Q3 2025 Gladstone Capital Corp Earnings Call

Operator: Greetings and welcome to the Gladstone Capital Corporation Third Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A 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. I'd now like to turn the call over to your host, Mr. David Gladstone, Chief Executive Officer for Gladstone Capital Corporation. Thank you. You may begin.

Greetings and welcome to the Gladstone Capital Corporation, third quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A 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,

David Gladstone: Well, thank you for that nice introduction and good morning to everyone out there. This is David Gladstone, Chairman, and this is the earnings conference call for Gladstone Capital Corporation. It is a quarter ending June 30, 2025. Thank you all for calling in. We are always happy to talk to our shareholders and the analysts who follow us. We welcome the opportunity to provide updates for our company. Now, before we begin, we are going to have Katharine Girkes, our Director of Investor Relations and ESG, to provide a brief declaration regarding certain regulatory matters concerning this call. Katharine?

As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, Mr. David Gladstone. Chief executive officer for Gladstone, Capital Corporation. Thank you. You may begin.

Well, thank you for that. Nice introduction and good morning to everyone out there. This is David, Gladstone chairman and this is the earnings conference call for Gladstone capital.

and it's a quarter ending June, 30, 202025

Thank you all for calling in. We're always happy to talk to our shareholders and the analysts who follow us,

Uh, welcome, we welcome the opportunity to provide updates for our company.

Provide a brief.

Katharine Girkes: Good morning. Today's call may include forward-looking statements, which are based on management's estimates, assumptions, and projections. There are no guarantees of future performance, and actual results may differ materially from those expressed or implied in these statements due to various uncertainties, including the risk factors set forth in our SEC filings, which you can find on the investors' page of our website, gladstonecapital.com. We assume no obligation to update any of these statements unless required by law. Please visit our website for a copy of our Form 10-Q and Earnings Press Release, both issued yesterday, for more detailed information. You can also sign up for our email notification service and find information on how to contact our Investor Relations Department. We are also on X at GladstoneComp and Facebook, keyword the Gladstone Companies. Now, I will turn the call over to Gladstone Capital Corporation's President, Bob Marcotte.

Declaration regarding certain regulatory matters. Concerning this call Katherine.

Good morning, today's call may include forward-looking statements, which are based on Management's estimate assumptions and projections.

There are no guarantees of future performance and actual results May differ materially from those expressed or implied. In these statements due to various uncertainties, including the risk factors that force in our SEC filings which you can find on the investors page of our website, Gladstone capital.com.

We assume no obligation to update any of these statements unless required by law.

Please visit our website for a copy of our form, 10-Q, and earnings press release, both issued yesterday. For more detailed information,

You can also sign up for our email notification service and find information on how to contact our investor Relations Department.

We are also on X at Gladstone comps and Facebook keywords, the Gladstone companies.

Now, I will turn the call over to Gladstone capitals president. Bob Marcos

Bob Marcotte: Thank you, Katharine. Good morning, and thank you all for dialing in this morning. I will cover the highlights for the quarter and a few subsequent events and some comments on our near-term outlook for the company, beginning with our last quarter results. Fundings last quarter totaled $73 million and included two new PE-sponsored investments in the healthcare and industrial manufacturing sectors. Exits and prepayments remained elevated at $82 million as we exited two sizable investments in the aerospace and restaurant industries. Net originations were a negative $9 million for the period, as the bulk of the new deal pipeline we discussed last quarter slipped past the quarter end. Interest income for the period fell slightly to $20.9 million, largely as a result of the 5.2% decline in the average earning assets.

Thank you, Katherine. Good morning, and thank you all for dialing in. This morning, I'll cover the highlights of the quarter, a few subsequent events, and some comments on our near-term outlook for the company.

Beginning with our last quarter results, funding's last quarter, totaled, 73, million and included, 2, new PE sponsored investments in the health care and Industrial manufacturing sectors.

Exits and prepayments remain elevated at 82 million. As we exited 2 sizeable investments in the Aerospace and restaurant Industries. So net originations were a negative 9 million for the period. As the bulk of the New Deal pipeline. We discussed last quarter, flipped past the quarter end.

Bob Marcotte: However, the weighted average portfolio yield rose 20 basis points to 12.8% for the quarter, with one-time items associated with the prepayments. Interest in financing costs fell 8.8% with lower bank borrowings, while net management fees rose a half a million as incentive fee credits declined to $700,000, and net investment income was flat at $11.3 million for the period. Net realized losses were $3.6 million for the quarter, the bulk of which was related to the post-restructuring valuation of our investment in EGs, which is now a performing debt investment. One of the larger contributors to the unrealized appreciation for the quarter was our printed circuit board investment, which hit a slowdown in bookings, which we are addressing. However, on balance, the portfolio appreciation offset the decliners. For the TTM period, our ROE came in at a respectable 15.8%.

Interest income for the period fell, slightly to 20.9 million largely as a result of the 5.2% decline in the average earning assets.

However, the weighted average portfolio yield Rose 20 basis points to 12.8% for the quarter with 1-time items associated with the prepayments.

Interest in financing costs fell 8.8% with lower Bank borrowings while net management fees Rose a half a million as in centipede credits declined to 700,000 and net investment. Income was flat at 11.3 million for the period.

Net realized losses were 3.6 million for the quarter. The bulk of which was related to The Post restructuring, valuation of our investment in eegs, which is now a performing debt investment.

