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Gladstone Investment Corp. Reports Operating Results (10-Q)

November 03, 2009 | About:

Gladstone Investment Corp. (NASDAQ:GAIN) filed Quarterly Report for the period ended 2009-09-30.

Gladstone Investment Corporation is an investment company that seeks to make equity-type investments in small and mid-sized private businesses in the U.S. Gladstone Investment Corp. has a market cap of $110.2 million; its shares were traded at around $4.99 with a P/E ratio of 8.3 and P/S ratio of 4.3. The dividend yield of Gladstone Investment Corp. stocks is 9.6%.

Highlight of Business Operations:

The recession has affected the availability of credit generally and, as a result, subsequent to our fiscal year end, we sold 29 senior syndicated loans that were held in our portfolio of investments at March 31, 2009 to various investors in the syndicated loan market (collectively, the Syndicated Loan Sales) in order to repay amounts outstanding under our prior credit facility, which matured in April 2009. These loans, in aggregate, had a cost value of approximately $104.2 million, or 29.9% of the cost value of our total investments, and an aggregate fair market value of approximately $69.8 million, or 22.2% of the fair market value of our total investments, at March 31, 2009. Additionally, during September 2009, we sold certain senior syndicated loans (see Recent DevelopmentsSenior Syndicated Sales section below) to various investors in the syndicated loan market. Upon the settlement of these loans in October 2009, we have two remaining senior syndicated loans which we plan to exit in the long-term future. These sales, in aggregate, have changed our asset composition in a manner that has affected our ability to satisfy certain elements of the Codes rules for maintenance of our RIC status. In order to maintain our status as a RIC, in addition to other requirements, as of the close of each quarter of our taxable year, we must meet the asset diversification test, which requires that at least 50% of the value of our assets consist of cash, cash items, U.S. government securities or certain other qualified securities. During the quarter ended September 30, 2009, we fell below the required 50% asset diversification threshold.

On April 14, 2009, through our wholly-owned subsidiary, Gladstone Business Investment, LLC (Business Investment), we entered into a second amended and restated credit agreement providing for a $50.0 million revolving line of credit (the Credit Facility) arranged by Branch Banking and Trust Company (BB&T) as administrative agent. Key Equipment Finance Company Inc. also joined the Credit Facility as a committed lender. Under the terms of the Credit Facility, committed funding was reduced from $125.0 million under our prior facility to $50.0 million. See Liquidity and Capital Resources section below for further information. As of the date of this filing, approximately $16.1 million was outstanding under the Credit Facility and $32.1 million was available for borrowing due to certain limitations on our borrowing base. As a result of this limited availability under our credit facility, and the restraints upon our investing activities required in order to maintain RIC status under the Code as described above, we are unsure when we will once again be in a position to make any new investments. The Credit Facility also limits our distributions to stockholders and, as a result, we recently decreased our monthly cash distribution rate by 50% as compared to the prior year period. We do not know when market conditions will stabilize, if adverse conditions will intensify or the full extent to which the disruptions will continue to affect us. If market instability persists or intensifies, we may experience increasing difficulty in raising capital.

Short-Term Loan On September 29, 2009, we purchased $85.0 million of short-term United States Treasury securities through Jefferies & Company, Inc. (Jefferies). The securities were purchased with $10.0 million in funds drawn on the Credit Facility and the proceeds from a $75.0 million short-term loan from Jefferies with an effective annual interest rate of approximately 0.65%. On October 2, 2009, when the securities matured, we repaid the $75.0 million loan from Jefferies in full, and repaid the $10.0 million drawn on the Credit Facility for the transaction.

During September 2009, we finalized the sale of certain senior syndicated loans (HMTBP Acquisition II Corp. and a portion of Interstate Fibernet, Inc.) to various investors in the syndicated loan market. These loans, in aggregate, had a cost value of approximately $6.8 million, or 2.9% of the cost value of our total investments, and an aggregate fair market value of approximately $5.5 million, or 2.7% of the fair market value of our total investments, at September 30, 2009. Upon the settlement of these loans in October 2009, we received approximately $5.5 million in net cash proceeds and recorded a realized loss of approximately $1.3 million (See Note 12, Subsequent Events). These loans are included in our condensed consolidated assets as of September 30, 2009 and were valued at their respective sale prices.

Interest income from our investments in debt securities of private companies decreased for the three months ended September 30, 2009, as compared to the prior year period for multiple reasons. The level of interest income from investments is directly related to the balance, at cost, of the interest-bearing investment portfolio outstanding during the period multiplied by the weighted average yield. The weighted average yield varies from period to period based on the current stated interest rate on interest-bearing investments and the amounts of loans for which interest is not accruing. The average cost basis of our interest-bearing investment portfolio during the three months ended September 30, 2009 was approximately $186.1 million, compared to approximately $294.4 million for the prior year period, due primarily to the aggregate senior syndicated loan sales. Also contributing to the decrease in our interest income from

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