Q2 2024 Gladstone Capital Corp Earnings Call
Operator: Greetings and welcome to the Gladstone Capital Corporation Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Gladstone, Chief Executive Officer. Thank you, sir. You may begin.
Greetings and welcome to the Gladstone Capital Corporation's second quarter earnings Conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr. David Gladstone Chief Executive Officer. Thank you Sir you may begin.
David John Gladstone: Thank you, LaTanya. That was a nice introduction, and hello everybody. This is David Gladstone, Chairman, and this is the earnings conference call for Gladstone Capital for the quarter ending March 31st, 2024. Thank you all for calling in. We're always happy to talk with our shareholders and analysts and welcome the opportunity to provide updates to the company. I hope we have some good questions today, but we're going to start off first with our general counsel, Michael LiCalsi. And he's going to make a few statements regarding forward-looking statements.
David John Gladstone: Thank you Latanya and that was a nice introduction and Hello, everybody.
David John Gladstone: This is David Gladstone Chairman and this is the earnings conference call for Gladstone capital for the quarter ending March 31st 2024. Thank you all for calling in we're always happy to talk with our shareholders and analysts and welcome the opportunity to provide.
David John Gladstone: Dates to the company I hope we have some good questions today, but we're gonna start off first with our general counsel Michael of calcium.
David John Gladstone: He's going to make a few statements regarding forward looking statements Michael Thanks, David Good morning, everybody. Today's report May include forward looking statements under the Securities Act of $19 33, and the Securities Exchange Act of 1934, including those regarding our future performance. These forward looking statements involve certain risks and uncertainties that are based on our current plan.
Michael Bernard LiCalsi: Thanks, David. Good morning, everybody.
Michael Bernard LiCalsi: Today's report may include forward-looking statements under the Securities Act of 1933 and the Securities Exchange Act of 1934, including those regarding our future performance. Now, these forward-looking statements involve certain risks and uncertainties that are based on our current plans, which we believe to be reasonable. Many factors may cause our actual results to be materially different from any future results expressed or implied by these forward-looking statements, including all risk factors in our Forms 10-Q, 10-K, and other documents that we file with the SEC.
Speaker Change: <unk>, which we believe to be reasonable I think factors may cause our actual results to be materially different from any future results expressed or implied by these forward looking statements, including all risk factors in our forms 10-Q, 10-K, and other documents that we filed with the SEC, saying you can find them on our investors page of our website.
Speaker Change: Stone capital Dotcom and while you're on there you can also sign up for our email notification service you can also find the documents on the Sec's website, which is www dot FCC that G O V.
Michael Bernard LiCalsi: And you can find them on our Investors page of our website, gladstonecapital.com. And while you're on there, you could also sign up for our email notification service. You can also find the documents on the SEC's website, which is www.sec.gov. However, we undertake no obligation to publicly update or revise any of these forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Now, today's call is simply an overview of our results, so we ask that you review our press release and Form 10-Q, both issued yesterday, for more detailed information. Again, you can find them on the Investors page of our website. With that, I'll turn the call over to Gladstone Capital's President, Bob Marcotte. Thank you.
Speaker Change: We undertake no obligation to publicly update or revise any of these forward looking statements whether as a result of new information future events or otherwise except as required by law that today's call is simply an overview of our results. So we ask that you review our press release and Form 10-Q, both issued yesterday for more detailed information.
Speaker Change: Again, you can find them on the investors page of our website with that I'll turn the call over to Gladstone Capital's President Bob Marcotte.
Robert L. Marcotte: Thank you, Michael. Good morning, and thank you all for dialing in this morning.
Robert L. Marcotte: Thank you Michael Good morning, and thank you all for dialing in this morning I'll cover the highlights for last quarter before turning the call over to Nicole to review the details of our financial results for the period.
Robert L. Marcotte: I'll cover the highlights for the last quarter before turning the call over to Nicole to review the details of our financial results for the period. So, beginning with our last quarter results. Fundings last quarter were modest at $45 million given the traditionally slow first quarter and limited new deal buyout activity in the market. And like recent quarters, about two-thirds of the funding were add-ons to the existing portfolio investments. Prepayments and amortization totaled $15 million, so net originations were $30 million for the period.
Robert L. Marcotte: SOFR rates were unchanged, so the weighted average yield on our investment portfolio was largely unchanged at 14%. However, average earning assets for the period rose 3.5%, resulting in a 3% increase in our total interest income to $23.7 million for the quarter. However, the combination of increased interest costs from higher average bank borrowings and an increase in non-earning assets offset the increase in earning assets, and net interest was unchanged at $17.5 million for the quarter. Management fees rose to $5.7 million in the absence of new deal advisory fee credits, and net investment income declined by 9.7% to $10.8 million.
