in that gain is not managed as a traditional credit or debt oriented BDC. You say what does that mean? We're investing in operating companies and when we make an investment in a company we generally take a significant equity position in that company and as a component of the management buyouts. This differs from most other public BDCs that are predominantly debt-only focused and generally referred to as credit oriented BDCs. For example, the current portion of equity to debt for the investments in our portfolio are approximately 28% in equity to 72% in debt at cost. Most other BDCs you'll find generally are going to be around 10% equity and 90% debt. So this is intentional on our part and as our strategy and the shareholder value proposition because we believe it's different than most other BDCs in that further; one, we want the debt portion of our investments to provide the income to pay, and over time, certainly try to grow our monthly distributions. And this is similar to other BDCs, that we are yield oriented after all. And secondly, along with the debt investments, though we want to own significant equity positions, looking for an increase in value to provide the capital gains and other income, as I mentioned, on the exit. So as we execute this strategy, these potential capital gains and this other income may then be distributed to our shareholders in the form of incremental or additional distributions. Third, a further advantage to our approach is that as a provider of the equity and the majority of the debt in any transaction we generally have flexibility in the term of the particular debt and certainly the interest rate on that debt, and if necessary, influence, if you will, over the downside protection of a particular portfolio company as time goes along. Now to continue growing we make new buyouts and as our portfolio matures we will manage the sale, or as we call it, the exit, in this portfolio consistent with our strategy. We will generally be guided by three things, one, market conditions; two, assessing the risk and return in continuing to hold an investment versus the exiting of that investment; and three, we are sensitive to preserving the portfolio of assets which does produce the income base for our monthly distributions. With these exit definitions and so on, since inception, which was 2005, we have achieved nine buyout liquidity event exits, which in the aggregate have generated about $95 million in the net realized gains and about $20 million in this other income which comes from exits, and we will touch a little more on this later on. Which is resulting in an aggregate cash-on-cash return on the exit of the equity portion of those investments of approximately 3.8 times, which has given us a total increase to our net assets of about $150 million. To this point, and as recently reported, we actually sold our investment in Behrens Manufacturing, that was this quarter, which resulted in a realized gain of $5.8 million, that's on the equity, and other income of around $900,000 and net cash proceeds of $19.2 million, which does include the repayment of our $10 million of debt investment that we made at the time and that of course comes out at par. Earlier in the year we had reported the sale of Acme Cryogenics, which actually generated a net realized gain of $18.8 million on equity and about $2.8 million of dividend income from that transaction. For the fiscal year to date, we have generated net realized gains of $24.6 million, and other income resulting from these exits of about $3.7 million. Again, the effort to have realized gains come from our investments that we make is starting to occur and we look forward to more of the same. From time to time, also, we may need to right size the capital structure in a portfolio company to allow us the flexibility we touched on earlier which will allow us to improve that company's future success. We most recently did this in October with one of our investments. One of the restructures created a realized loss. We do remain with a significant equity ownership position in that Company and a first lien loan which is current. This investment has also been recorded previously with an unrealized loss so there's been no real change or effect, if you will, on NAV as result of us doing this restructure which we do for the right reasons. The Company is doing very well now and we look forward to