Gladstone Investment Corporation
Q1 2013 Earnings Call Transcript

Published: 30 Jul 2013

[Operator:]

Good morning and welcome to the Gladstone Investment Corporation First Quarter and Year-Ended June 30, 2013 Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Mr. David Gladstone. Please go ahead, sir.

[David Gladstone:]

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. The 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 and have an open invitation to come visit us in McLean, Virginia, it's a suburb just outside of Washington D.C. and please stop in 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 is President and a board member of the company. He will cover a lot of ground. So Dave Dullum, go ahead.

[Dave Dullum:]

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 and those produce the 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%, of what's roughly $94 million in the equity securities. These, we look to the produce the capital gains going forward. There are 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 our portfolio company, although the portfolio company is able to pay it and 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 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 fee which has an average contractual rate of about 3.2% per annum. Currently the success fees which is owing to us, there are approximately the $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 overtime and therefore add to the shareholder value. In fact, since mid-2010 we have realized capital gains of about $30 million through the sales of our actual equity ownership, our 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. All ability 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 have 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 provide capital directly to a business owner who is not seeking to sell the alright, 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

[David Gladstone:]

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

[David Watson:]

Thanks. Good morning everyone. I'll start with our debt capital activity. As I am sure, some of you are aware. We're excited to have substantially increased the size of our line of credit. It could have added two additional lenders to the bank group. The addition of Everbank and Alostar two 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 of date approximately six months to April 30, 2016, or three years out. If it is not renewed or extended by the maturity date, all conformed entrance will be due and payable on or before April 30, 2017 or four years out. In addition, there are two one-year extension options to be agreed upon all parties, which if exercised could inspect push the facility out six years and all the other terms shareholder name the same. So between the extension and expansion on our line of credit, we feel we are well capitalized with over $53 million in the availability alone on our line of credit today, but 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 US Treasury Securities purchased through the use of borrowed funds at quarter end to satisfy our assets diversification requirements. We had a $122 million in liabilities consisting of $40 million in terms preferred stock, $49 million in borrowings outstanding on our three-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, at the June 30, 2013, we had $230 million in net assets or $8.70 per share or less than one-to-one 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, $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. For moving the effects of the Galaxy dividend income and relative 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 and debt investments alone which resulted 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 events 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 turning to three 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. Net 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 used to estimate the fair value of our investment. Last quarter, we experienced $10.4 million in unrealized appreciation primarily from the Venyu Solutions Inc. which benefited from increased financial and operational performance and market comparable and Galaxy Tool Holdings which continues to increase its financial and operational performance. Our entire portfolio has had a fair value as the 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 $0.50 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 two 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 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 a 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. Now, I'll turn the call back over to David.

[David Gladstone:]

All right, thank you, David Gladstone. 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 number 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 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 addition of the two 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 this a very favorable fund to invest in and I think, I will call of you go out and buy some shares. We are looking at still on 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 are going, although right now and maybe they are going in the right way. For example, our country is still very dependent on countries that don't wish us well and all we have massive oil and gas reserves in U.S., it is taking some time to get past the government to go out and let businesses develop them. To have 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 call very serious inflation. I have always believe that's a bad idea that say we can borrow and spend our way to prosperity not work in any country that I know of. That theory has been disproving 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 are 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 that 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 any way and they will 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 that 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 is what we are hoping, we are 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. Most realistically we are probably in the 14%, 15% range of unemployment which is still way to 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, our 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 continue to put (inaudible) 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'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 at www.gladstoneinvestment.com that's the site and you can also follow us on Twitter using the name GladstoneComps, 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 is 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 six 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:]

(Operator Instructions) We have a question from Mickey Schleien from Ladenburg.

[Mickey Schleien:]

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 three that you closed were? Did you partner with these sponsors to outright buy these companies or were they dividend re-caps or what was the nature of the deals and in terms of the upsizing of the line of credit portend another strong quarter of portfolio growth coming up?

[David Gladstone:]

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

[David Dullum:]

Thank you. So yeah thanks for the question. Yeah 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. As we indicate, usually we are going to do them with someone group like in - this group of independent sponsors as they call these good folks that sometime find opportunities and they need us to bring both the equity and sub-debt. So it's a great opportunity for us. So in all three cases, as I mentioned well these are two - and two of them, they're independent sponsors. And the third one, it is a sponsor that actually has 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, that we have significant equity ownership in those businesses. And again if it's the profile that's what we keep looking for.

[David Gladstone:]

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 bought in two new banks obviously and that will give us a chance to ramp up and I would say over the next three to six months, we should put that money to work and that should be very accredited to dividend. Other questions, Mickey.

[Mickey Schleien:]

Yeah, I wanted to touch base on (inaudible), relatively new investment. I think it's only been on the books for six months but you mark down the preferred shares pretty dramatically. Can you talk about that?

