Christopher Nolan

Christopher Nolan inquired about the significant quarter-over-quarter change in diluted share count, whether this increase would be sustained due to convertible debt, the current conversion price, and any updates on regulatory structures affecting BDCs, specifically the AFFE rule.

Answer

CFO Nicole Schaltenbrand explained the diluted share count change is an accounting requirement for convertible debt calculation and will be sustained as long as convertible debt is present. She noted the conversion price would only change inconsequentially with supplemental distributions. President Bob Marcotte clarified that the convertible debt can be settled with cash or stock, making the diluted share count more of a disclosure requirement. Regarding the AFFE rule, President Bob Marcotte stated it has been under discussion for years, and any changes would take several years to implement, so they are not anticipating short-term impacts.

Christopher Nolan from Ladenburg Thalmann questioned the significant quarter-over-quarter change in Gladstone Capital's diluted share count and sought clarity on its persistence. He also inquired about any potential updates or changes to the regulatory structures affecting BDCs, particularly the AFFE rule, given the company's proximity to Washington D.C.

Answer

CFO Nicole Schaltenbrand clarified that the diluted share count change is primarily an accounting requirement related to convertible debt, which is expected to be a sustained factor. President Bob Marcotte added that the convertible debt offers flexibility for settlement in cash or stock, making it more of a disclosure item than a practical expectation of share issuance. Regarding the AFFE rule, Mr. Marcotte noted it has been under discussion for years without concrete changes, and even if relieved, any practical impact on index calculations and liquidity would likely take several years to materialize.

Christopher Nolan asked if the company is considering material share repurchases given the stock price and low leverage, whether to expect accelerating portfolio growth in fiscal 2026, and the rationale behind the recent dividend reduction, including if it signals a shift to a base plus supplemental dividend structure.

Answer

President Bob Marcotte acknowledged being tempted by share repurchases but highlighted the need to balance it with equity expansion opportunities. He confirmed expectations for accelerating portfolio growth in fiscal 2026 due to lower turnover and expanded relationships. Regarding the dividend reduction, Marcotte explained it was a responsible move to set expectations for 2026, anticipating further rate compressions, and to maintain a healthy position by reducing commitment fees and expecting increased fee load. He also indicated that supplemental dividends, driven by capital gains and overall ROE, could certainly be seen going forward.

Christopher Nolan asked about the potential for material share repurchases given the stock price and low leverage, the expectation for accelerating portfolio growth in fiscal 2026, and the rationale behind the dividend reduction for the fiscal first quarter. He also questioned if the dividend structure would shift to a base plus supplemental model.

Answer

President Bob Marcotte acknowledged being tempted by share repurchases but noted that equity would become a growth issue, making buybacks challenging until the stock's earnings power is recognized. He confirmed expectations for accelerating portfolio growth in fiscal 2026 due to lower turnover and expanded relationships. Regarding the dividend reduction, Mr. Marcotte explained it was a responsible move to set expectations for 2026, anticipating further rate compressions and aiming to absorb pressure through reduced commitment fees and increased fee load. He also indicated that supplementals, driven by equity gains, could certainly be seen on a go-forward basis, aligning with the company's goal of achieving overall shareholder return.

Christopher Nolan inquired whether the unrealized gains were predominantly equity-driven, sought clarification on the M&A market's liquidity dynamics regarding credit versus equity availability, and asked about the potential positive effect of declining base rates on the discount rate used in fair value calculations.

Answer

Taylor Ritchie, CFO of Gladstone Investment, confirmed that unrealized gains were predominantly equity-driven, with some debt fair value increases. David Dullum, President, discussed the competitive M&A environment, noting that while credit is available, GAIN's ability to provide both equity and debt offers a competitive advantage by speaking for the entire capital stack. Ritchie clarified that most investments are fair valued using TEV (EBITDA x multiple), not discounted cash flow (DCF), so declining base rates would not significantly impact their primary valuation approach.

Christopher Nolan asked if the unrealized gains were predominantly from equity investments and sought Gladstone Investment's perspective on M&A market liquidity, particularly regarding the availability of equity versus credit. He also questioned whether the recent decline in base rates would positively impact the discount rate used in fair value calculations for portfolio companies.

Answer

Taylor Ritchie, CFO of Gladstone Investment, confirmed that the unrealized gains were predominantly equity-driven, with some debt fair value increases. Ritchie and David Dullum, President, discussed that while credit is widely available, Gladstone Investment's ability to provide both debt and equity offers a competitive advantage by speaking for the entire capital stack. Ritchie clarified that most investments are fair valued using a Total Enterprise Value (TEV) approach (EBITDA x multiple) rather than discounted cash flow (DCF), so while a lower risk-free rate would theoretically improve DCF, it's not the primary valuation method.

Christopher Nolan asked about the projected flat efficiency ratio for 2026 and where the company sees leverage for EPS growth. He also inquired about new mechanisms driving deposit growth, specifically if loan disbursements are now deposited into Newtek accounts, and whether these are low-interest bearing core deposit accounts.