Bob Marcotte: With respect to the portfolio, the portfolio turnover for the period did not have a material impact on our investment mix, as new originations were predominantly first lien debt, which was maintained at 70% of the fair value of the portfolio, and total debt holdings came in at 90% of the portfolio at fair value. As of the end of the quarter, we had three non-earning debt investments with a cost basis of $28.8 million or $11.5 million or 1.7% of our debt investments at fair value. As I mentioned earlier, since the end of the quarter, we have been busy working through our deal pipeline and have closed on four new platform investments and an add-on bringing July and early August originations to $93 million. Net of the $3.8 million payoff of our last material broadly syndicated loan, net originations for July and early August were $89 million.

1 of the larger contributors to the unrealized. Appreciation for the quarter was our printed circuit board investment, which hit a Slowdown in bookings, which we are addressing. However, unbalanced the portfolio, appreciation offset the decline in. So for the TTM period, our Roe came in at a respectable 15.8%

with respect to the portfolio.

The portfolio turnover for the period. Did not have the material impact on our investment. Mix as new and originations were predominantly first lean debt which was maintained at 70% of the fair value of the portfolio. And total debt Holdings came in at 90% of the portfolio of fair value.

As of the end of the quarter, we had 3 non-blondes.

Bob Marcotte: While I am sure I will get some questions about the recent spike in investment activity in the face of the broader market conditions, our core strategy of focusing on growth-oriented lower middle market investments backed by PE sponsors is unchanged. For context, of the eight deals funded since the end of last quarter and thus far this quarter, which have totaled $159 million, 88% were first lien investments with an average closing leverage of 3 times EBITDA and an average margin over SOFR of in excess of 7%. Reflecting on our outlook for the next quarter or two, I would like to leave you with a couple of comments. The vast majority of the anticipated portfolio events are behind us, and between our remaining new deal pipeline and new investment opportunities, we anticipate a resurgence in our portfolio growth.

As I mentioned earlier, since the end of the quarter, we've been busy working through our deal Pipeline and have closed on 4 new platform Investments and an add-on, bringing July and early, August originations to 93 million, and net of the 3.8 million payoff of our last material, broadly syndicated loan, net originations for July, and early, August were 89 million.

And while I'm sure I'll get some questions about the recent spike in investment activity, in face of the broader market conditions, our core strategy of focusing on growth oriented lower Middle Market Investments backed. By pe sponsors is unchanged.

For context of the 8 deals funded since the end of last quarter and thus far this quarter, which have totaled 159 million 88% were firstly Investments within average closing leverage of 3 times ibida and an average margin over sofa of an excess of 7%.

In our outlet for the next quarter to, I'd like to leave you with a couple of comments.

Bob Marcotte: Market volatility aside, we continue to see a healthy flow of attractive lower middle market deal opportunities and are thrilled to have closed deals with six new sponsors since March 30. In addition to recycling the wave of investment exits in the past couple of quarters, we expect to continue to benefit from our incumbent position as the originator, lead lender, and in some cases, equity co-investor in the newer vintage growth-oriented businesses closed recently as they look to growth or acquisition or expansion and support the appreciation of their equity position. We ended the quarter with a conservative leverage position with debt at 64% of NAV and the bulk of our upsized and renewed bank credit facility available to support the growth of our earning assets in the next couple of quarters.

The events are behind us and between our remaining New Deal Pipeline and new investment opportunities. We anticipate a Resurgence in our portfolio growth

Market volatility aside, we continue to see a healthy flow of attractive lower Middle, Market deal opportunities, and are thrilled to have closed deals with 6, new sponsors since March 30th.

In addition to re recycling, the wave of investment exits in the past, couple of quarters, we expect to continue to benefit from our incumbent position as the originator lead lender. And in some cases equity co-investor in the newer vintage growth oriented businesses closed recently. As they look to growth through acquisition or expansion and support the appreciation of their Equity position,

Bob Marcotte: I would like to turn the call over to Nicole Schaltenbrand, Gladstone Capital Corporation's CFO, to provide some details on the fund results for the quarter.

We ended the quarter with a conservative leveraged position with debt at 64% of nav and the bulk of our upsized and renewed Bank. Credit facility available to support the growth of our earning Assets in the next couple of quarters.

Katharine Girkes: Thanks, Bob. Good morning, everyone. During the June quarter, total interest income declined 2.3% to $20.9 million as the average earning assets declined 5.2%, while the weighted average yield on our interest-bearing portfolio rose slightly to 12.8% for the period. Total investment income of $21.7 million was unchanged from last quarter as prepayment fees lifted the other income for the quarter. Total expenses were largely unchanged versus the prior quarter as interest expenses declined $500,000 with lower bank borrowings. However, net management and incentive fees rose by a similar amount. Net investment income for the quarter was $11.3 million or $0.50 per share. The net increase in net assets resulting from operations was $7.4 million or $0.33 per share for the quarter ended June 30th, as impacted by the realized and unrealized valuation depreciation covered by Bob earlier.

And now I'd like to turn the call over to Nicole Shelton, brand Gladstone Capital, CFO to provide some details on the fund results for the quarter.

During the June quarter total interest income declined 2.3% to 20.9 million as the average earning assets declined 5.2%. While the weighted average yield on our interest bearing portfolio, Rose slightly to 12.8% for the period.

Total investment income of 21.7 million was unchanged from last quarter as prepayment fees. Lifted the other income for the quarter.

Total expenses were largely unchanged versus the prior quarter as interest expenses declined, 500,000 with lower Bank, borrowings however, net management, and incentive fees Rose, by a similar amount.

Net investment income from the quarter was 11.3 million or 50 cents per share.

