Gladstone Capital (US:GLAD)2020-07-30 18:05Financial Data and Key Metrics Changes - Total interest income increased by $600,000 or 5.7% to $11.6 million, primarily due to an increase in the average balance of interest-bearing investments [21] - Net investment income for the quarter was $6.1 million, a decrease of 7.1% compared to the prior quarter, or $0.195 per share [24] - Net assets from operations rose to $15 million or $0.48 per share, compared to a decrease of $27.8 million or $0.89 per share for the prior quarter [24] - NAV increased by 4% to $7.27 per share as of June 30 [10][26] Business Line Data and Key Metrics Changes - Originations for the quarter totaled $56.5 million, with net originations of $39.4 million after repayments of $17.1 million [6][7] - The portfolio yield remained unchanged at 10.9%, with the weighted average balance of interest-bearing investments increasing by $24.7 million or 6.1% to $429 million [21][22] - Non-accrual investments declined to 1.5% of the portfolio at fair value, with no payment defaults experienced [11] Market Data and Key Metrics Changes - The asset mix remained relatively unchanged, with first lien loans dropping to 47% of cost and second lien loan exposure increasing to 43% at cost [16] - The company noted that much of the unrealized appreciation was attributed to auto and energy sector exposures, despite challenges in those sectors [12][14] Company Strategy and Development Direction - The company intends to continue managing investment capacity proactively and sell existing assets to support new investments while maintaining targeted leverage levels [20] - The focus remains on lower middle market investments, with an emphasis on portfolio diversity and underwriting discipline to weather economic challenges [18][32] - The company is cautious regarding new deals due to potential lasting COVID-related financial impacts but has seen a pickup in deal activity [19] Management's Comments on Operating Environment and Future Outlook - Management expressed uncertainty about the future due to government actions related to COVID-19, making forecasting difficult [34] - The company believes it has weathered much of the previous quarter's challenges and is well-positioned for growth due to its portfolio composition and active management [18] - Management highlighted the importance of maintaining a cushion in leverage to manage portfolio-related matters effectively [44] Other Important Information - Total assets as of June 30 were $458 million, with liabilities rising to $231 million [25] - The company declared monthly distributions of $0.065 per common share for July, August, and September, resulting in an annual yield of 10.7% [28][29] - The company successfully extended the revolving period of its credit facility by six months to July 15, 2021 [27] Q&A Session Summary Question: Investment activity and pipeline - Management indicated that both recent investments pre-dated the quarter and were adjusted due to quarter activities, with a focus on low-leverage deals [38] Question: Improvement in risk ratings - The improvement in risk ratings was attributed to new deals with lower leverage and improved performance of top companies [40] Question: Leverage strategy - Management confirmed that leverage is currently around 1-to-1 and emphasized maintaining a cushion for portfolio management [42][44] Question: Appetite for issuing common equity - Management stated that issuing common equity would require attractive investment opportunities to cover marginal funding costs [46] Question: Nature of capital-seeking businesses - Management noted that many businesses seeking capital are under stress, with some looking to recapitalize existing lenders [54] Question: Correlation between business trends and bond values - Management observed a disconnect between the leveraged loan market and actual business trends, with many assets still marked below expected values [58] Question: Competition from insurance companies - Management expressed confidence in competing with larger funds, focusing on lower middle market opportunities where larger funds may not venture initially [63]