its future. Now we're very mindful that whenever we do sell a portfolio company that it may reduce our income producing asset base and the income is obviously very important for us to maintain the monthly distributions to stockholders. Therefore, our deal generation activities must continue to have a very high priority. To generate new investment opportunities our team calls on independent sponsors, middle-market investment bankers and other sources to create these proprietary investment opportunities. We do not depend on others to negotiate or structure our investments. So generally, our investments include partnering with the management teams and other sponsors that we might work with in the purchase of any one business. Again, our strategy of providing this financing package including the secured debt and the majority of the equity is a competitive advantage, since it gives the seller or the independent sponsor, if one is involved, and the management team a high degree of comfort that this purchase will occur, certainly from the financing perspective. We believe that our strict adherence to investment fundamentals and our thorough due diligence process have enabled us to provide shareholder returns in both our consistent regular monthly distributions as well as the incremental distributions, which we touched on, from time to time from cap gains. We continue to build a pipeline of portfolio of opportunities, and while we've made no new investments in this quarter and one earlier in the year, which was The Mountain which we reported on, we are actively reviewing and conducting due diligence on a few potential investments and hopefully one new investment, perhaps before our fiscal year end. So we are operating though in a buyout environment where the competition for new purchases is currently very high, purchase prices being paid are often contrary to our conservative value approach and expected financial returns, so we are going to stick with our approach and be successful by not hopefully making investments that we are overpaying for. Now the target for the equity portion of our investments in this regard is a minimum 2 to 3 times cash and cash return. And then our secured debt investments, which again, are primarily first lien loans, typically carry a cash yield that is in the low teens, which balances the equity portion of the investment thereby producing this blended current cash yield which supports our shareholder distribution expectations. Typically, we also have a success fee, which is attached to the debt security and generally occurs when we have a change of control, and could be paid in cash in advance from time to time by the portfolio company at its option. So our investment focus is not changed in that we generally invest in companies with consistent EBITDA, as we mentioned earlier, operating cash flow with a potential to expand, and the areas of interest for us generally are the light specialty manufacturing, specialty consumer products and services, industrial products and services and we have one or two that fall around the aerospace and energy area, although we have minimum exposure there and right now are not necessarily considering anything in that sector. Briefly, our fund activity during the quarter, December 31, 2016, we mentioned we had exited Behrens Manufacturing with a $5.8 million gain. We recognized a gain of $1.2 million related to additional earn out proceeds from our prior exit of Funko, which we still have a small participation in. And as previously reported, we did restructure one of our investments. So our goal is to continue strategically to add accretive investments and position our existing portfolio for potential exits. Thus, we hope to maximize distributions to shareholders with solid growth in both the equity and the income portion of our assets. In this regard, as our portfolio is beginning to mature and we are able to look forward to managed exits and realized capital gains, we are considering a distribution strategy to reward shareholders with additional distributions from the realized capital gains and other income, which is generated at the time, which is over and above our monthly distributions which are made from our net investment income. With that I'm going to turn this over to our Chief Financial Officer, Julia Ryan, and she will give you some more details on this financial performance.