Robert L. Marcotte: So beginning with our last quarter results fundings last quarter were modest at 45 million given the traditionally slow first quarter and limited new deal buyout activity in the market and like recent quarters about two thirds of the fundings were add ons to the existing portfolio investments.
Robert L. Marcotte: Prepayments and amortization totaled $15 million, so net originations were $30 million for the period.
Robert L. Marcotte: Sofa rates were unchanged. So the weighted average yield on our investment portfolio was largely unchanged at 14%. However average earning assets for the period rose three 5%, resulting in a 3% increase in our total interest income to $23 7 million for the quarter.
Robert L. Marcotte: The combination of increased interest costs from higher average bank borrowings and an increase in non earning assets offset the increase in earning assets and net interest was unchanged at $17 5 million for the quarter.
Robert L. Marcotte: Management fees rose five to $5 7 million in the absence of new deal advisory fee credits and net investment income declined by nine 7% to $10 8 million. However, net realized gains rose to $2 2 million and the combination totaled $29 eight.
Robert L. Marcotte: However, net realized gains rose to $2.2 million, and the combination totaled $0.298 per share, or 120% of dividends for the period. In the aggregate, net realized and unrealized gains on the portfolio totaled $12.9 million, which lifted our ROE for the quarter to 22.3% and 17% for the last 12 months. With respect to the portfolio, our portfolio continues to perform well, with senior debt representing 71% of the portfolio, and we ended the quarter with two non-earning debt investments, which represent $20.4 million at cost, or 1.8% of assets at fair value.
Robert L. Marcotte: <unk> per share or 100, 120% of dividends for the period.
Robert L. Marcotte: In the aggregate net realized and unrealized gains on the portfolio totaled $12 9 million, which lifted our ROE for the quarter to 22, 3% and 17% for the last 12 months.
Robert L. Marcotte: With respect to the portfolio our portfolio continues to perform well with senior debt, representing 71% of the portfolio and we ended the quarter with two non earning debt investments, which represent $24 million at cost or one 8% of assets at fair value.
Robert L. Marcotte: Depreciation for the quarter of $12 9 million was led by depreciation of five equity positions driven by strong underlying operating performance or preferred share liquidation preference a mouse and a $1 9 million realized gain related to residual interest associated with the <unk>.
Robert L. Marcotte: Appreciation for the quarter of $12.9 million was led by the appreciation of five equity positions driven by strong underlying operating performance or preferred share liquidation preference amounts and a $1.9 million realized gain related to residual interest associated with the sale of a former investor. Regarding our near-term outlook, I'd like to leave you with a couple of comments. We continue to benefit from our incumbent position supporting growth-oriented businesses across a variety of industry sectors, and with PE sponsors facing extended investment hold periods, if they have not hired a bank or sold, they are continuing to seek ways to creatively grow and recapitalize their investments, and supporting these performing businesses we know well is a low-risk way to grow our assets.
Robert L. Marcotte: All of a former investment.
Robert L. Marcotte: Regarding our near term outlook I'd like to leave you a couple of comments, we continue to benefit from our incumbent position supporting growth oriented businesses across a variety of industry sectors and with PE sponsors facing extended investment hold periods. If they have not hired a banker to sell they are continuing to see.
Robert L. Marcotte: Ways to creatively grow and recapitalize their investments and supporting these performing businesses, we know well as a low risk way to grow our assets.
Robert L. Marcotte: The syndicated loan market for larger, well-established credits improved significantly last quarter, which has led to some spread compression for these companies, which we expect will trigger an uptick in prepayment activity for some of our larger positions over the balance of the year. We ended the quarter with a conservative leverage position at just below 89% of NAV and ample availability under our bank credit facility. So we're well positioned to grow our earning assets and fee income to continue to support our shareholder distributions in the coming year. And now I'd like to turn the call over to Nicole Schaltenbrand, the CFO of Gladstone Capital, to provide some more details regarding the fund's financial performance for the quarter.
Robert L. Marcotte: The syndicated loan market for larger well established credits improved significantly last quarter, which has led to some spread compression for these companies, which we expect will trigger an uptick in prepayment activity for some of our larger positions over the balance of the year.
Robert L. Marcotte: We ended the quarter with conservative leverage position at just below 89% of NAV and ample availability under our bank credit facility. So we're well positioned to grow our earning assets and fee income to continue to support our shareholder distributions in the coming years now.
Robert L. Marcotte: And now I would like to turn the call over to Nicole shelter Brown, the CFO of Gladstone capital to provide some more details regarding the fund's financial performance for the quarter.