Katharine Girkes: Moving over to the balance sheet, as of June 30th, total assets rose to $780 million, consisting of $751 million in investments at fair value and $29 million in cash and other assets. Liabilities rose $7 million to $306 million and consisted primarily of $255 million of senior notes. As of the end of the quarter, advances under our $320 million line of credit of $27.5 million and $14.5 million of preferred stock. During the quarter, we successfully closed on a two-year extension and upsize of our bank line, which included a reduction in the revolver borrowing margin. As of June 30th, net assets declined $3.6 million to $474 million from the prior quarter end with the realized appreciation, and NAV per share fell $0.16 from $21.41 to $21.25 as of June 30th. Our leverage as of June 30th rose slightly to 64% of net assets.

The net increase in net assets. Resulting from operations was 7.4 million or 33 cents per share for the quarter ended. June 30th as impacted by the realized and unrealized valuation depreciation covered by Bob earlier.

Moving over to the balance sheet, as of June 30th, total assets, Rose to 780 million, consisting of 751 million in Investments at fair value, and 29 million in cash and other assets.

Liabilities Rose, 7 million to 366 million and consisted primarily of 255, million of senior notes. And as of the end of the quarter Advantage under our 320 million line of credit of 27 and a half million and 14 and a half million of preferred stock.

during the quarter, we successfully closed on a 2-year extension and up size of our bank line, which included a reduction in the revolver borrowing, margin

As of June 30th, net assets declined, 3.6 million to 474 million from the prior quarter end with the realized appreciation and nav per share. Fell 16 cents from 2141 to 2125 as of June 30th.

Katharine Girkes: Subsequent to June 30th, we have funded net originations of $89 million, funded with cash on hand and bank borrowings, bringing our line of credit outstandings to $104 million and total leverage to 81% of NAV. With respect to distributions, monthly distributions for August and September will be $16.50 per common share, which is an annual run rate of $1.98 per share. The board will meet in October to determine the monthly distribution to common stockholders for the following quarter. At the current distribution run rate for our common stock and with a common stock price at about $26.91 per share yesterday, the distribution run rate is now producing a yield of about 7.4%. Now I'll turn it back to David to conclude.

Our leverage as of June 30th, Rose slightly to 64% of net assets.

And subsequent to June 30th, we have founded net, originations of 89 million funded with cast cash on hand and Bank. Borrowings bringing our line of credit outstanding to 104 million and total leverage to 81% of math.

With respect to distributions monthly distributions for August and September will be 16 and a half cents per common share which is an annual run rate of 1.98 cents per share.

The board will meet in October to determine the monthly distribution to Common stockholders for the following quarter.

at the current distribution, run rate for our common stock, and with the common stock price at about 2691 per share yesterday, the distribution run rate is now producing a yield of about 7.4%,

David Gladstone: Thank you very much, Bob Marcotte, Nicole Schaltenbrand, and Katharine. You all did a great job in informing the shareholders and the analysts out there that follow our company. Glad to have that quarter past us, and we did a good job, I think. In summary, a stellar quarter for Gladstone Capital Corporation. I think the team maintained their underwriting, leverage, pricing, and discipline. As you know, we are always working all of those positions in order to be conservative. We closed eight new investments since our last call for $159 million. That is a good run rate. The company has a very strong balance sheet and recently redid and expanded the bank line to support our healthy leverage and the amount of deal opportunities. The team has done a great job weathering the last couple of quarters of repayments.

and now, I'll turn it back to David to conclude

Well, thank you very much Bob.

The call and Katherine. You all did a great job in informing the shareholders and the analysts out there that follow our company and glad to have that quarter past us and we did a good job I think.

Okay, in summary.

Stella quarter for Gladstone capital, I think team maintained their underwriting and leverage and pricing and discipline as you know, will always

Working, all all of those positions in order to be conservative.

We closed 8 new Investments since our last call for 159 million and that's a good good run rate.

The company has a very strong balance sheet and recently redid an expense to the bank and the expanded the bank line.

To support our healthy, leverage in the amount of deal opportunities.

David Gladstone: Always get in the way of those repayments, and then we have to find another deal to replace it. They are well on their way to growing the company and its investment portfolio to support the shareholders' distributions, which is what we live for. In summary, the company continues to stick with its strategy of investing in growth-oriented lower middle market businesses with good management. Many of these investments are supported by mid-sized private equity funds that have put a lot of equity in underneath us and that are looking for experienced partners like our team to support the acquisition growth of the companies they have invested in. This gives us an opportunity to make attractive interest-paying loans and small equity investments along the way. This is the end of our presentation. If the operator will come on and tell people how they can ask questions.

Always get in the way that is repayments. And then, we have to find another deal to

Replace it. It's

they're well on their way to Growing the company and its Investment Portfolio to support the shareholders distributions which is what we live for.

In summary, then the company continues to stick with the strategy of investing in growth oriented lower Middle Market businesses with good management.

many of these Investments are supported by midsize private Equity Funds that have put a lot of equity in underneath us and that are looking for experienced Partners like our team to support the acquisition growth of of the companies they've invested in

This gives us an opportunity to make attractive investment, paying interest paying loans.

Small Equity Investments along with the way.

This is, uh, the end of our presentation. So if they operate, it will come on and tell people how they can ask some questions.

Operator: Thank you. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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. Our first question comes from the line of Mickey Schleien with Clear Street. Please proceed with your question.

Thank you. If you'd like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

You may press star 2. If you'd 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.

Mickey Schleien: Yes. Good morning, everyone. Bob, a couple of high-level questions if I can. Much has been written about the growth of private credit and the impact on spreads. I am interested in understanding whether you are seeing that capital drift down into the lower middle market where you focus and whether that is impacting your outlook for spreads on new deal flow.

Our first question comes from the line of Mickey shellene with clear Street, please proceed with your question.