[Julia Ryan:]

Thanks, Dave, and good morning, everyone. The funds had a strong quarter with the successful exit of Behrens, as Dave mentioned, and the generation of $5.2 million in net investment income. We also successfully amended our credit facility in November, which among other things, extended the maturity date to 2021, decreased the current interest margin to 3.15%, and while we decreased our available commitment to about $165 million, overall the changes to the credit facility increased net available borrowings to us. At the end of December we had over $486 million in assets consisting of approximately $471 million in investments at fair value, $4 million in cash and cash equivalents and about $11 million in other assets. Our liabilities at the end of the quarter consisted of $43.7 million in borrowings outstanding on our credit facility, about $139 million in term preferred stock at liquidation value and about $10 million in other liabilities, leaving $297 million in net assets. Net asset value per share was $9.82 at the end of this quarter, up $0.17 from the last quarter, which primarily resulted from net unrealized depreciation of $9 million which was slightly offset by the net realized losses of $3 million Dave mentioned earlier. The appreciation was principally due to an increase in the operating performance, such as EBITDA, of certain portfolio companies. Overall, our fair value to cost remains at over 90%. Consistent with previous quarters, we continued to use an external third-party valuation specialist to provide additional data points regarding market comparables and other information related to certain of our more significant equity investments. We plan to continue this practice and update the externally provided data on an annual basis for all of our significant equity investments. Moving over to the income statement for the December quarter, total investment income was $13.4 million compared to $11.7 million in the prior quarter. Total expenses, net of credit, were $8.2 million compared to $6.6 million in the prior quarter leaving net investment income of $5.2 million compared to $5.1 million in the prior quarter. Net investment income remained relatively flat as the increase in other income, which was both dividend income and success fees, of $1.7 million was offset by an increase in net expenses. Other income was 12% of total investment income in the current quarter as compared to less than 1% in the prior quarter. As mentioned on previous calls, we expect other income, which is primarily composed of success fees and dividend income, to remain meaningful but variable from quarter to quarter. Net expenses increased by $1.5 million in the current quarter which was primarily driven by $0.8 million increase in bad debt expense, a $0.6 million decrease in credits from the advisor and a $0.6 million increase of the incentive fee which was primarily due to the higher other income. As a result of these factors, our net investment income per share remains at $0.17 per common share in the current quarter. Consistent with previous quarters, our current period net investment income, together with undistributed net investment income from prior periods, or an amount that we refer to as the spillover, more than covered our quarterly distributions to shareholders of $18.75 per common share. Our distributions coverage ratio was more than 230% this quarter, which means that current and prior period net investment income covered our quarterly distributions by more than 230%. As of December 31, total undistributed net investment income and total undistributed net realized gains were $14.4 million or $0.47 per common share. We continue to actively manage our undistributed income and net realized gains with the ultimate goal to cover, and over time, increase distributions to our shareholders. This may take the form of incremental periodic distributions. Now let's turn to realized and unrealized changes in our assets. For the quarter ended December 31, 2016, we recognized a net realized loss of about $3 million consisting of the realized loss on the restructure of Banco, offset by realized gains from the exits of Behrens and a $1.3 million additional earn out proceeds gain from the exit of Funko which we reported in the prior year. During the previous quarter we recorded minimal realized activity. We also recorded $8.9 million of net unrealized depreciation in the current quarter which was due to the improved performance of certain portfolio companies as well as the reversal of net unrealized depreciation as a result of the access and restructures noted earlier. One portfolio company continues to remain on nonaccrual representing less than 1% of the fair value and to cost basis on our total debt investments at the end of this quarter. Our portfolio's approximate allocation between debt and equity securities was 72% to 28% at cost. Our debt portfolio is well-positioned for any interest rate increases with about 90% of our loans having variable rates with a minimum floor and the remaining 10% having fixed rates. The weighted average yield on interest-bearing debt investments remained consistent quarter over quarter at about 12.7%. This strong yield excludes success fees on our debt investments. We also do not currently have any debt securities with the non-cash paid in kind interest feature. Success fees are yield enhancements that are generally contingent upon a change of control such as an exit or sale, although there are certain circumstances when a portfolio company can elect to pay the fee earlier. We only recognize success fees on our income statement when they are earned, which generally coincides with the receipt of cash. For comparison purposes, if we had accrued these success fees as we would if it was paid in kind interest, like other BDCs do, our weighted average yield on the interest-bearing assets would approximate 14.8% due in the current quarter. As of December 31, the success fees accrued in off-balance-sheet totalled about $25 million or $0.81 per common share. There is no guarantee that we will be able to collect any or all of these success fees or have any control over the counting of collection. From a credit priority standpoint, 100% of our loans are secured with 74% having a first lien priority and the remaining 26 having a second lien priority in the capital structure of the respective portfolio companies at cost. Overall, Gladstone Investment had another quarter of strong operational performance, financing and investment exit success. We have maintained our distribution rate while remaining committed to covering our distributions with income as we have done consistently in the past. Now I will return the call to David Gladstone.

[David Gladstone:]

