Gladstone Capital Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022; comparisons are to the year ended September 30, 2021. Gladstone Capital is an externally managed business development company and regulated investment company investing primarily in debt and equity of U.S. lower-middle-market businesses.
Financial performance and position
| Metric | FY2022 / September 30, 2022 | Prior comparable period |
|---|---|---|
| Investment income | $63.2 million | $53.8 million; up 17.4% |
| Net investment income (NII) | $32.3 million; $0.94 per share | $26.1 million; $0.79 per share |
| Net increase in net assets from operations | $19.9 million; $0.58 per share | $84.3 million; $2.54 per share |
| Investment portfolio | $649.6 million fair value; $656.1 million cost, across 52 companies | $557.6 million fair value across 46 companies |
| Net assets / NAV per share | $315.5 million / $9.08 | $318.4 million / $9.28 |
| Debt | $141.8 million drawn on credit facility and $200.0 million notes at principal; notes payable reported net at $197.6 million | $50.5 million facility borrowings and $188.8 million notes at principal |
| Cash and cash equivalents | $2.0 million, plus $0.1 million restricted cash | $0.7 million, plus $0.2 million restricted cash |
| Cash flow | $76.4 million used in operating activities; $77.7 million provided by financing activities | $14.1 million used in operations; $12.4 million provided by financing |
| Common distributions | $0.795 per share paid during FY2022; $27.3 million total. About $1.4 million was return of capital. | $0.78 per share; $26.0 million total |
NII was approximately 51% of investment income, compared with approximately 49% in FY2021. This is a simple ratio, not a company-reported operating margin. As a lender, Gladstone reports investment income rather than conventional sales revenue.
- Interest income rose 8.1% to $54.0 million, principally as the weighted-average principal balance of interest-bearing investments increased 11.7% to $517.0 million. Weighted-average yield declined to 10.4% from 10.6%.
- Other income rose 138.9% to $9.2 million, mainly due to higher success-fee and dividend income.
- Net expenses after adviser credits increased 11.6% to $30.9 million. Interest expense increased 12.6% to $13.0 million, and the net incentive fee increased.
- The portfolio recorded $17.5 million of net unrealized depreciation, versus $55.3 million of net unrealized appreciation in FY2021. At year-end, investments were valued at 99.0% of cost, versus 102.0% a year earlier.
- Asset coverage on senior debt was 190.4%, above the 150% statutory threshold. Credit-facility availability was reported at $60.1 million, subject to borrowing-base constraints; the company reported compliance with facility covenants.
Material changes, outlook and risks
- New investments totaled $215.3 million and additional funding to existing portfolio companies was $59.6 million. Unscheduled repayments were $151.2 million. The portfolio grew by six companies year over year.
- The LWO investment was restructured after the portfolio company emerged from Chapter 11: $16.8 million of debt was converted to $3.3 million of first-lien debt and $6.8 million of equity, with an approximately $8.5 million realized loss. The Lignetics sale generated a $13.4 million realized gain and $1.6 million of success-fee income.
- The company issued $50 million of 3.75% notes due 2027 and redeemed $38.8 million of 5.375% notes due 2024. At year-end it had $150 million of 5.125% notes due 2026 and $50 million of 3.75% notes due 2027.
- The credit facility commitment rose to $225 million in September 2022 and to $245 million in October 2022. The revolving period was scheduled to end October 31, 2023; if not extended, facility principal and interest are due by October 31, 2025.
- Management said inflation had not materially impaired portfolio companies’ debt-service capacity to date, in part because companies had largely offset cost increases through pricing. It cautioned that cumulative inflation could pressure margins and repayment ability. The filing provides no formal earnings or investment guidance.
- Most debt investments have floating rates: 88.5% of debt principal was variable-rate and 11.5% fixed-rate. The company estimated a 100-basis-point rate increase would increase annual net assets from operations by $3.9 million, before potential changes in incentive fees; actual outcomes may differ. Rising rates also raise borrowing costs and can weaken borrowers’ capacity to pay.
- LIBOR transition was underway; most new variable-rate investments in the September quarter used SOFR, and management expected minimal operational impact from the transition. The credit facility had been amended to SOFR plus an 11-basis-point adjustment.
- Key risks include illiquid private investments and subjective Level 3 valuations, portfolio and industry concentration, borrower defaults, inflation and interest-rate volatility, leverage and refinancing, limited cash, distribution sustainability, and dependence on the affiliated Adviser. Five largest positions were 26.9% of portfolio fair value. No loans were on non-accrual at year-end.
- Unrealized success-fee receivables were $4.7 million and contingent on portfolio-company change-of-control events. Undrawn portfolio-company credit and delayed-draw commitments, plus an uncalled capital commitment, totaled $74.8 million; management estimated their fair value was immaterial. No material legal proceedings were reported.
Important facts for investors to verify
- Review the portfolio’s subsequent credit performance, non-accruals, and valuation changes, particularly for holdings with material depreciation or restructuring exposure; most investments rely on unobservable Level 3 inputs.
- Confirm actual facility availability and covenant headroom after eligible collateral, subsequent borrowing, and the October 2022 commitment increase; assess the 2023 revolving-period extension and 2025 maturity plan.
- Assess whether cash NII supports the monthly distribution. FY2022 distributions included a return-of-capital component, and some reported income was non-cash PIK or OID.
- Track realized outcomes against year-end marks and contingent success fees, including collection of the $4.7 million success-fee receivable.
- Evaluate the effects of higher benchmark rates, borrower refinancing needs, and transition of remaining LIBOR-linked loans to replacement rates.