Yes, good morning everyone. Um, Bob a couple of high-level questions if I can. Um, you know, much has been written, much has been written about, uh, the growth of, uh, private credit. Um, and the impact on spreads, um, interested in understanding whether you're seeing, uh, that Capital drift down into the lower Middle Market where you, um, you focus and whether that's impacting your outlook for spreads on New Deal flow,

Bob Marcotte: Mickey, generally speaking, I would say no. What we're seeing is, you know, our starting investments, if you take our eight deals and $160 million average, about $20 million. So we're still well below the threshold for most of the large funds. What we do see are sponsors who may be starting up their platforms. They've seen the pricing up market, and they try to push for lower spreads as they start up their deals. It doesn't come down in competition. It comes down more in private equity expectations. We've been generally pretty successful at resisting that. While our average is certainly well north of a 7% spread over SOFR, there are some where we will dip slightly below that. For the most part, we continue to operate at least 100 basis points or more north of where the middle market spreads are currently clearing.

Mickey generally speaking, I would say, know what we're seeing is uh, you know, our starting Investments. If you take our a, our 8 deals and 160 million the average about 20 million dollars. So, um, we're still well below the threshold for most of the large funds. What we do see are

Sponsors, who may be starting up their platforms. They've seen the pricing up market and they try to push for lower spreads.

In their start, as they start up their deals, but it doesn't, it doesn't come down in competition. It comes down more in in in private Equity expectations and and we've been generally pretty successful at resisting that. And while our average is certainly well, north of

7% spread over so far. There are some where we will dip slightly below that. But for the most part, we continue to operate at least 100 basis points or more north of where the Middle Market spreads. Are currently, um, currently clearing.

Mickey Schleien: That's really good news. I'm glad to hear that. Bob Marcotte, one follow-up from me. We're obviously getting mixed signals on the economy. GDP rebounding in Q2, but that was off of a weak Q1 impacted by tariffs and all of that. Now the job market's weak and inflation's climbing again. How do you feel about the overall health of the portfolio? Do you see any tail risks developing? How is all this uncertainty playing into M&A activity and the expectations for that to pick up later this year or next year?

That that's um, that's really good news. I'm glad to hear that. Um, Bob 1 follow up from me, we're we're obviously getting mixed signals on the economy with you know GDP rebounding in the second quarter but that was you know off of a week first quarter impacted by tariffs and all that. And now the job Market's weak and inflation's climbing again. So how do you feel about the overall health of the portfolio? Um, do you see any tail risks developing? And how's all this uncertainty playing into, uh, m&a activity, and the expectations for that to pick up, you know, later this year next year.

Bob Marcotte: Mickey, I think most of our investments have a pretty well-articulated growth strategy. They have a technology. They have a service model. They have a competitive advantage or a growth-oriented capability. They tend to have a multi-year outlook for growth. In many cases, it's in the current economy. Obviously, we do not, as we have discussed in the past, do a ton of consumer-oriented businesses. When we underwrite the long-term growth along with the private equity teams that are investing in these businesses, we are buying into what that strategy is. We are generally not buying on the basis of economic growth or particular broad base of economic assumptions. That visibility does not really work in the cash flow model that we use. In terms of changes and uncertainty, we are certainly concerned about how the headwinds in certain spending or consumption patterns may be affected.

you know, Mickey I I think most of our investments have a pretty

Well, articulated growth strategy, um, they have a technology, they have a service model, they have, you know, a competitive advantage or a growth oriented um capability. And so they tend to have a multi-year outlook for growth.

You know, particular broad-based of of uh economic assumptions. Um that visibility doesn't really work in the cash flow model that we we uh we use in terms of, you know, changes and uncertainty. Yeah, we are we are certainly concerned about um you know how the headwinds in certain

Bob Marcotte: We certainly are both running those sensitivities as well as stressing the cases. I would also say, as I outlined, we are going into these businesses with relatively conservative leverage, on average, under three turns. We have the ability to withstand some headwinds at that level that these companies can generate reasonable free cash flow over and above our debt service and sustain definitely some headwinds. I would also say that virtually all of our investments that we have spoken to since our last call have been sponsored deals. You are talking about new investments. You are talking about sponsors who have put in significant money and are willing to defend those assets. With respect to the overall portfolio, there are a couple of folks that we are mindful of and we are watching very closely.

Spending or consumption patterns may may be affected um and and we certainly are both running those sensitivities.

As well as stressing the cases. But I would also say as I outlined we're going into these businesses with with relatively conservative leverage on average, under 3 turns. Um, you know we have the ability to withstand some headwinds

At that level. But these companies can generate reasonable free cash flow over and above our debt service and sustain, uh, sustained. Definitely some headwinds. And I would also say that virtually all of our investments, um, that we've spoken to since our last call have been sponsored deals. So you're talking about new Investments, um, you know, talking about, you know, sponsors who have put in significant money and are willing to defend those assets. Um, with respect to the overall portfolio.

Bob Marcotte: I do not think at the moment that we are terribly concerned of any in particular, given the current tariff outlook or the like, given the growth profile and the cash flow cushions that these businesses have when we underwrite them.

Sure. There's a couple of folks that we are, we are mindful of, and we are watching very closely, but um, I don't think at the moment that we are terribly concerned, uh, of any in particular given the current tariff Outlook or or the like, um, given the growth profile and the cash flow um uh, cushions that these businesses have when we under write them,

Mickey Schleien: Thanks for that explanation, Bob. That's really helpful. I appreciate it. That's it for me this morning.

Bob Marcotte: Thank you for calling in, Mickey.

That think thanks for that. Um explanation Bob, that's really helpful. Uh I appreciate it. Um, that's it for me this morning.