Thank you, Julia. Nice report, and good report from David Dullum. Good quarter. Michael, good report. During the past quarter we were able to report some great accomplishments such as the sale of the investment in Behrens for the $5.8 million. That makes up almost $25 million worth of capital gains for the nine months, and plus about $3.7 million in fees. So the Company is doing well on the equity side. We've amended our credit facility and that made us much stronger and good performance for the future and the portfolio is doing well. The net asset value increased by about 1.7% just for the quarter, but it's up almost 13% for the nine months. So we're doing something right. Additionally, we continue to look at a lot of deals, but when the marketplace is hot, as it is today, we don't like to go out and overpay for transactions. So we're still being very careful. We believe that we will have continued success going into this fourth quarter that we are in, it ends March 31, 2017. Folks, there's a lot of optimism out today; however, there's still people saying we are going to enter a recession and our Company is well-positioned to handle a potential downturn should it happen. We can handle it because of the diversification we have in the portfolio, plus the structure of our loans mostly being in first liens and being able to take possession of these companies should there be a problem. With regard to the current concerns, we like everybody else are still watching the federal reserve, or the fed as they call it, for monetary policies. While we have variable rates on most of our loans, increasing rates will not hurt us much, and anyway, they don't raise it by that much anyway. The increase is maybe 0.25%. It's more of a psychological rate rise then there is a big change, and the main reason I think the fed is pushing so hard for higher rates is because they have to find buyers for all of the money that they are printing. She's borrowing using treasury notes and T-bills, and to get people to buy the US treasuries when they are issued is -- they're just printing money so they need higher rates to get the next person to buy. So higher rates are not going to have a big impact on us. Obviously, if it gets extremely high it hurts the small business concerns that we lend to. Another concern is the volatility still in oil and gas. Low oil prices are really terrific; they benefit the consumer in many businesses. But the oil industry still is an integral part of the US economy and a loss there is a lot of pain in the economy. I know that folks in Houston feel it pretty bad down there. Fortunately we don't have a significant investment related to oil and gas companies so this Company has avoided investments there. The federal deficit is now over $19 trillion; probably going to hit $20 trillion this year with the rounds of spending that are going on. All this spending puts pressure on the fed to fund more and more of the spending that's going on by borrowing money at a fairly furious rate. Many private companies, like those which we invest in, feel there's still too much regulation around healthcare, financial services, energy, emissions and now the minimum wage. It's really hindering performance and it stops us from expanding in a lot of job growth. We all understand why big businesses move operations out of the United States and place them in Latin America, Mexico, for example, Asia, where there is less regulation and lower taxes. But midsized businesses, similar to the ones that we invest in, end up having to hire manufacturing operations outside the US in order to stay competitive. That again puts pressure on job growth here in the United States. At this point in time, there is a tremendous positive feeling for all of the midsized and small businesses. The optimism index that's measured by a number of different associations show it at all-time highs. Businesses are expecting the new administration to cut taxes, cut regulations and cut out the current healthcare insurance program for better insurance programs when they come on board. We will just have to wait and see if some or all of these expected changes will happen. I am very optimistic that there will be some good strong changes that will favor capitalism and the small business community. And for those Companies that import parts and products from Asia, there is some heartburn because some of our businesses do that of course. But you have to remember, if there is a tax, it's on all of the Companies. So those businesses that compete with other businesses here in the United States will all be suffering the same thing if there is some kind of import tax. At this point we don't have any idea what the tax may look like and how it will be applied or phased-in, so we will have to wait and see. Some of our companies buy parts and products from Asia. We have to note that this tax is not just on our companies, but across-the-board on all of the imports, so it will hit some of our companies very bad. And it may mean that our people here in the United States will have to pay more for products. It may be that lower tax rates in the US companies and the import tax on imports encouraging foreign companies to open plants here, so we may see competition that is in Asia now or in Mexico move here. That will be good for job creation but that will mean more competition from local companies. Auto manufacturing plants, many of them -- Toyota, for example, BMW, Mercedes, Honda, they are already here. In fact, I think some of them may be manufacturing more cars here than they are in their own country. In light of all of these concerns, our Company, Gladstone Investment, is continuing to be very selective. We ask lots of questions about businesses before we invest, and I think we will just keep being very conservative. The distributions, of course, in January, our Board of Directors declared our monthly distributions on our common stock at $0.0625 per common share for each of the months of January, February and March of 2017, for an annual rate of $0.75 per common share, which is consistent with prior years. And through the date of this call, we've made a 130 non-sequential monthly cash distributions to our common stockholders, and additionally have made some special distributions as well. At December 2016, we've distributed a total of $185 million or $8.11 per share to common stockholders based on the number of shares outstanding at the time of payment. Current distribution rate is very nice with the common stock moving up yesterday to about $9 a share. That means the yield is down to 8.3% and is still very high compared to lots of other alternatives out there. We also have the series B preferred stock that is trading at $25.55, came out at $25, that's about 6.6%. We have the series C preferred stock trading at $25.54. That's about 6.4% yield. And the series D is at $25.54, or about 6.1%. In summary, at this point in time this Company is clocking along at a great rate, doing a great job. And in summary, we believe that this Company is in for some attractive investments that we're going to continue our monthly distributions and hopefully incremental distributions from potential capital gains and other income. We expect this quarter to be a good one that ends on March 31, 2017. And that's our year-end as well, so hope to continue to see some strong returns. Now, Chelsea, if you'll come on, we will get some questions from the analysts out there and some of our shareholders.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Laura Engel with Stonegate Capital Partners. Your line is now open.

[Laura Engel:]

I wonder if, related to the restructuring, if you all could tell us a little bit about being Dane Co the trigger for that either the request Or it was something that you all approached them on and related to their business what gives you this confidence going forward that they are in place now and this was a successful restructuring as far as the right sizing?