Nicole Schaltenbrand: Thanks, Bob. Good morning, everyone. During the March quarter, total interest income rose 700,000, or 3%, to $23.7 million, with an increase in average earning assets. However, the weighted average yield on our interest-bearing portfolio was largely unchanged at 14%. The investment portfolio weighted average balance increased to $680 million, which was up $23 million, or 3.5%, compared to the prior quarter. Other income was $300,000, and total investment income rose $800,000, or 3.3%, to $24 million for the quarter. Total expenses rose by $1.9 million, as net management fees rose $1 million with lower new deal closing and advisory fee credits and a $700,000 increase in interest expenses from higher bank borrowing.
Nicole Schaltenbrand: Bob Good morning, everyone. During the March quarter total interest income rose 700000, or 3% to $23 7 million with the increase in average earning assets and.
Nicole Schaltenbrand: The weighted average yield on our interest bearing portfolio was largely unchanged at 14.
Nicole Schaltenbrand: The investment portfolio weighted average balance increased to 680 million, which is up 23 million or three 5% compared to the prior question.
Nicole Schaltenbrand: Other income was 300000 in total investment income rose 800000, or three 3% to 24 million for the acquired.
Nicole Schaltenbrand: Total expenses rose by $1 9 million as net management fees Rose 1 million with lower new deal closing and advisory fee credits and a 700000 dollar increase in interest expenses from higher bank borrowings.
Nicole Schaltenbrand: Net investment income for the quarter was $10.8 million, which was a decline of $1.2 million compared to the prior quarter, or $0.2475 per share. The net increase in net assets resulting from operations was $23.6 million, or $0.54 per share, for the quarter ended March 31st, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier. Moving over to the balance sheet, as of March 31st, total assets rose to $812 million, consisting of $792 million in investments at fair value and $20 million in cash and other assets.
Nicole Schaltenbrand: Net investment income for the quarter was $10 8 million, which was a decline of $1 2 million compared to the prior quarter or $24 seven five cents per share.
Nicole Schaltenbrand: Net increase in net assets, resulting from operations was $23 6 million or 54 cents per share for the quarter ended March 31st as impacted by the realized and unrealized valuation depreciation covered by Bob earlier.
Nicole Schaltenbrand: Moving over to the balance sheet as of March 31, total assets rose to 812 million consisting of 792 million in investments at fair value and $20 million in cash and other assets.
Nicole Schaltenbrand: Liabilities rose with net originations to $380 million as of March 31st and consisted primarily of $254 million in senior notes, and as of the end of the quarter, advances under our $244 million credit facility were $117 million. As of March 31st, net assets rose to $431 million from the prior quarter end due to investment appreciation.
Nicole Schaltenbrand: I abilities or EIS isn't that originations of 380 million as of March 31 consisted primarily of 254, 9% senior notes.
Nicole Schaltenbrand: And as of the end of the quarter advances under our $244 million credit facility, where $117 million.
Nicole Schaltenbrand: As of March 31st net assets rose to $431 million from the prior quarter end with investment appreciation.
Nicole Schaltenbrand: NAV rose 3% from $9.61 per share as of December 31st to $9.90 per share as of March 31st. And subsequent to March 31st, as I think most of you are aware, we executed a one-for-two reverse stock split, and our shares of Common Stock, And as a result, the approximate NAF per share is $19.80, and the ongoing monthly distribution doubled to $16.50 per share per month. Additionally, after the end of the quarter, we invested $7.3 million in a new proprietary investment, including senior debt and preferred equity.
Nicole Schaltenbrand: Nah rose, 3% from $9 51 per share as of December 31 to $9 90 per share as of March 30 cars.
Nicole Schaltenbrand: And subsequent to March 31.
Nicole Schaltenbrand: I think most of you are aware, we executed a one for two reverse stock split and our shares of common stock.
Nicole Schaltenbrand: And as a result, the approximate NAV per share is $19.80 and the ongoing monthly distributions doubled to $16.05 per share per month.
Nicole Schaltenbrand: Additionally, after the end of the quarter, we invested $7 3 million and our new proprietary investments, including senior debt and preferred equity. We also received the payoff of our second lien debt investment in giving home health, which included prepayment penalties of 900000 and in distribution on our warrant position of two and a half million dollars.
Nicole Schaltenbrand: We also received the payoff of our second lien debt investment in Giving Home Health, which included prepayment penalties of $900,000, and a distribution on our warrant position of $2.5 million. With respect to distributions, our monthly distributions to common shareholders of $0.165 per common share were announced for the months of April, May, and June, which is an annual run rate of $1.98 per share.
Nicole Schaltenbrand: We also received the payoff of our second lien debt investment in grey matter of systems, which included prepayment fees of 200000.
Nicole Schaltenbrand: With respect to distributions our monthly distributions to common shareholders of $16.05 per common share were announced for the months of April may and June which is an annual run rate of $1.98 per share. The board Lamine ended July to determine the monthly distributions to common stockholders for the following quarter.