David Gladstone: Operator, can you come on and get the second question?

Thank you for calling in money.

Operator: Yes, sir. Thank you. Our next question comes from the line of Sean Paul Adams with B. Riley Securities. Please proceed with your question.

Operator, can you come on and we'll get to the second question? Yes, sir. Thank you.

Our next question.

Mickey Schleien: Hey, guys. Good morning. You've largely stayed around the.

Sean Paul Adams: Good morning.

Mickey Schleien: Good morning. You've largely stayed around the same portfolio mix in secured first lien term loans. However, matching the theme of the secured second lien term loans and equity co-investments from post-quarter end, are you evaluating shifting that structure mix around to boost portfolio yields?

Hey guys. Good morning. Um you have more stayed around this morning, you've largely stayed around. The same portfolio. Mix and first leaning however matching the theme of the second lean and Equity co-investments from post quarter end. Are you evaluating shifting that structure mix around to boost portfolio yields?

Bob Marcotte: Not, Sean Paul, there's no fundamental core strategy to change that. I think we look at each individual investment. There's no overall macro intention. As long as we're able to generate unit tranche assets with yields that make sense for us, it's not really what we're focused on. I will say two caveats to that. One, in some of the larger investments, we have brought in bank partners, so have done kind of first out, last out situations where scale and efficient and pricing have been a little bit more competitive. Those will show up on our SOI as secured assets. There may be a turn or a turn and a half of bank financing in front of us in those situations, and we are getting essentially second lien pricing. The number of transactions we've done there has been very, very limited.

Not.

Sean Paul, not not. Um, there's no fundamental core strategy to to, to change that. I think,

um, we look at each individual investment. Um, there's no overall macro intention as long as we're able to generate unitronic assets.

Bob Marcotte: The second thing that I would say is we have been successful doing a number of transactions where asset-backed facilities are more cost-effective and are appropriate for the business. In those cases, we will do a second lien behind it. In those cases, we're getting attractive pricing and generally fall within the purview of the overall asset support for the facility. Those are the two angles that we're playing to manage some of our yield targets. For the most part, we're not when you go into the lower middle market, the number of situations where a straight drip of second lien or subordinated debt doesn't tend to be the case because you think of a $4 or $5 or $6 or $8 million EBITDA business, a turn to a turn and a half is a very small investment. Generally, it creates more complications than not.

With uh, yields that make sense for us. Um, it's not um it's not really what we're focused on. I will say uh 2 caveat to that 1 um in some of the larger Investments, we have brought in Bank Partners, so have done, um, kind of first out last out situations, where scale and efficient, and, and pricing. Um, have been a little bit more competitive. Um, and so those will show up on our on our uh, uh, on our SOI as secured assets. There may be a a turn or turn and a half of Bank financing in front of us in those situations. And we are getting, essentially second link pricing, the number of transactions. We've done there has been very, very limited. Um, the second thing that thing I would say is we have been successful, um, doing a number of transactions where uh, asset back facility.

Facilities are more cost-effective and uh are appropriate for the business. And in those cases we will do a second lean behind it. Um and in those cases we're getting attractive pricing and generally fall within the

Bob Marcotte: Most of our investments are unit tranche, and the question is whether we want to bring in a bank to effectively leverage the pricing and get to almost a pseudo second lien, but within the confines of a unit tranche facility. We're managing all those angles, but straight second lien doesn't really work in the lower middle market.

Mickey Schleien: That's very helpful. Thank you.

The most of our investments are unitron and the question is whether we want to bring in a bank to effectively leverage the pricing and get to a almost a pseudo second lean but within the confines of a unitron facility. So we're managing all those angles but straight second lean doesn't really work in the lower Middle Market.

That's very helpful. Thank you.

Operator: Thank you.

David Gladstone: Operator, can you find if we have another question, please?

Operator: Yes, sir. Our next question comes from the line of Christopher Nolan with Ladenburg Thalmann. Please proceed with your question.

Thank you. Alright. Can you find if we have another question please? Yes, sir.

Our next question, comes from line of Christopher Nolan with lenberg Salman.

Mickey Schleien: I think I've taken the questions. In your comments, you mentioned that your quarter to date, the leverage ratio increased to 81% of NAV. Is that correct?

Bob Marcotte: Yes.

I think it's taking me questions. Um in your comments you mentioned that you a quarter of the date. The leverage ratio increased to 81% of nav. Is that correct?

Yes.

Mickey Schleien: Do we expect to be dialed back with repayments later on in the quarter? How does a pattern of repayments typically go in the quarter? Is it sort of back-ended towards the last weeks in the quarter?

Um, and do should we expect uh to be dialed back with um, re repayments later on the quarter? How does a pattern of prepayments typically go in the quarter? Is it sort of back-ended towards the last weeks and the quarter?

Bob Marcotte: Yeah, we'd love to be able to predict those things. I would say they've been coming at a fast and furious. If you tally up the last two quarters plus, you know, I think the number last count was something like 40% of our portfolio, and we don't really control the timing of them. As far as companies, normally we see those as companies that are up for sale, that the sponsor has been in long enough, it's time to exit. There are two companies that we are aware of in the portfolio that are up for sale. One, which may close in the coming quarter, and it would be at the very end or the beginning of next. The second, believe it or not, is under contract to be sold, and we are, as the incumbent, the preferred lender to go forward.