[David Dullum:]

This particular investment has been in our portfolio for period of time, its one that we acquired. We were not the lead as we do nowadays, our model has changed a little over the years as you know and so we ultimately, back a few years ago had to, effectively take the business over if you will. For the right reasons we made changes to the management and the team that is in their currently we brought in just about two years ago. They're in the highly I would call it specialized machining business serving both the healthcare marketplace and also the aerospace industry and with the new team in place they made great strides in improving their overall manufacturing efficiency, getting the sort of margins necessary. So we chose to give the company opportunity given what we see is a great upside now and frankly more incentive to the management team to have more ownership than they had before. As a result of that we were able to, as I mentioned earlier, restructure it in a way where we still have a significant equity ownership but in doing that we obviously did realize a loss which I mentioned early we also had is un-realizable impact on NAV. Now we think they've got the right capital structure and looking forward we think we have a an opportunity yet to make some pretty decent returns on our equity. That's basically it. We like the team. We finished a good investment. Some of the things they are doing now with the customer base is pretty good.

[Laura Engel:]

Okay. And then I know as far as diversification being important. We talked about-- or I guess you mentioned the maturing for portfolio and it does look like the pace is speeding up a little bit for these exits, this is something we can expect to continue at this pace going forward? And then also if you could comment you mentioned maybe one company you are looking at to close on before year end. Is there anything specific as far as that addition to kind of complement your portfolio or further diversify your portfolio?

[David Dullum:]

I can't comment specifically on that. Obviously, I think the way to think of it is we are a -- we keep rolling forward and the objective as to complete growing assets at the same time. As we as I mentioned we do because of the nature of our business in the way our profile is where we are acquiring businesses and as a result of that we will exit that take a realized gains. The real way to think about this is we are now in a mode in our Company with maturity and I mentioned maturity meaning we now have a portfolio of 35 companies and another number of them have been in our portfolio from say two to five, six years. So we are managing the methodologies and the way we think about exits at the same time without eroding the asset base which is obviously important to us. So the short answer would be keep looking forward to exit as we manage and, hopefully, constructively and likewise looking to bring on new investments that's the main part of our business obviously working hard to make net new acquisitions as we can within the context of the marketplace that we operate in.

[Laura Engel:]

Right. Well great. I appreciate the responses and again congratulations on the strong operational results this quarter.

[Operator:]

Our next question comes from the line of Kyle Joseph with Jefferies. Your line is now open.

[Kyle Joseph:]

Just wanted to talk a little bit about when you guys talked to your companies how their outlook has changed may be pre- and post-election, and even a little more recent pre- and post-inauguration.

[David Dullum:]

Kyle this is Dave again. I don't think I will be honest that we feel like we are seeing much change in anything on the demand side given the nature of the companies we have. Clearly where you see conversations occurring in David Gladstone touched on it is there are some potential changes. We think some of them are potentially really good from the regulatory perspective and then thinking through impact either import taxation or otherwise. But nothing definitive so as of right now I would say this is actually is a slight uptick and that reflected itself somewhat in the performance we have seen from the portfolio companies and as a result of that the relative valuation. I'd say neutral to perhaps optimistic.

[David Gladstone:]

Kyle, what I was referring to Kyle, is the indexes that are published on optimism and I think you see this from a lots of people that are in the capitalistic side of our country. A lot of promises have been made so we're optimistic but this is like cooking a steak. We all hear the sizzle and we are waiting for the state to come now.

[Kyle Joseph:]

And then just in terms of the middle market valuations. Have they followed public market valuations or can you give us some color there?

[David Dullum:]

I think they've stayed the last really nine months a year we've seen multiples the way we think it, so let me just address it from that perspective. Good businesses that are anywhere up to $10 million in EBITDA are still getting multiples that are in the 6 times to up to some cases 8 times, 9 times and that seems to moderate slightly but not a heck of a lot. So I don't know if that follows public valuations or not I think it's around the fact that there is still significant cash capital available and demand for good quality operating businesses in the middle market. That tends to put somewhat of a bit of an artificial price value on some of these companies.

[David Gladstone:]

So the other thing, Kyle just from that perspective is we are not in the technology sector and have not been from the beginning in the technology sector is getting huge multiples. As you move down to what I will call more standard businesses or some people would call mundane businesses, you see the 6 to 9 times on some of those depending on the growth outlook. People will pay up for growth. We've been a little reluctant to do that but at the same time finding good businesses with the 6 multiple is a good way to think about us.

[Operator:]

And our next question comes from the lone of Andy Stapp with Hilliard Lyons. Your line is now open.

[Andy Stapp:]

Am I understanding correct that the real driver and the lack of new investments in the quarter with valuations being at levels that you just weren't willing to pay. Do have you any feel as to when market conditions may become more favorable?