Nicole Schaltenbrand: The board will meet in July to determine the monthly distributions to common stockholders for the following quarter. At the current distribution rate for our common stock, with the common stock price at about $21.77 per share yesterday, the distribution run rate is now producing a yield of about 9.1 percent. Now, we'll turn it back to David to conclude.
Nicole Schaltenbrand: At the current distribution rate for our common stock with the common stock price at about 21.
Nicole Schaltenbrand: 77 cents per share yesterday, the distribution run rate is now producing a yield of about nine 1%.
Nicole Schaltenbrand: And now I'll turn it back to David to conclude.
David John Gladstone: Thank you, and you did a great job, Nicole and Bob. Earnings for that quarter. Michael, you did a great job, too, in letting our stockholders know and the analysts know that they're following our company and all about our recent performance. Highlights to me would be the company continues to scale its investment portfolio and has eclipsed the $800 million last quarter, which is over 37% in the past two years, while maintaining the lower middle market focus.
David John Gladstone: Thank you and you did a great job Nicole and Bob.
David John Gladstone: Earnings for that quarter.
David John Gladstone: Michael you did a great job, two and letting our stockholders no and the analysts know that are there.
David John Gladstone: They are following our company in all about her recent performance highlights to me would be the company continues to scale its investment portfolio.
David John Gladstone: Hamper Eclipse now the 800 million last quarter, which is up over 37% in the past two years, while maintaining the lower middle market focus.
David John Gladstone: It's a different discipline than others might see, but this is a good yield for this kind of company with such a good track record. While we saw a small uptick in the non-performing assets, the investment team is on top of the situation, and otherwise, Portfolio continues to perform well, having supported significant net returns in Portfolio Appreciation again this quarter, which lifted net asset values by a share of 6.8 percent. And between the high rates and the portfolio performance, GLAAD has achieved a return on investment of about 17% for the past year, which puts the company in the top end of all the business development company peers that we compare ourselves to.
David John Gladstone: It's a different discipline then.
David John Gladstone: Others might see but this is a good yield for this kind of a company with such a good track record.
David John Gladstone: While we saw a small uptick in the nonperforming assets. The investment team is on top of the situation in the otherwise portfolio continues to perform well having supported significant net and.
David John Gladstone: In portfolio appreciation again, this quarter, which lifted net asset values.
David John Gladstone: Share of six 8%.
David John Gladstone: And between the high rates in the portfolio performance glad has achieved a return on investment of about 17% for the past year, which puts the company in the top end of the all the business development company peers that we compare ourselves to.
David John Gladstone: In summary, the company continues to be well-positioned as a portfolio company, and it's in good shape with a strong balance sheet. And I think that will support us well for further growth, and hopefully, the growth orientation will increase our dividends as well. Many of these investments are in support of mid-sized private equity funds that are looking for experienced partners to support their acquisition and growth of their businesses in which they have invested a pretty substantial amount of equity.
David John Gladstone: In summary, the company continues to be well positioned as a portfolio.
David John Gladstone: And it's in good shape and strong balance sheet.
David John Gladstone: And I think that will support us well for further growth and hopefully the growth orientation.
David John Gladstone: Increase our dividends as well.
David John Gladstone: Many of these investments are in support of midsized private equity funds that are looking for experienced partners to support their acquisition and growth of their businesses.
David John Gladstone: Which they have invested pretty substantial amount of equity. This gives us an opportunity to make an attractive interest paying loans to support our ongoing commitment to pay cash distributions to our shareholders.
David John Gladstone: This gives us an opportunity to make attractive interest-paying loans to support our ongoing commitment and to pay cash distributions to our shareholders. So now, LaToya, if you'll come on, we'll get some good questions from the people that have called in today. LaToya?
David John Gladstone: So now latoya, if you'll come on we'll.
LaToya: Get some good questions from the people that have called in today and Latoya.
LaToya: Thank you we will now conduct a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.
Operator: Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for our first question. Our first question comes from Mickey Schleien with Lattinburg. Please proceed.
Mickey Max Schleien: Formation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, while we poll for our first question.
Mickey Max Schleien: Our first question comes from Mickey <unk> with Ladenburg. Please proceed.
Mickey Max Schleien: Yes, good morning, everyone. Bob, according to LSEG, lower middle market spreads have contracted about 50 basis points over the last year, but they're still above pre-COVID levels. So when you think about the supply and demand for lower middle market capital and the health of the economy, what's your view and the outlook for loan spreads in your business?
Mickey Max Schleien: Yes, good morning, everyone.
Mickey Max Schleien: Bob According to LSE G.
