GAIN

Business Context and Reporting Period

Company: Gladstone Investment Corporation (Gladstone)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Model: Closed-end, non-diversified management investment company operating as a Business Development Company (BDC) and Regulated Investment Company (RIC). The Company invests in debt and equity securities of private businesses.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Restructuring: The Company sold 29 senior syndicated loans during the six months ended September 30, 2009, generating approximately $69.2 million in proceeds but recording a realized loss of $34.6 million. This was done to repay the prior credit facility and reduce exposure to the syndicated loan market.
• Investment Portfolio Value: Total investments at fair value decreased from $313.9 million (March 31, 2009) to $204.3 million (September 30, 2009). The portfolio is now heavily concentrated in Control and Affiliate investments.
• Liquidity Position: Cash and cash equivalents increased significantly to $86.3 million, driven by loan sales and short-term borrowing activities used to maintain RIC status.
• Debt Reduction: Borrowings under the line of credit were reduced from $110.3 million to $36.3 million following the repayment of the prior facility and the establishment of a new $50.0 million facility.
• Performance: Net assets decreased by $27.3 million for the six-month period, primarily due to the realized losses on loan sales and unrealized depreciation in Control and Affiliate equity holdings.

Guidance, Outlook, Risks, and Unusual Items

• RIC Status Risk: The Company fell below the 50% asset diversification threshold required to maintain Regulated Investment Company (RIC) status following the sale of syndicated loans. To maintain status, the Company utilized short-term loans to purchase U.S. Treasury securities. Management warns that making new investments before regaining compliance could jeopardize RIC status.
• Capital Constraints: The Company's ability to make new investments is constrained by the reduced size of its credit facility ($50 million vs. previous $125 million) and the requirement to maintain RIC diversification. The Company is currently unable to issue equity at a price below NAV without stockholder approval, though such approval was granted in August 2009.
• Distribution Reduction: Due to lower net investment income, the monthly cash distribution was reduced from $0.08 to $0.04 per share effective in the first quarter of fiscal year 2010.
• Valuation Methodology: The Company shifted from using Discounted Cash Flow (DCF) models for syndicated loans to using third-party bid quotes as market liquidity returned in the quarter.
• Unusual Items: A $75.0 million short-term loan from Jefferies was utilized in September 2009 to purchase Treasury securities to satisfy RIC diversification tests; this loan was repaid in October 2009.

Investor Verification Checklist

• RIC Compliance: Verify the Company's ability to maintain the 50% asset diversification test in future quarters without relying on short-term borrowing.
• Credit Facility Renewal: Confirm the status of the $50.0 million credit facility maturing on April 14, 2010, and the terms of any renewal or refinancing.
• Portfolio Valuation: Review the fair value assessments of Control and Affiliate investments, which experienced significant unrealized depreciation ($26.4 million and $6.1 million respectively for the six months).
• Distribution Sustainability: Assess whether the reduced distribution rate of $0.04 per share is sustainable given the current net investment income levels.
• Equity Issuance: Monitor the Company's ability to raise capital via equity issuance given the stock price trading at a discount to NAV.