[David Dullum:]

Yes. Andy, thanks for the question the first part is yes we certainly -- we very active in the reviewing, looking at in our lingo making in the cases of interest on deals and working through the initial phases of diligence. Yes have not been able to get there and the ones we've been looking at because the multiples have been as we mentioned. Both myself and David Gladstone have been on the higher end of where we believe the value is so that's the main driver and we certainly got a lot of availability and we have capacity, issues are not around any of that it's all a function of wanting to maintain a good quality portfolio. We have a good portfolio now and we feel good about that certainly looking forward so we want to add to it in a positive incremental way. In terms of changing, anyone can speculate I think looking out and looking at our backlog and looking at some of the things we're doing I am hopeful frankly that we will see a pickup in our activity over the next nine months. That's more around just continuing to work hard at the companies we think are going to be in a value range that work for us. I would say it is probably going to be there is a sense out there of a slight uptick in opportunities and values we would be willing to pay.

[David Gladstone:]

Andy, when optimists come forward as they are now when people are optimistic you have sellers that are willing to sell because they think it's a good time to sell. More importantly the really good managers that are working for the larger companies are willing to let go the big umbrella that's protecting them and step out and do smaller transactions like ours. So we get a double whammy we get sellers willing to sell in great management teams that are willing to lead the larger companies and go run a smaller business and make some upside projections for how much their wealth might be if they make it work right. So it's a good time right now and I would expect unless something blows up that we do not see coming out of left field I think this is a great time to be in this business.

[Andy Stapp:]

Okay. And could you provide more color on the linked quarter increase of the weighted average yield on interest-bearing investments?

[Julia Ryan:]

Andy this is Julia Ryan. I believe the yield went up from 12.5% to 12.7% that's just the results of the change of the average portfolio and the period interest rates have stayed relatively consistent.

[Andy Stapp:]

Okay. And how much would short-term interest rates after rise to pierce interest rate floors?

[Julia Ryan:]

It would not have to raise very much but from a sensitivity perspective, if that's where your question is going, it would not impact us in our net investment income significantly even if rates were to rise.

[Operator:]

Our next question comes from the line of Mickey Schleien with Ladenburg. You're line is now open.

[Mickey Schleien:]

Dave there were a lot of prepared comments. I think I heard you say that you are reluctant to sell portfolio companies because obviously you want to generate an II to support the dividend. Did I hear that correctly?

[David Dullum:]

I don't know that I said it Mickey the way you just said it. I think what I said was and I mentioned actually I think when also once you asked the question about diversity we manage a portfolio and again recognizing that we differ from the credit BDCs we are going to have a smaller universe of portfolio companies. We look very hard as we do our forecasts internally and our own projections and think about the portfolio of assets which are operating businesses and when the timing might be right to perhaps take an exit. If everything works and the management is interested in doing that. So we managed it accordingly to that. I don't know if that helps or not?

[Mickey Schleien:]

It does. I mean what I am asking is why not strike while the iron is hot. I understand and you and I have talked about the concentration of portfolio as being an issue but I am sure given the level of interest amongst the PE community to buy some could quality businesses that you are getting bids. But I think I understand what you are seeing going back to the Dane Co restructuring. I am just a little curious on understanding the actual structure, because you're carrying the debt at about 64% of cost. But it's unaccrual. So why wouldn't you take the cost down to you know the $5.7 million that you are valuing it at and call it what it is which is basically a 15% coupon.

[David Dullum:]

Well I'm not sure why we would do that, honestly. We structured it according to and working with the management team to what we thought made sense for the Company, for the carrying cost and for the upside that we have with the equity ownership so I don't think we would want to change the structure we have at this point.

[Mickey Schleien:]

And a few more valuation questions, I see that Mitchell debt was revalued upward pretty very nicely quarter to quarter. In fact at 111% of cost and that's pretty unusual even with prepayment fees. Can you help me understand how a piece of debt gets to 111% of cost and likewise with auto safety, the same sort of things happened over the last year.

[Julia Ryan:]

Sure, Mickey this is Julia Ryan. Without getting too nuanced with reporting requirement as you know some of our debt tranches have success fees attached to them. In certain instances GAAP will require us to include the success fee feature in the valuation of the debt instrument and so therefore some of these marks would reflect that concept under GAAP.

[Mickey Schleien:]

Okay so as opposed to PIC which is occurring through the income statement and reflected in the balance sheet. I get it. And Julia, did you actually give the spillover taxable income number for December 31 per share?