Mickey Max Schleien: Lower middle market spreads have contracted about 50 basis points over the last year, but they're still above pre COVID-19 levels. So when you think about the supply and demand for lower middle market capital and the health of the economy, What's your view and the outlook for loan spreads in Europe.
Mickey Max Schleien: Business.
Bob: Good morning, Mickey I think that indication of where the spread compression is.
Robert L. Marcotte: Good morning, Mickey. I think that indication of where the credit compression is occurring coincides with what we're seeing. Obviously, that's a much lower level than what is happening in the upper middle market realm, where, frankly, you have broadly syndicated loans in the CLO market red hot and driving spreads down. That doesn't generally apply to credits where deals start at under $10 million in EBITDA. You have to remember that most of our portfolio companies start under $10 in EBITDA and grow over time, and it's only when they get to a larger scale that we see price compression.
Robert L. Marcotte: Coincides with what we're seeing obviously, that's a much lesser level than what is happening at the upper middle market.
Robert L. Marcotte: Realm, where frankly, you have broadly syndicated loans in the CLO market Red Hot and driving spreads down that doesn't generally apply to credits where a deal started under $10 million of EBITDA you have to remember that most of our portfolio companies start under 10 in each.
Robert L. Marcotte: EBITDA and grow over time, and it's only when they get to you know a larger scale that we see that price compression. So we're expecting some in the line in the range of what you're outlining but just to give you. An example, the prepayment that we just disclosed in our subsequent events.
Robert L. Marcotte: So we're expecting some in the range of what you're outlining, but just to give you an example, the prepayment that we just disclosed in our subsequent events was a very large credit that we were opportunistically invested in several years ago, and the company's EBITDA was in the range of north of $100 million, for the purpose of indicating. And when it was repriced, it was priced at levels that just didn't make sense for us, so we let that pay off. Going forward, we'll continue to focus on our market where we can think there's less competition, and the scale does not warrant the kind of price compression that you're alluding to.
Robert L. Marcotte: It was a very large credit that we were opportunistically invested in several years ago and the company's EBITDA was in the range of.
Robert L. Marcotte: North of $100 million just.
Robert L. Marcotte: Indicating purposes and when it when it repriced it priced at levels that just don't make sense for us. So we let that pay off.
Robert L. Marcotte: Going forward, we will continue to focus in our market, where we think there is enough.
Robert L. Marcotte: Competition is less and the scale.
Robert L. Marcotte: It does not warrant the kind of price compression that that you're alluding to.
Robert L. Marcotte: I appreciate that. Thanks for that explanation. Bob, I realize they're relatively small investments, but could you give us a quick update on the outlook for DKI and B&T?
Speaker Change: I appreciate that thanks, thanks for that explanation.
Speaker Change: Bob I realize they're relatively small investments, but could you give us a quick update on the outlook for PKI in BMT.
Bob: Dk I is a business that's in the.
Robert L. Marcotte: DKI is a business that's in the restoration business. It's a business that, you know, there's obviously a wide swath of players in that marketplace. We're talking about storms, fires, events like that, which obviously continue to happen fairly regularly.
Robert L. Marcotte: Our restoration type business.
Robert L. Marcotte: It's a business that.
Robert L. Marcotte: There's obviously a wide swath of players in that marketplace, we're talking about storms fires.
Robert L. Marcotte: Events like that which obviously continue to happen fairly regularly the business has been in transition I'm going from a.
Robert L. Marcotte: The business has been in transition, going from a franchise-oriented business to more of a TPA type of business. That's required the business to alter some of its marketing and retool some of its cost structure, and it's in that process. We are working with the team to try to expedite the matter, and if we can't find a way to organically grow it, there are enough players in the marketplace that we believe that there are strategic exit alternatives that we would pursue.
Robert L. Marcotte: Hum.
Robert L. Marcotte: Franchise oriented business to more of a T P. A type of business that's.
Robert L. Marcotte: Required the business to alter some of its marketing and retool some of its cost structure and it's in the it's in that process. We are.
Robert L. Marcotte: We are working with the team to try to expedite the matter and if we can't find a way to organically grow it theres enough op. There is enough players in the marketplace that we believe that there's a strategic exit alternatives that we would pursue.
Robert L. Marcotte: In the case of B&T, it's largely an engineering platform that has some unique advantages and is extremely experienced in the wireless engineering business. Unfortunately, there are only a couple of major players in that business that drive most of the revenues. It has the capability to outsource to offshore resources, which are far more cost-effective, to support some of that engineering capability.
Robert L. Marcotte: In the case of in the case of B and T.
Robert L. Marcotte: It's largely a engineering platform that has some unique advantages, it's extremely experienced and the wireless engineering business.