Uh, yeah. We we we'd love to be able to predict to predict those things. I would say. Um, they've been coming at a fast and furious if you, if you tally up the last, uh, 2 quarters, Plus

Bob Marcotte: So we really don't see much in the way of additional repayments at this stage due to sale of the company. But there's very little predictability other than the normal transaction sell side, you know, time frame. So at this point, it's fairly erratic. In fact, last quarter, I think there was a period in time where we were actually net in cash. So, you know, getting through last quarter with a relatively low amount of leverage, we ended the quarter on a fairly strong note and obviously have continued it since then. So I wish I could plan it, but it's a tough thing to call.

Um, you know, I think the number of last count was something like 40% of our portfolio and we don't really control the timing of them. Um, as far as companies normally, we see those as companies that are up for sale, that the sponsor has been in long enough, it's time to exit. Um, there are 2 companies that we are aware of in the portfolio that are up for sale, um, 1 which may close in the coming quarter and it would be at the very end of the beginning of next. Um, and the second, um, believe it or not, um, is is under contract to be sold and we are as the incumbent, the preferred lender to go forward. So we really don't see much in the way of additional repayments at this stage, um, due to sale of the trans sale of the company, um, but there's very little predictability other than, uh, other than the normal transaction sell side. Uh,

You know, uh uh, time time frame. So at this point it's it's fairly erratic. Um, in fact, last quarter,

I think there was a period in time where we were we were actually net in cash. So, you know, getting through last quarter with a relatively low.

Hello, my amount of Leverage. Um, we ended the quarter on a fairly strong note and obviously have continued it since then. So it's uh,

I wish I could plan it but but it's it's, uh, it's uh, it's a tough thing to call.

Mickey Schleien: For my follow-up, do you guys have a large debt maturity in early 2026? Can you share with us your thinking in terms of whether or not it's better to possibly finance that with an adjustable rate bank facility or go for term debt given, you know, the uncertainty about further rate cuts?

But and for my follow-up. Um, do you guys have a large um

Debt maturity in early 2026. Um, can you share with us your thinking in terms of whether or not? It's better to possibly finance that with an adjustable rate Bank facility or go for term debt given you know the uncertainty about further rate cuts.

Bob Marcotte: We've been evaluating that maturity on the horizon for some time. We certainly have the capacity under our line to deal with it. That would not be our preferred course. We're evaluating options to not knock a portion of that off, but frankly, have been somewhat disappointed in the current spreads that the markets are pricing for companies in our size range. We are pursuing a variety of alternatives to address that maturity given what we believe is the relatively low leverage and consistency of our performance. We will be moving forward with that over the coming quarter. We are on it. We have a backup plan, but at this stage, there's nothing concrete. We certainly have not only the January maturity, but we have a call on an expensive piece of paper that starts in September that we can also manage. More to come on the capital markets front.

We've been evaluating, you know, that that maturity um on the horizon for some time.

Um we certainly have the capacity under our line to to to deal with it. Um that would not be our preferred course.

We are evaluating options to not knock knock a portion of that off. Um, but but frankly, um, have been, um, somewhat, um, disappointed in the current, um, the current spreads that, um, the markets, um, are pricing, uh, for companies in our size range. So we are pursuing a variety of alternatives to, to address that maturity. Um, given what we believe is the relatively low leveraging and consistency of our performance.

And we'll be moving forward with that over the coming quarter. So we're we're on it, we have a backup plan, um but at this stage there's nothing nothing concrete. We certainly have not only the January maturity, but we have a call on an expensive piece of paper that starts in September that we can also manage so

More to come on the uh, Capital Markets Front.

Mickey Schleien: Okay. Thank you.

Okay, thank you.

David Gladstone: Operator, who is our next questioner?

Operator: Thank you. Our next question comes from the line of Erik Zwick with Lucid Capital Markets. Please proceed with your question.

Operator, who's our next questioner?

Thank you. Our next question comes from the line of Eric zwick with Lucid Capital markets, please proceed with your question.

Justin (for Erik Zwick): Yeah. Good morning. This is Justin. I am for Eric today. It sounds like some of the spike in investment activity may have been related to timing. Can you talk about how your pipeline and backlog are looking for the remainder of the quarter and this year?

Activity may have been related to timing. Um, can you talk about how your pipeline and backlog are looking for the remainder of the quarter and this year?

Bob Marcotte: Sure. There are a number of deals in advanced stages right now that we expect to continue. We do have a healthy number of additional investments on the horizon. I would say that follow-on acquisitions for some of the recent companies is also part of that equation. I look at it two ways. One is the number of transactions and volumes. While it obviously may not be as robust as what we've done in the last month and a month and a half, I think it will continue to be in that $50 million to $100 million range on originations, which we've traditionally done on a quarterly basis. I think the positive is also that, frankly, we don't see $75 million to $100 million of repayments coming. So we have to look at what the net originations are going to look like.

Um,

Sure, uh, the there are a number of deals in advanced stages, right now that um, are, are we expect to continue? Um, we do have a healthy number of additional Investments on the horizon.

And I would say that follow on Acquisitions uh, for some of the recent companies is also part of that equation. Um,

I look at it 2 ways. 1 is the number of transactions and volumes and while it obviously, it may not be as robust as what we've done in the last uh last month and month and a half. Um I think it will continue to be in that you know 50 to 100 million dollar range on originations which we've traditionally done on a quarterly basis. I think the positive is also that frankly we don't see you know,

Bob Marcotte: Given the current fund, given the current situation, being in a positive net originations in the range of $50 million or more a quarter is a nice place to support our organic growth. That's probably where we were before the recent swing up in repayments. I think we're going to get back there very, very quickly.

75, you know, to 100 million dollars of repayments coming. So we have to look at what the net originations are going to look like and

Given given the current fund given the current situation being in a positive net, originations in the range of, you know, 50 million or more a quarter is a nice place of uh for to support our, our organic growth. Um, and that's probably where we would we were before the recent swing up in in repayments

And I think we're going to get back there very, very quickly.

