Gladstone: Business development buys

Business development companies (BDCs) have seen improving fundamentals due to hard work and fiscal discipline, as well as an improvement in the environment for small businesses.

Within this specialty mezzanine finance sector, the Gladstone companies are among the smaller BDCs but also among the most conservative. Here's a look at Gladstone Capital (GLAD) and Gladstone Investment (GAIN).

Gladstone Capital makes loans while Gladstone Investment is more involved in buy-outs and invests in both debt and equity, sometimes to smaller companies.

GLAD has helped solve its �biggest challenge��obtaining more long-term financing�with a preferred stock offering.

Though it raised only $35 million, and matures in 2016, nonetheless it�s a start. The company also extended its revolver to 2015. These two developments allow the company to start investing again.

This lack of long-term capital has been only one reason for the company�s slow growth; the conservative and disciplined nature of the management is also a factor, though we prefer slow conservative investment to a more aggressive growth.
Last quarter, there was essentially no growth in the portfolio as repayments more-or-less offset new investments. The existing portfolio credit is stable.

With leverage less than 50% (well below the BDC average), and the capital raised from the preferred, GLAD may now start to focus on increasing the portfolio.

With a dividend, now covered by Net Investment Income, equating to a yield of just over 10% and the stock trading at a 16% discount to (somewhat conservative) NAV, we would recommend purchase for new investors.

Meanwhile, Gladstone Investment has a lower yield, but room to grow It has improved its working capital, by extending and increasing its line of credit (to the end of 2014).

With a very low leverage of just 10% and only $21 million borrowed, GAIN is in a position to make additional investments, but is seeking to raise long-term capital to avoid the 2009 disaster where credit lines were yanked forcing sale of long-term investments.

GAIN�s dividend was fully covered last year, and the rate of Net Investment Income (which BDCs use as the basis for dividend payments) is now running above the dividend.

So there could be another dividend hike (it was raised twice last year), or perhaps, the company tantalizing hinted, an extra dividend would be paid.

GAIN, like GLAD, still has the challenge of finding long-term capital, and they are reluctant to raise equity so far below NAV.

With a current yield of 7.9% and trading at 21% below NAV, Gladstone Investment�with the likelihood of dividend increases and growth potential from its equity�is also a buy for new investors.




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