Answer

President and CEO Barry Sloane indicated that the primary leverage for EPS growth in 2026 would come from continuing to grow business deposits from payroll and merchant services to lower the cost of funds, and from the larger volume and size of ALP loans (C&I held for sale). He also expressed hope to beat the projected expense line. Sloane confirmed that the loan application data automatically populates the bank deposit application, and for the past six to seven months, borrowers are required to make loan payments from their Newtek account. He affirmed that these are low-interest bearing core deposit accounts, which will drive lower deposit costs.

Christopher Nolan questioned the leverage for EPS growth in 2026, given the projection for a relatively flat efficiency ratio of 55%-56%.

Answer

President and CEO Barry Sloane highlighted key leverage points: growing business deposits from payroll and merchant services to lower the cost of funds, and the increasing volume and larger average loan size of ALP (C&I held for sale) loans. He also mentioned potential for further efficiency gains at both the bank and holding company levels.

Christopher Nolan questioned if the current credit metrics (decreasing EBITDA coverage, increasing interest coverage) indicate a recipe for dividend recaps by private equity sponsors, and if covenants prevent this. He also asked about trends in the private equity space regarding extended hold times and a potential break in the logjam, and for CFO Rick Allorto to clarify NII trends.

Answer

Chairman and CEO Art Penn stated that dividend recaps have a high bar for PennantPark as a lender, though they have benefited as equity co-investors, noting an increase in such activity. He linked extended private equity hold times to equity rotation, observing a market slowdown post-April 1st but renewed optimism due to stability and potential interest rate declines. CFO Rick Allorto reiterated that no significant timing issues affected NII, attributing variances primarily to a decrease in the PSLF dividend and one-time JV expenses, which Art Penn confirmed were related to financing activity.

Christopher Nolan followed up on NII, investment assets, and average yields, asking if timing issues related to closing deals late in the quarter contributed to revenues going down while investment assets went up.

Answer

Rick Allorto, CFO, clarified that the primary variance in NII was a decrease in the PSLF dividend, which was impacted by one-time financing expenses at the joint venture during the quarter, rather than timing issues with deal closings.

Christopher Nolan of Ladenburg Thalmann & Co. Inc. asked if income from the equity rotation is expected to offset potentially higher costs from refinancing the 2026 debt maturity, and if the Truist credit facility could be used for this purpose.

Answer

Art Penn, Founder and Managing Partner, acknowledged that future refinancing rates are a key variable. The primary goal is to rotate equity into yield-generating assets and then assess the capital structure. He confirmed they have multiple financing tools, including their credit facility, bonds, and securitizations, and will use them to prudently match assets and liabilities.

Christopher Nolan sought clarification on the 4.4 times debt-to-EBITDA ratio, asking if it indicates decreasing leverage or increasing EBITDA. He also inquired about potential share buybacks given the stock trading below book value, and if joint ventures restrict such actions.

Answer

Chairman and CEO Art Penn confirmed the 4.4x debt-to-EBITDA ratio, noting it could be a result of both increasing EBITDA and companies deleveraging. He added that new deals are also being underwritten with relatively low leverage in the low to mid-4s. Regarding buybacks, Art Penn stated that the board of directors consistently evaluates all options, including share repurchases, and noted that insiders are continuous buyers of their public and private funds, suggesting the stock presents good value.

Christopher Nolan sought clarification on the 4.4 times debt to EBITDA ratio, asking if it indicates decreasing leverage or increasing EBITDA. He also inquired about the company's consideration of share buybacks given the stock trading 17% below book value, and if joint venture activities restrict such actions.

Answer

Art Penn, Founder and Managing Partner at PennantPark Investment Advisers, LLC, stated that the 4.4 times debt to EBITDA ratio could be attributed to both increasing EBITDA and companies deleveraging, which is a company goal. He added that new deals are also underwritten with relatively low leverage. Regarding buybacks, Penn confirmed that the board of directors consistently evaluates all options, including share repurchases, and noted that insiders are continuous buyers of their public and private funds, suggesting the stock currently offers good value.

Christopher Nolan asked about the valuation method for the Portland property (fair value or cost), whether it's considered an unencumbered asset, and if a recent low-price sale of another Portland office building (Big Pink) indicates a broader decline in property valuations, including for the Ritz.

Answer

CEO Tom Capasse stated the Portland property is carried at fair value, with an appraised value of $425 million. CFO Andrew Ahlborn clarified that condos are held for sale at fair value, while other components (hotel, office/retail) are held for use at cost, though all were initially recorded at fair value. Andrew Ahlborn confirmed the Portland property is not an unencumbered asset due to existing leverage. Tom Capasse distinguished the Ritz as a luxury hospitality asset, unique in the Portland market, and not comparable to older Class B/C office properties like the 'Big Pink,' citing positive RevPAR trends and ongoing stabilization.

Christopher Nolan questioned the valuation method for the Portland property (fair value vs. cost), whether it's an unencumbered asset, and expressed concern about its valuation given a recent significant price drop for another marquee Portland office building.

