GLADSTONE CAPITAL CORP Q3 FY2025 earnings call

• Last quarter, fundings were $73M with 2 new PE-sponsored investments; exits and prepayments were $82M. Net originations were -$9M.
• Interest income $20.9M, weighted average yield 12.8%. Net investment income flat at $11.3M.
• Post-quarter end, closed 4 new platform investments and an add-on; July and early August originations $93M, net $89M.
• Anticipate portfolio growth, healthy lower middle-market deal flow; closed deals with 6 new sponsors since March 30.
• Ended quarter with conservative leverage; bank credit facility available to support earning assets growth.

During the quarter, fundings totaled $73 million with 2 new PE-sponsored investments in healthcare and industrial manufacturing. Exits and prepayments were $82 million. Interest income fell slightly to $20.9 million due to a 5.2% decline in average earning assets, but the weighted average portfolio yield rose to 12.8%. Net investment income was flat at $11.3 million. As of June 30, total assets were $780 million, liabilities $306 million, and net assets $474 million. Monthly distribution for August and September is $0.165 per common share, with an annual run rate of $1.98 per share. Revenue contribution details: Fundings ($73M) and exits/prepayments ($82M) are key components, with interest income and net investment income playing roles in the overall financial picture.

• Anticipate resurgence in portfolio growth due to remaining new deal pipeline and investment opportunities.
• See healthy flow of lower middle-market deal opportunities.
• Expect to benefit from incumbent position in newer vintage growth-oriented businesses.
• Bank credit facility available to support growth of earning assets.
• Monthly distribution for August and September set at $0.165 per share, annual run rate $1.98.

• Uncertainties in economic conditions affecting spending/consumption patterns, requiring sensitivity and stress testing.
• Difficulty in predicting prepayment timing as it's erratic and tied to transaction sell-side time frames.
• Uncertainty around debt maturity in early 2026 and evaluating financing options (adjustable rate bank facility vs. term debt) given rate uncertainty.

Q: Much has been written about the growth of private credit and its impact on spreads. Are you seeing capital drift into the lower middle market impacting spreads on new deal flow?

A: Generally, no; starting investments are below large fund thresholds. Sponsors may push for lower spreads, but we've been successful resisting, with average closing leverage 3x EBITDA and margin over SOFR in excess of 7%.

Q: How do you feel about the overall health of the portfolio and tail risks with mixed economic signals?

A: Most investments have articulated growth strategies. We're concerned about spending/consumption headwinds but investments have conservative leverage (under 3 turns) and cash flow cushion. Virtually all new investments are sponsored deals.

Q: Are you evaluating shifting portfolio structure mix to boost yields?

A: No fundamental core strategy change. In some larger investments, we've brought in bank partners for first-out, last-out situations, getting second-lien pricing within unitranche facilities. Straight second lien doesn't work in lower middle market due to small investment sizes complicating matters.

Q: Quarter-to-date leverage ratio increased to 81% of NAV. Should we expect repayments to dial back later in the quarter?

A: Prepayments are erratic. Some companies are up for sale, but little predictability. We don't see much additional repayments due to sale at this stage, but it's tough to call.

Q: Thoughts on financing debt maturity in early 2026, adjustable rate vs. term debt?

A: Evaluating the maturity, we have capacity under our line but are disappointed in current market spreads. Pursuing alternatives to address the maturity, with a backup plan but nothing concrete yet.

Q: Pipeline and backlog for remainder of the quarter and year?

A: Have healthy inbound opportunities. Expect $50M to $100M originations per quarter. December is typically busy, but cautious due to economic uncertainties and deals taking longer to close. Expect strong Q4 but cautious given market uncertainty.

Q: Update on Edge Adhesives on nonaccrual?

A: In wind-down mode, likely to be sold off soon, with accumulated depreciation likely to be realized.

Q: Feeling on future pipeline rebuilding and December quarter matching September quarter?

A: Continuing to see attractive inbound opportunities. Expect $50M to $100M originations per quarter. Will have strong net originations for balance of year. December is busy, but cautious due to economic uncertainty. Lower middle-market transactions are less impacted by interest rates, expecting strong Q4 but with caution.