[David Gladstone:]

Valuations are always a lot of fun. As you know, these are private companies and the Bernanke bubble that came in right at the time of valuations was not helpful either every marks that Standard & Poor's gave us was down quarter-over-quarter. Never seen that before, but looking at -- and 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 are --

[Dave Dullum:]

Mickey, just one point of clarification though, we actually close that deal about a year ago, so we've actually had it for a year, and as David Gladstone suggested, 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 as generally based on an index of the multiple that we paid for the company. So it's an ironic thing and that, we do a good job I believe in the way in which we purchase companies and the multiples, we pay which generally tends to be lower than the market at the time and so when you index them sometimes you can find an normally 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 $100,000 as an example in the trialing 12 EBITDA times, a multiple is 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 and we 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.

[Mickey Schleien:]

Okay. I understand and my last question is similar, you have Danco and [Noble] marked quite low but still on a accrual status, so wanted to understand how to reconcile that?

[Dave Dullum:]

Well the good news is, they are 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 marks 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 are 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 and good management, and we are doing all the right things. So again, nothing specific to tell you about those and the good news we keep them on accrual and they are moving in the right direction.

[David Gladstone:]

Next question, Denise?

[Operator:]

Sure, we have a question from Daniel Furtado from Jefferies & Company. Please go ahead, sir.

[Martin Kemnec:]

This is actually Martin Kemnec for Dan Furtado. Thanks for taking my questions. Actually I have one question for David Dullum here, if you could just speak to evaluations currently and I know in your prepared comments you noted and you guys typically look around 6 to 6.5 times EBITDA, interesting article in the journal this morning about small cap in the season and just how they are well above the general market, but maybe you could add some color in on how are you evaluating new opportunities with the kind of rise in the small cap space and how specific to the private companies that are in your portfolio, how do 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?

[Dave Dullum:]

Right. I try to do the best I can and you know, without going into too much glory details, but regarding, I think the first part of your question, how we look at in evaluating deals on new deals that we're doing. We are fairly rigorous in, I wouldn't 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 has been 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 secondary, the moral 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 you put all that together and if it comes out and says 6.5 is what works for that particular business through all that analysis, we'll pay it and for 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 know that helps, but it's more around the rigor of our own internal process, when we do the diligence and do their valuation from an investment return standpoint. In regards to just generally evaluations again without again go into a lot of very detailed discussion. What we are seeing I think the trend generally over the last quarter or so in terms of I'll call it bucket of multiples that we look at for the size of companies that we are 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 evaluation standpoint. But again, until we get the actual data it's very hard to say.

[David Hibbert Watson:]

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 are looking at the short-term what will it be worth over the next 30 days to 60 days and this brings up a huge confusion that goes on in the marketplace for business development companies because mutual funds and closed 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 are 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 closed end funds but BDC is 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 management when we put our evaluations together, we use the generally accepted valuation techniques for determining what the value might be over the next 30 days to 60 days and in order to calculate that net asset value. But because of the imprecise nature, valuations of private securities in a BDC portfolio, the relationship over BDC stock price to the number of reported 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 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.

[Martin Kemnec:]

And maybe Mr. Gladstone, maybe a follow-up question. With the recent move higher in rates here, have you seen any reaction in loan pricing from banks? You know, I assume a lot of your own portfolios 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 tenure?

[David Gladstone:]

Yeah, we haven't seen the banks to 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'd say asset-based lending banks that will do revolving lines of credit and even to some extends, some term loans. And sure they push the rate up as quickly as they can on anything that's long term. Really the marketplace hasn't changed. It was amazing how Bernanke's little hand that thanks we are going to change, change 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 and send the certainly short term have. So as long as I think we are hope to the short term, I think we will balance up and down, but if we have to go to marketplace and raise long term debt, we've seen some companies go out and do some, what they call baby bonds in the BDC marketplace and those are all over 7%. They are fixed which is nice, but on the other hand they are very higher rate for our business that tends to be very competitive right. Don't know if that answers your question or not?

[Operator:]

It is JT from Janney Capital Markets. Please go ahead.

[JT:]

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

[David Gladstone:]

Well, that's one for Dave Dullum, he is out there in the marketplace competing every day, go ahead.

[David Dullum:]

JT, 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't 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 very aggressive banks in terms of getting some cases even up four times leverage on EBITDA at rates that are fairly low. So depends on what the -- how we are competing, foregoing as I mentioned and we like to compete, 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 are 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 take our spots carefully and that is what we have to do.

[David Watson:]

Just on the debt side, because as you know I am 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 now providing equity and neither do we. So we compete with them and we see the uni-tranches providers coming in and we are doing some of that as well, but the competition has floated down from the senior indicated loan marketplace, the second lean syndicated loan marketplace. Second leans now which are equate to mezzanine are doing about 8% to 8.5% over LIBOR and sometimes 8% over LIBOR and of course second leans. And as you probably have read the tick 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.

[JT:]

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's the one company that would, that doesn't necessarily fall that trend to be dry or we've seen for the past three quarters, valuation to continue decline there. I was wondering if you could provide any more detail just specifically on that one investment.

[David Gladstone:]

JT, I'll tell you real quick, one of the good news, bad news about [BDrive] frankly is it's somewhat, it's neither seasonal or 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 it's 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:]

(Operator Instructions).

[David Gladstone:]

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

[Dave Dullum:]

REIT.

[David Gladstone:]

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.

[Operator:]

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