Justin (for Erik Zwick): Okay, great. I think I heard in the prepared remarks that EGs has been returned back to accrual status. Any update on Edge Adhesives, which remains on non-accrual?

Okay, great. And then I think I heard a prepared remarks at EGS has been returned back to a cruel status. Any update on edge adhesives, which remains unnoticed

Bob Marcotte: That investment is in the wind-down mode and will probably be, you know, sold off at some point in the very near future. I don't think that business is likely to be held long enough to see a recovery timeframe. So those are probably situations where there may be some realization of that accumulated depreciation.

Uh, that investment is is in the wind down mode and will probably be, um, you know, uh, sold off at some point in the very near future. Um, I don't think that business is

Um, is likely to be.

Um held long enough to see our recovery time frame. So um those those are probably situations where there may be some realization of that accumulated depreciation.

Justin (for Erik Zwick): Okay. Great. Thanks for taking my questions.

Bob Marcotte: Sure.

Okay. Great. Thanks for taking my questions.

David Gladstone: Operator, do you have another question coming?

Sure.

Operator: Yes. Our final question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.

Operated. You have another question coming? Yes, our final question comes from the line of Robert Dodd with Raymond James. Please proceed with your question.

Robert Dodd: Hi, guys, and congratulations on the quarter. Just follow up first on that activity level, Bob Marcotte. I mean, it sounds like you're, obviously, the beginning of this quarter was extremely active. Kind of get the feeling that you're seeing the future pipeline rebuild sufficiently, maybe not to produce another quarter like that in the December quarter. But to your point, you normally, December obviously is a pretty strong seasonal quarter. Do you think there's a possibility that the December quarter kind of matches the September quarter, or do you think that the pipeline isn't rebuilding at a sufficient pace for that to happen?

Uh hi. Hi guys. And congratulations on on the quarter. Um on just follow up first on on that. Um, activity. Uh, level bulb. I mean in in in sounds like your your I mean, obviously the beginning of this quarter was extremely active kind of get the feeling that you you you're seeing the future pipeline rebuild. Sufficiently maybe maybe not to to produce another quarter like like that in the December quarter. But um to your point you normally December obviously is a is a pretty strong

Seasonal quarter, would you do you think that there's a possibility um that the December quarter kind of matches the September quarter? Or do you think that the pipeline isn't rebuilding at a sufficient pace for that to happen?

Bob Marcotte: Robert, I would say we are continuing to see attractive inbound opportunities. I think $50 million to $100 million of originations a quarter is something that we can do. We have been averaging better than that. I do think that we may have some prepayments, but we will have strong net originations through the balance of the year. You are right, December is always a busier quarter. I have to be cautious in the sense that there is constantly movement around in terms of economic uncertainties, and certainly, deals are taking longer to close. That is why a lot of the transactions slipped past the Q2 quarter end. So I have to be somewhat cautious, but I would say, yes, I think we would expect to see a pretty strong Q4. Traditionally, that is when a lot of these deals get closed.

Um, Robert. I I would say we are continuing to see attractive inbound opportunities.

Um you know I I think 50 to 100 million of originations. Uh a quarter is something that we can do. We have been averaging better than that.

Um I I do think that we may have some free payments but we will have strong net originations to the balance of the year and you're right. December is always a bizarre quarter.

You know, I have to be cautious in the sense that there's constantly movement around, um, in terms of Economic uncertainties, and, and certainly deals are taking longer to close. That's why a lot of the transactions slipped past the, the 6:30,

Quarter end. So I I I have to be somewhat cautious but I would say yes. I think we would expect to see a pretty strong.

Q4.

These fields get closed.

Bob Marcotte: But I am a little bit more cautious given the uncertainty in the current market. I think also, the pace or change in interest rates tends to change some of the momentum in the marketplace. I think one of the benefits of the lower middle market is the transactions typically are trading at much more reasonable multiples. So interest rates are not as impactful on the valuation multiples in our market. So you can still trade at seven or eight times and still afford to finance at its current rates. I would expect if those rates go down, we could have a stronger year-end opportunity. But right now, I would say we have gone through a pretty elevated bit of growth, and I would expect originations in that $50 to $100 per quarter net would still be pretty attractive growth.

um,

but I'm I'm a little bit more cautious. Given the uncertainty in the current market.

Um,

I I think also, you know, the the pace or change in interest rates tends to change.

Some of the momentum in the marketplace.

Um, you know, I think 1 of the benefits of the lower Middle Market is

The transactions typically are trading at much more reasonable multiple.

So, interest rates are not are not as.

Uh, impactful on the valuation multiples in our Market.

So it's you can still trade at 7 or 8 times and still for to finance it at the current rates.

Um, and I would expect if those rates go down, we could have a stronger year-end opportunity.

But you know, right now I would say uh We've we've gone through a a pretty elevated state of growth and I would expect originations in that 50 to 100 for per quarter.

Bob Marcotte: We are talking about transactions where we are investing $15 million to $25 million. It takes a lot of manpower to prudently underwrite and to document and diligence those number of transactions. So there is just a natural limitation as to how much we are going to book in a given quarter because of the size deals we do. That is not going to change. So $50 million to $100 million is probably more than I would want. It is an acceptable range. More than that really does not work given our origination models.

Net, uh, would would still be pretty attractive growth? We we are, we are, we are talking about transactions where we're investing, you know, 15 to 25 million dollars. It takes a lot of manpower.