[Julia Ryan:]

Yes. I did not give your taxable number because our tax planning always likes a little behind as it does for everybody but the amount as of 12/31 there is $14 million of undistributed income and capital gains.

[Mickey Schleien:]

$14 million. Okay. Lastly tread is valued back at par which has been you nonaccrual for a while would that indicate that there is a possibility for that credit to be placed back on accrual in the near future?

[Julia Ryan:]

We would likely hope so. We're not quite there yet because we continue to evaluate I know policy is once they start making payments we evaluate it and evaluate whether that is sustainable. We're not quite there yet but stay tuned.

[Mickey Schleien:]

Have they started making payments?

[Julia Ryan:]

They have not.

[Mickey Schleien:]

They have not but clearly the valuation from your percent perception would indicate that is a likelihood, correct?

[Julia Ryan:]

Hopefully so.

[David Dullum:]

You never know, Mickey. We're just not going to say yes or no at this point is still up in the air.

[Operator:]

Our next question comes from David West with Davenport & Company. Your line is now open.

[David West:]

My only question that's left is to David Dullum you talked about the capacity, the availability that you had to make new loans and I know the Company doesn't like to get too close to the 1-to-1 leverage. But do you feel like you have $40 million or $50 million availability to be put on the current balance sheet.

[David Dullum:]

At least, yes, David if not more. We are in good shape there.

[Operator:]

We do have a question from the line of Mitchell Penn with Janney. Your line is now open.

[Mitchel Pennsylvania:]

Quick question, can you provide some color on the mountain? I noticed the preferreds got written down.

[David Dullum:]

Yes. So, Mitch, that is a company we acquired earlier this year actually physically in the last calendar year. We had to make some changes in the people. The company is doing well and their earnings is slightly lower than what we anticipated to do some spend that they had to make so as a result that effectively adjusted a multiple relative to EBITDA decline. But no fundamental change in the business at all or what they are about and what they are doing in effect we are doing some significant strengthening the management team which is very positive.

[Mitchel Pennsylvania:]

One other question, thinking about your strategy in a rate rising environment. You guys typically purchase the whole company and you can sort of structure the debt and the equity the way you and the company want it. The question is as rates rise are you thinking that maybe you will increase the interest rate you receive or will you leave it at a current levels on companies that you purchase in the future if you do get some significant increase in rates.

[David Dullum:]

I think it's a good question. I would answer this way. Probably not just decide to raise rates because they are rising for that sake. Another way to think of it is again as I try to stress without going into detail too much, is the relationship between the proportion of debt and the proportion of equity in any one deal. And that combination blending down to what we believe is the right current cash pay recognizing we don't take into account PIC. Which in our case, we have known, as you all know, it's all exit fees. That's how we think of it and where could potentially make some adjustment might be on the ratio between the debt and the equity and remembering that an important factor for us, in all of these deals is what we call fixed charge coverage which means that we do not want to overstress the Company from a cash flow perspective. It's more important to be able to have the Company pay our interest at a level that works for that combination of debt. So the wrong answer to your question when I would say is the mere fact that interest rates go up is not necessarily going to drive our willingness or desire to raise rates. It's got to work in combination with the right capital structure for the Company and the debt and the equity combination.

[Operator:]

[Operator Instructions]. Our next question comes from the line Mark Farchione, a private investor. Your line is now open.

[Mark Farchione:]

First of all Dave and Dave you guys did a great job and great quarter. My question is more for Julia I think. At what level do your excess profits results in a pass-through to the investors? And as far as any increase in dividend going forward, how many months would you say you would make an announcement of that type? Thank you.

[Julia Ryan:]

Mark, thanks for the question we continue to evaluate the amount that has not yet been distributed and we are working with our Board to evaluate when would be the right time to potentially make any additional distributions to our shareholders, at this point there is no definitive plan and we are working on it.

[Operator:]

[Operator Instructions]. I am not showing any further questions at this time. I would like to turn the call back over to Mr. David Gladstone for any closing remarks.

[David Gladstone:]

All right, thank you, Chelsea. And we appreciate all the questions. We enjoy it much more -- much more fun quite frankly if we get a lot of good questions and you had a lot this time that wraps it up for this quarter and we will see you next quarter and that's the end of this call.

[Operator:]

Ladies and gentlemen thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.