Gladstone Capital (GLAD) - 2019 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Total interest income declined by $600,000 or 5.5% from the prior quarter, primarily due to a 30 basis point decline in average yield on the investment portfolio and non-earning and restructured investments [19] - Total investment income rose by $600,000 or 5.1% to $12.5 million for the quarter [20] - Net investment income was $6 million or $0.21 per share, covering 100% of shareholder distribution [21] - Net assets rose by $7.5 million since the prior quarter end, with net realized and unrealized portfolio appreciation of $3.3 million [22] - Net asset value per share increased by $0.13 to $8.11 as of March 31 [23] Business Line Data and Key Metrics Changes - Originations for the quarter were down, typical for the first calendar quarter, with one small syndicated investment of $3.3 million closed [9] - Exits and repayments were elevated at $49 million, including a $2.1 million realized gain from the sale of United Flexible [10] - The asset mix shifted slightly, with senior secured assets dropping 5% to 49% of the investment portfolio at fair value, while second-lien investments rose to 38% [14] Market Data and Key Metrics Changes - The company noted a decline in average yield due to a mix shift with older assets rolling off and newer assets being less effective in driving yield [32] - The energy portfolio was consolidated, reducing net energy exposure while supporting the growth of the combined entity [36] Company Strategy and Development Direction - The company is focused on reinvesting payments from the previous quarter into lower middle market businesses, positioning itself for growth in the fiscal year ending September 30, 2019 [26] - The company remains committed to paying cash dividends, with a declared monthly distribution of $0.07 per common share for April, May, and June [27] - The company sees improved positioning in private businesses and aims to support ongoing commitments to cash distributions to shareholders [28] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the near-term outlook, expecting higher average investment balances and core net interest income due to recent investments and a current investment backlog [17] - The management team is monitoring potential spikes in prepayment activity as borrowers consider selling amid elevated market valuations [18] - Management remains positive about the outlook for LWO, despite challenges, and is working with the management team to address operational issues [40] Other Important Information - The company completed the restructuring of its senior secured position in LWO Acquisition, converting $9.7 million of exposure to a success-based fee term loan [16] - The company has approximately $74 million of availability under its line of credit, with leverage increasing to approximately 85% post quarter-end [24] Q&A Session Summary Question: Decline in portfolio's average yield - Management clarified that the yield is based on actual LIBOR rates and noted a slight change in aggregate yield due to older assets rolling off and non-earning assets affecting the average yield [31][32] Question: Catalyst for Impact! and WadeCo merger - The merger was driven by efficiency and scale, as both companies were in the chemical distribution business and owned by the same sponsor, aiming to support growth in a competitive market [33][34] Question: Outlook for LWO given valuation decline - Management believes the sector continues to grow, and they are working with the management team to address operational issues, maintaining a positive outlook despite challenges [39][40] Question: Impact of Chinese tariffs on Meridian - Management indicated that the tariffs were a temporary issue, and with adjustments made, they expect Meridian to return to accrual status soon [46][50] Question: New Trident's nonaccrual status - Management explained that New Trident was being marketed for sale, and once it became clear that a sale was unlikely, the decision was made to proceed with bankruptcy and restructuring [54][55]