To prudently underwrite. And to document and, and diligence those number of transactions,

And so, there's just a natural. There's a natural limitation as to how much we're going to book in a given quarter because of the size deals, we do. Um and that's not going to change.

So, got it. 50 to 50 to 100 is probably more than I would want. It's an acceptable range; more than that really doesn't work given our...

Robert Dodd: Got it. Got it. Appreciate the color there. Thank you. Just following up on the answer to an earlier question. On the first lien last out, right? As you said, you effectively gained second lien pricing. But how much of the first lien structure are you selling down to a bank? Because obviously, I think you said like a turn, which would be a lot less than would normally be done if you were the second lien behind the first lien, right? You would normally have that. So are you getting second lien pricing, but materially better first dollar in effective, you know, once the filer is taken account structure than you would get if it was a straight second lien? Are you getting higher pricing with better risk, for lack of a better term?

Uh, origination models.

Appreciate the color there. Thank you. Um, just

Uh, and said to, to an earlier question on the first thing last out, right? I mean, as you said, you effectively getting secondly in pricing, but I mean how much of

The the the firstly in structure you selling down to a bank? Because obviously, I think you said like like a turn, which would would be a lot less than would normally done. If if you were the second lean behind the first lean, right? You'd normally have that so are you getting second? Lean pricing but materially better.

Bob Marcotte: Well, as long as you don't spread the word, Robert. Yes. People come to us because they want an experienced partner and they want unit tranche structuring. We have banks that recognize and value what we bring to the table. So if that unit tranche is, let's say, 3.25 turns of leverage, and let's use round numbers, let's say $8 million of EBITDA. So you're talking about roughly $26, $28 million of debt. We might bring in a $15 million first lien, and we might take, you know, a $13 million last out. So the senior's in for something less than two turns, a turn and a half, and we are getting second lien pricing inside of 3.25 turns. To me, that's a pretty attractive attachment point.

Um, first dollar in effective, um, you know, once the philosophy account, um, structure, then you would get if it was a straight. Certainly, I mean, I you get, you get higher pricing with with with with better risk factor better well as long as long as you don't spread the word Robert um

Yes. You know people come to us because they want an experienced partner and they want units unitron structuring we have banks that recognize and value. What we bring to the table.

so if that unitron is, let's say 3 and a quarter turns of Leverage

Um, and let's use round numbers. Let's say, 8 million dollars of IBA de. So you're talking about roughly 30

Uh 26 28 million of of debt so we might bring in uh 15 million dollar. You know first lean and we might take you know a 13 million dollar last out. So the debt the the seniors in for

Bob Marcotte: We control the documents, we control the structure, we control the covenants, and we're getting essentially second lien pricing at first lien leverage limitations. Yes, it is an attractive play if you can put enough to work and getting and managing that, you know, origination, the diligence, and the documentation.

Something less than 2 turns a turn and a half and we are getting second lean pricing inside of 3 and a quarter turns to me that's a pretty attractive attachment point.

And we control the documents, we control the structure, we control the covenants and we're getting um essentially second lean pricing at first lean, leverage limitation, so yes it is in attractive.

Robert Dodd: I mean, I appreciate that color. I mean, just taking the flip side to it, right, to your point, then obviously you're only putting out half the capital because it's the 13, 14 that you would normally. So if you took the whole thing, you'd be in for 26, 28 to your numbers, but you're actually in perhaps.

play, if you can put enough uh, to work and and in getting and managing that, you know, D that origination the diligence and the documentation

Bob Marcotte: We do not want 26 or 28. It is five and a quarter to five and a half. That does not work in our model, right?

Hasn't worked in our model.

Robert Dodd: Yeah, yeah, yeah. No, I get that.

Bob Marcotte: would much rather be at $7, $7.50 or more and have a slightly smaller investment. We still have the opportunity to grow, and we still have the opportunity to generate the fees off the transaction, and we still service a strong relationship with our private equity clients.

Right, so much rather. We we'd much rather be at 7

7, 750, or more and and have a slightly smaller investment, we still have the opportunity to grow

Robert Dodd: Got it. Got it. Yeah, I appreciate it. Thank you.

And we still have the opportunity to generate the fees off the transaction, and we still Service uh a strong relationship with our private Equity clients.

Got it, got it. Yeah, I appreciate it. Thank you.

David Gladstone: Robert, you've been following this industry almost as long as I've been working in it. So I know you know we're not going to change. We're going to continue to do what we always do and do it in a way that rewards our shareholders. But thank you for that.

You've been Robert, you've been following this industry, almost as long as I've been working in it. So I know, you know, we are not going to change. We're going to continue to do what we always do. And

Robert Dodd: I appreciate that, David and Bob Marcotte. I mean, yes, sticking to your strategy is important. That's where your expertise is, so stick to it. Yeah, thank you.

David Gladstone: Okay. Operator, do we have anybody else?

Do it in a way that rewards our shareholders, but thank you. I appreciate that. David and Bob, I mean, yes, sticking to your strategy is important. That's where your expertise is so stick to it. Yeah, thank you.

Okay.

Operator: No, sir. There are no other questions at this time. I will turn the floor back to you for any final comments.

Operator, do we have anybody else?

David Gladstone: All right. Thank you very much, all of you. We appreciate you calling in, and we love it when you have a lot of questions. Make sure you get a good sheet full of questions for next time, and we'll see you at the next meeting. That's the end of this conversation.

No, sir. There are no other questions at this time. I'll turn the floor back to you for any final comments.

Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

All right, thank you very much. All of you. We appreciate you calling in and we love it when you have a lot of questions. So, uh, make sure you get a good sheet full of questions for next time and we'll see you at the next meeting. That's the end of this conversation.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.