Robert L. Marcotte: Fortunately there is only a couple of major players in that business that drive most of the revenues. It has the capabilities to outsource to.
Robert L. Marcotte: Offshore resources, which are far more cost effective to support some of that engineering.
Robert L. Marcotte: Our capability.
Robert L. Marcotte: The problem is, in a business like that, the CAPEX cycles are very difficult to predict. When networks get upgraded, when cell sites and things get altered, when they spend money on a spectrum, it can be up and down. We are going into a new cycle of spend in the telecommunications realm. We still have some 5G spend that's going on. You have people like T-Mobile and Verizon spending on additional wireless capacity as an alternative Internet service offering. You also have a significant amount, and they do this as part of their business, of broadband money coming out of the Infrastructure Act. The administration signed it into law.
Robert L. Marcotte: The problem is in a business like that.
Robert L. Marcotte: The capex cycles are very difficult to predict.
Robert L. Marcotte: When networks get upgraded when cell sites and things get get altered.
Robert L. Marcotte: When they spend money on a spec.
Robert L. Marcotte: Spectrum, it can be up and down.
Robert L. Marcotte: We are going into a new cycle of spend.
Robert L. Marcotte: In the telecommunications realm, we still have some five G spend that's going on and you have people like T mobile and Verizon spending on additional wireless capacity as an alternative.
Robert L. Marcotte: Internet service or offering.
Robert L. Marcotte: And you also have a significant amount.
Robert L. Marcotte: And they do do this as part of their business significant amount of broadband.
Robert L. Marcotte: Money coming out of the infrastructure Act.
Robert L. Marcotte: It's taken a few years to ultimately get it aligned and get it beginning to be deployed, but I think if you look at this quarter, the amount of money per year that's going to be spent to move broadband to rural areas has increased. It's almost doubled. I think the numbers that I've seen are somewhere between $8 billion and $10 billion per year going to be spent extending broadband services more broadly across the U.S. We are beginning to see the release of those amounts, and we're hopeful that that will be part of what will lift the engineering services that B&T provides.
Robert L. Marcotte: The administration signed into law, it's taken a few years to ultimately get it aligned and get it are beginning to be deployed but I think if you look at this quarter the amount of money per year, that's going to be put to move broadband the rural markets has increased.
Mickey Max Schleien: Yeah, I understand. Thank you.
Mickey Max Schleien: It's almost doubled I think the numbers that I've seen are somewhere between eight and $10 billion per year are going to be spent extending the broadband services more broadly across the U S. So we are beginning to see the release of those amounts and we're hopeful that that will be part of what.
Mickey Max Schleien: We'll lift the engineering services that <unk> provide.
Mickey Max Schleien: Yeah, I understand. Thanks for that. That's really useful. Just a couple of housekeeping questions sort of trying to gauge the portfolio's risk. Can you give us a sense of the current average EBITDA, debt-to-EBITDA, and cash interest coverage ratios?
Speaker Change: Yes, I understand thanks for that.
Speaker Change: That's really useful just a couple of housekeeping questions sort of trying to gauge.
Speaker Change: The portfolio's risk can you give us a sense of the current average EBIT.
Speaker Change: Debt to EBITDA and cash interest coverage ratios.
Speaker Change: Uh huh.
Robert L. Marcotte: We cover the gamut, as I have alluded to in the past, in terms of overall EBITDA. EBITDA can generally start as low as $2 to $3 million and range upwards to $150 million. So an average is pretty distortive. I think a simple average there just wouldn't be reflective.
Speaker Change: We cover the gamut.
Speaker Change: I alluded to in the past in terms of overall EBITDA EBITA can generally start as low as $2 million to $3 million.
Robert L. Marcotte: And and range upwards to $150 million of EBITDA. So an average is pretty distortive.
Robert L. Marcotte: I think a simple average there just wouldn't wouldn't be reflective.
Robert L. Marcotte: Yes.
Robert L. Marcotte: The vast majority of our credits start with sub-10 million of EBITDA and grow from there. In terms of overall leverage, I think the overall leverage profile is in the roughly 4X range. I think that's consistent with where we were before.
Robert L. Marcotte: Vast majority of our credits start in sub $10 million of EBITDA.
Robert L. Marcotte: And grow and grow from there in terms of overall leverage I think the overall leverage profile is is in the roughly four X range I think that's consistent where we were before.
Robert L. Marcotte: And interestingly, there's probably a bit of a bar bill. The businesses that have grown that we've been making additional investments in and are of size tend to be slightly lower leveraged than the early stage credits where they're still in a growth mode, and they tend to have slightly higher leverage. But it's still in the range of roughly four turns of debt-to-EBITDA, and for the most part, that supports the kind of interest coverage that we typically would require. We generally have deals with at least two and, mostly, three covenants in the transactions, and most of those would require debt service coverage in the range of $110 to $120.
