Gladstone Capital Corporation (Nasdaq: GLAD) — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2023. Dollar amounts below are in millions except per-share data. The filing is unaudited. Gladstone is an externally managed business development company investing primarily in debt and equity of U.S. lower-middle-market businesses.
Financial performance
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Nine months ended June 30, 2023 | Nine months ended June 30, 2022 |
|---|---|---|---|---|
| Investment income | $22.8 | $13.8 | $62.7 | $47.2 |
| Net investment income | $11.7 | $6.9 | $30.0 | $24.8 |
| Net increase in net assets from operations | $11.9 | $(5.6) | $29.6 | $14.8 |
| Net investment income per share | $0.31 | $0.20 | $0.82 | $0.72 |
| Operations per share | $0.32 | $(0.16) | $0.81 | $0.43 |
- Quarterly investment income rose 65.6%; interest income increased 73.2%, reflecting a larger average interest-bearing portfolio and higher yields. The reported average yield was 13.6%, versus 10.0% a year earlier. Nine-month average yield was 13.0%, versus 10.2%.
- Quarterly net investment income increased 68.1%, while expenses after Adviser credits rose 63.0% to $11.1 million. Higher borrowing costs and incentive fees were major contributors. Nine-month expenses after credits rose 45.7% to $32.6 million, and net investment income rose 21.1%.
- Quarterly realized and unrealized results were a net gain of $0.2 million, compared with a $12.5 million net loss a year earlier. For nine months, net realized and unrealized results were a $0.5 million loss, compared with a $10.0 million loss.
Financial position, liquidity and distributions
- At June 30, total assets were $730.1 million, investments at fair value were $715.3 million, total liabilities were $372.1 million and net assets were $357.9 million. NAV was $9.27 per share, up from $9.08 at September 30, 2022.
- Debt included $163.8 million outstanding on the revolving credit facility and $200.0 million principal of notes payable. Cash and restricted cash totaled $1.8 million; revolver availability was $53.5 million, subject to borrowing-base and other constraints.
- Regulatory asset coverage on senior debt was 195.8%, above the 150% minimum; the company reported compliance with credit-facility covenants. Its credit-facility-defined net worth was $554.3 million versus a $355.8 million minimum.
- Nine-month operating cash flow was negative $33.7 million, compared with negative $18.6 million in the prior-year period. Investing activity included $148.1 million of investment purchases and $84.5 million of repayments and net sale proceeds. Financing cash flow was positive $33.4 million, including $37.6 million net common-stock proceeds and $22.0 million of net revolver borrowings, partly offset by $24.7 million of distributions.
- Common distributions paid for the nine months totaled $0.675 per share, up from $0.5925 in the comparable period. The board subsequently declared $0.2675 per common share for the September 2023 quarter, including a $0.02 supplemental distribution. The company reported that prior fiscal-year distributions included a partial return of capital; tax characterization for the current year was not final.
Material changes, outlook and risks
- The portfolio grew to 52 companies and $715.3 million fair value from $649.6 million at September 2022. Debt represented 91.5% of portfolio cost. First-lien debt was 74.5% of portfolio fair value. The five largest investments represented 24.0% of the portfolio, down from 26.9%.
- Unrealized investment depreciation for the nine months was $13.4 million. Management attributed it to reversals of prior appreciation on realized exits and declines in comparable valuation multiples and performance at some portfolio companies. Quarterly depreciation included declines at WB Xcel Holdings and NeoGraf, partly offset by improvement at other investments.
- Edge Adhesives was placed on non-accrual; its $6.1 million debt cost basis was valued at $2.8 million. No loans were on non-accrual at September 30, 2022. PIK interest was $2.6 million for the nine months; such income is accrued but may not be received in cash until repayment.
- The June 2023 revolver amendment reduced the commitment to $223.7 million, extended the revolving period to October 31, 2025 and maturity to October 31, 2027, and increased the applicable margin to 3.00% during the revolving period and 3.50% thereafter. Nine-month average revolver borrowings were $136.4 million at a 7.7% effective rate, versus $41.5 million at 6.4% a year earlier.
- The company sold 3.87 million common shares through its at-the-market program for $38.3 million gross proceeds, at a weighted-average $9.90 per share; reported sales were above then-current estimated NAV. It also launched an offering of up to 6 million shares of 6.25% Series A preferred stock at $25 per share; none had been sold as of June 30.
- No earnings or portfolio guidance was provided. Management cited sensitivity to interest rates, inflation, economic and capital-market conditions, portfolio-company performance, investment exits and access to financing. It said inflation had not materially impaired borrowers’ ability to service debt to date, but future effects remain uncertain. Most investments use Level 3 fair-value inputs, making valuations dependent on estimates and assumptions.
- The Adviser and Administrator are affiliates of the company’s chairman and CEO. The filing discloses related-party fee arrangements and other services to portfolio companies; the board renewed the advisory and administration agreements through August 2024.
Important facts for investors to verify
- Whether Edge Adhesives’ non-accrual status, any additional credit deterioration and PIK accruals affect future cash collections and distributions.
- How portfolio fair values—predominantly Level 3—compare with eventual recoveries, particularly for investments with recent markdowns.
- Revolver availability under borrowing-base constraints, refinancing needs and the effect of higher borrowing rates on net investment income and coverage.
- Whether common distributions remain covered by taxable income and operating cash receipts; confirm final tax characterization, including any return of capital.
- Progress and all-in issuance costs of the Series A preferred offering, and any future common-stock issuance relative to NAV.
- Compliance with BDC/RIC requirements, debt covenants and the 150% asset-coverage requirement as borrowings, distributions and portfolio values change.