Answer

CEO Tom Capasse stated the Portland property is carried at fair value, with a current appraised value of $425 million. CFO Andrew Ahlborn clarified that condos are held for sale at fair value, while other components are held for use at cost, all initially at fair value. Andrew Ahlborn also confirmed the property is not unencumbered due to existing leverage. Tom Capasse differentiated the Ritz property as a luxury hospitality asset, not comparable to older office buildings, noting positive trends in RevPAR and ongoing stabilization efforts.

The analyst asked about the quarter's spillover income, the strategy to improve returns given high leverage and low profitability, whether to expect portfolio contraction to lower leverage, and if the company has considered liquidating the BDC due to its stock trading significantly below NAV.

Answer

The company confirmed spillover income drove the supplemental distribution. The strategy to improve returns is to grow assets under management to better absorb the expense base. They expect natural deleveraging from portfolio repayments in the second half of the year and will manage new deployments carefully. Regarding liquidation, management's primary focus is on stabilizing the portfolio to improve shareholder value, but they will look into the specific transaction mentioned by the analyst.

Christopher Nolan asked for clarification on the nature of the capital being raised, questioned the lack of a share repurchase program given the stock's significant discount to book value, and inquired about the expected impact of recent non-accrual exits on NII for the upcoming quarter.

Answer

The executive clarified that the capital raise is for other vehicles to scale the platform, not for the BDC directly. Regarding share repurchases, they are considered a tool but there are no immediate plans to launch a program. A slight increase in NII might occur from wider spreads on new deals, but this could be offset by the falling SOFR curve, keeping overall asset yields relatively flat.

Inquired if the trend of pushing out loan maturities indicates credit distress, asked about the company's current risk posture (risk-on vs. risk-off) given macroeconomic crosscurrents, and sought to confirm if the strategy is to opportunistically add to positions.

Answer

The company clarified that extending loan maturities is not a sign of distress but rather proactive refinancing by issuers in a strong market. They view CLO BBs and equity as resilient asset classes and are actively and opportunistically evaluating relative value to redeploy capital, confirming they are not in a holding pattern.

Asked for clarification on a recent loan sale, its potential recurrence, the mechanics of strategic partnership loans, non-recurring items in the quarter, the accounting for fair value loans, and the company's strategy for managing reserves and capital levels.

Answer

The company clarified that a $53M sale was of recreational loans, not strategic partnership loans, and that similar sales may occur in the future. Strategic partnership loans are held for only about five days. The gain on the loan sale was the main non-recurring item, though it might recur. Gains on fair value loans are only booked upon exit. The recent capital raise provides ample room for growth, and the allowance for credit losses is managed based on economic conditions and portfolio performance.

Christopher Nolan of Ladenburg Thalmann questioned the sustainability of the $0.25 quarterly dividend, given the portfolio's contraction, and asked why the company is not executing more stock buybacks with its shares trading below NAV.

Answer

CFO and CIO Lewis Solimene acknowledged that Net Investment Income (NII) is expected to fall short of the dividend in the near term. He explained that the company will use its significant spillover income, which stood at $0.53 per share, to support the current dividend level. Regarding buybacks, Solimene noted that while the historical focus has been on portfolio investments and leverage management, the company is cognizant of all strategic options, including repurchases, given the stock's valuation.

Christopher Nolan characterized the venture capital market as being 'in the doldrums' since the collapse of Silicon Valley Bank and asked for management's diagnosis of the market's current challenges and potential remedies.

Answer

CEO Scott Bluestein fundamentally disagreed with the premise, highlighting Hercules' own tremendous business momentum since March 2023 with increased commitment and funding volumes. He cited strong aggregate VC investment data, including $214 billion in 2024 and a robust $92 billion in Q1 2025, as signs of a vibrant ecosystem. He acknowledged that the primary challenge is on the VC fundraising side, which has slowed due to a muted exit environment for M&A and IPOs, but maintained an optimistic long-term outlook.

Inquired about the interest rate structure of the new credit facilities (fixed vs. variable), the advance rates on these facilities, and the expected impact on the company's leverage levels after the baby bonds mature.

Answer

One of the new facilities is variable rate, allowing the company to benefit from rate cuts, while the delayed draw facility is fixed rate. Advance rates are typically 60-70% but can reach up to 80% for specific residential asset classes. Leverage is expected to remain constrained by a 1.5x asset coverage ratio covenant in both the new facilities and the existing bonds, which mature out to 2027.

Asked about the accounting for the upcoming loan sale, the status of cash for the December debt maturity, and the income statement impact of the Shem Capital investment.

Answer

The loan sale will be accounted for as a reserve recovery offset by a realized loss. The December debt maturity will be covered by a combination of cash on hand, proceeds from the loan sale, and availability on their credit facility. The Shem Capital investment is an equity investment and had no P&L impact in Q3 as it was made late in the quarter.

Inquired about the drivers of the loan loss allowance (LTV vs. cash flow), the potential impact of a rate cut on provisions, and the future capital structure and loan pricing strategy.

Answer

The loan loss allowance is driven by a mix of factors including LTVs, property cash flows, and developer issues. A single rate cut would help but isn't a panacea; a series of cuts is needed. The company is intentionally deleveraging by not replacing maturing debt with expensive new debt and is maintaining its loan pricing but originating less.