Robert L. Marcotte: An interesting, there's probably a bit of a barbell the businesses that have grown.
Robert L. Marcotte: That we've been making additional investments in and are of size tend to be slightly lower leverage than the earliest stage credits where.
Robert L. Marcotte: They are still in a growth mode.
Robert L. Marcotte: And they tend to have a slightly higher leverage.
Robert L. Marcotte: Got.
Robert L. Marcotte: It's it's it's still in the range of roughly four turns of debt to EBITDA.
Robert L. Marcotte: And for the most part that supports the kind of interest coverage that we typically would covenant, we generally have deals with at least two and mostly three covenants and the transactions and most of those would require debt service coverage in the range of 110 to 120.
Mickey Max Schleien: I understand. Those are all my questions. Thanks for your time this morning. Thanks for calling in. Next question-
Speaker Change: I understand those are all my questions. Thanks for your time this morning.
Speaker Change: Thanks for calling in Mckee next.
Speaker Change: Next question.
Operator: The next question comes from Sean Paul Adams with Raymond James. Please proceed.
Speaker Change: The next question comes from Sean Paul Adams with Raymond James. Please proceed.
Speaker Change: Good morning, guys.
Sean Paul Adams: Good morning, guys. Could you add a little bit more color on the new non-accrual WBXL? It looks like it's been on the books for about three years, so I'm wondering if there was any residual impact from the fires, as well as provide a little bit more color on the origination outlook for the rest of the year?
Speaker Change: To add a little bit more color on the new non accrual WP excel it looks like it's only been on the books for about three years. So so I'm wondering if there was any residual impact from the fires.
Sean Paul Adams: As far as providing a little bit more color on the origination outlook for the rest of the year.
Sean Paul Adams: XL was one of the few credits that we we have a little bit more consumer oriented exposure than I would normally expect in the portfolio.
Robert L. Marcotte: XL was one of the few credits that we have a little bit more consumer-oriented exposure than I would normally expect in the portfolio. XL, if you don't know, is a premium brand in the wetsuit market.
Robert L. Marcotte: XL.
Robert L. Marcotte: If you don't know us as a premium brand in the wet suit market.
Robert L. Marcotte: The business was.
Robert L. Marcotte: The business was doing fairly well, and we probably were a little bit more optimistic about where it stood. COVID certainly lifted the luxury and athletic activities that were going on in the marketplace, and it was fairly robust. Post-COVID, retail channels were reasonably full. However, the seasonality of those kind of offerings..., combined with just a consumer-oriented pullback was more severe. As a result, we put it on non-accrual.
Speaker Change: Doing fairly well and we probably.
Robert L. Marcotte: We're a little bit more optimistic about where it stood COVID-19 certainly lifted.
Robert L. Marcotte: The.
Robert L. Marcotte: Luxury and athletic activities that were going on in the marketplace and and it was fairly robust.
Robert L. Marcotte: Post COVID-19.
Robert L. Marcotte: Retail channels were reasonably full.
Robert L. Marcotte: The seasonality of those kind of offerings combined with.
Robert L. Marcotte: Consumer oriented pullback was more severe as a result, we put it on non accrual the company is in the <unk>.
Robert L. Marcotte: The company is in the throes of a new line launch, which is lined up and expected to occur as of the mid-summer time frame. And I can say that we are very optimistic that fall bookings are at a multiple of what they were last year. So we're positioned to restart it, but it was a little bit of a hangover situation for COVID, retail channels, consumers, and a refresh on the brand that we are working through at the moment.
Robert L. Marcotte: Throes of a a new line launch, which is lined up and expect it to occur.
Robert L. Marcotte: As of the mid summer timeframe and I can say that we are very optimistic that the fall bookings.
Robert L. Marcotte: Or at a multiple of what they were last year, so where we're positioned to restart it but it was a little bit of a hangover situation between COVID-19 retail channels consumer and a refresh on the brand that we are we are working through.
Robert L. Marcotte: Through at the moment.
Robert L. Marcotte: We have stepped in with a more significant involvement, and we've recruited external expertise to assist us in repositioning and taking advantage of the opportunity. This is a global business. It is selling to the US, and it is selling internationally.
Robert L. Marcotte: We have stepped in with a more significant.
Robert L. Marcotte: Involvement and we've recruited external expertise to assist us in <unk>.
Robert L. Marcotte: Repositioning and <unk> and taking advantage of the opportunity. This is a global business. It is selling U S is selling international and so.
Robert L. Marcotte: And so there's a lot of opportunity to get in that business, and I think we've brought in some resources to help us with that process, picking up on the originations for the back half of the year. That's the challenge for us.
Robert L. Marcotte: There's a lot of opportunity to go get in that business and I think we've brought in some resources to help us with that process.
Robert L. Marcotte: I'm picking up on the the originations for the back half of the year.
Robert L. Marcotte: You know that's that's the the challenge for US I will say that we are as I mentioned expecting an uptick in prepayment activities and we're very much focused on.
Robert L. Marcotte: I will say that we are, as I mentioned, expecting an uptick in prepayment activities, and we're very much focused on sifting through and finding good growth opportunities to redeploy that capital. I will say that once a business has grown and it's got $20, $30, $40 million of EBITDA on sales, our exposure tends to be a little higher. And so when we restart the process and bring in younger, lower middle market businesses, the initial exposures tend to be smaller, and it will take a period of time for those to grow and mature into credits of comparable size. So we are planting the seeds today.
Robert L. Marcotte: <unk>.
Robert L. Marcotte: Sifting through and finding good growth opportunities to redeploy that capital I will turn I will say that.
Robert L. Marcotte: So once the business has grown and it's got 2030 $40 million of EBITA and sells our exposure tends to be a little higher and so when we restart the yeah.
Robert L. Marcotte: The process and bring in earlier stage younger businesses in the lower middle market. The initial exposures tend to be smaller and it will take a period of time for those to grow and.
Robert L. Marcotte: And mature into credits of comparable size. So we are planting seeds today I think the deal that we referenced that.
Robert L. Marcotte: I think the deal that we referenced that has been closed is a nice transaction that is intended to be a roll-up or an add-on platform that is, interestingly, in the elevator repair business. It's a fragmented market where there are plenty of opportunities to grow. And those are the kind of situations we're currently working on to expand. So I think we will continue to see add-ons to some of the younger companies in the portfolio, and we'll continue to see opportunities at the lower end of the middle market where we will see that.
Robert L. Marcotte: It has been closed as a nice transaction that is intended to be a a.
Robert L. Marcotte: Yes.
Robert L. Marcotte: Roll up or a add on a platform that is interestingly in the.
Robert L. Marcotte: Elevator repair business.
Robert L. Marcotte: A fragmented market that there are plenty of opportunities to grow and those are the kind of situations. We're currently working on to expand so I think we will continue to see add ons to.
Robert L. Marcotte: Some of the younger companies in the portfolio and we'll continue to see opportunities at the lower end of the middle market, where we will see that.
Robert L. Marcotte: In terms of overall, I think the challenge will be to drive net growth over the course of the balance of the year, which could be $150-plus million of prepayments, plus or minus. If we can originate and stay ahead of that curve, I think that's what we're currently kind of shooting for. But it's not going to be a ton of net asset growth, given what we're expecting to be refinancing activity, because we're going to maintain our yield discipline, and we can certainly scale up, but given our cost structure and our returns, it doesn't make sense for us to do that.
Robert L. Marcotte: Comes of overall I think the challenge will be to drive that growth over the course of the balance of the year I think.
Robert L. Marcotte: Given.
Robert L. Marcotte: What could be you know a 150 plus million dollars of prepayments plus or minus.
Robert L. Marcotte: If we can originate and stay ahead of that curve I think that's a that's what we're kindly.
Robert L. Marcotte: Currently kind of shooting for.
Robert L. Marcotte: But it's not going to be a ton of net asset growth given what we're expecting to be refinancing activity, because we're going to maintain our yield discipline and we can certainly scale up but our cost structure and our returns just it doesn't make sense for us to do that.
Speaker Change: I don't know if that helps.
Speaker Change: Incredibly helpful. Thank you for the color I really appreciate it.
Sean Paul Adams: Incredibly helpful. Thank you for the color. I really appreciate it.
Speaker Change: We have another question.
Operator: We have another question,
David John Gladstone: Mr. Gladstone, there are no further questions in queue at this time. I'll turn it back to you for closing comments.
Moderator: Mr. Gladstone there are no further questions in queue at this time I will turn it back to you for closing comments.
David John Gladstone: Oh shucks, we wanted more questions. So you guys are not working very hard, so we're not getting enough questions. We want to get some more questions. We don't have a lot of problems in the portfolio, so I guess we're not gonna get many questions.
Gladstone: Oh Shucks, we wanted more questions.
David John Gladstone: So.
David John Gladstone: You guys are not working very hard so we are not getting enough questions. We want to get some more questions of course.
David John Gladstone: We don't have a lot of problems in the portfolio. So I guess, we're not going to get many questions at the end of this conference call and we thank you all for calling in.
Operator: That's the end of this conference call, and we thank you all for calling in. See you next quarter. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
Operator: See you next quarter.
Operator: Okay.
Operator: This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Operator: Okay.
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