Gladstone Capital Corporation Q1 FY2026 earnings call

• Fundings last quarter totaled $99.1 million with new private equity-sponsored investments and advances to existing portfolio companies.
• Exits and prepayments were $52.8 million, net originations $46.3 million.
• Interest income rose to $23.9 million with average earning assets increase offsetting SOFR rate decline.
• Interest and financing costs increased due to higher borrowings and investment balance.
• Net management fees rose with average assets increase.
• Net investment income $11.3 million. Net realized gains $300,000, unrealized losses $5.3 million.
• Portfolio growth didn't materially impact investment mix. PIK income $2.3 million.
• Significant prepayment of $42.8 million and $6 million senior debt investment since quarter end.
• Robust pipeline of over $100 million in late-stage deals.
• Conservative leverage position, net debt 93% of NAV. Increased floating rate bank borrowings.
• Line of credit facility $365 million, borrowing availability over $150 million.

Last quarter, fundings totaled $99.1 million, including $37.8 million and $61.3 million in new private equity-sponsored investments and additional advances to existing portfolio companies respectively. Exits and prepayments were $52.8 million, resulting in net originations of $46.3 million. Interest income rose to $23.9 million. Interest and financing costs increased by $200,000. Net management fees rose $600,000. Net investment income was $11.3 million. Net realized gains were $300,000, while unrealized losses were $5.3 million. Portfolio growth didn't materially impact investment mix. PIK income rose to $2.3 million. A significant prepayment of $42.8 million occurred, and there's a robust pipeline of over $100 million in late-stage deals.

• Pipeline of late-stage deals over $100 million is robust and should offset recent repayments.
• Resilience of lower middle market deal flows and existing portfolio growth prospects.
• Intend to rely on floating rate debt more to match asset rate sensitivity and reduce net funding costs as short-term rates ease.

• Uncertainty in interest rates with variable rate loans having floors, impacting interest income if rates decline.
• Impact of government shutdowns on certain investments, though a specific shutdown-related impact was a unique circumstance.
• Risks associated with PIK income credits, as some companies using PIK have specific business performance and liquidation-related issues.

Q: During your prepared remarks, you mentioned increasing the usage of the revolver due to the floating rate function there. Curious if you could just talk a little bit on the loans to what extent you use floors and how many of those are at their floors now, just kind of given the SOFR curve would indicate that the market is expecting some more reductions in the base rates.

A: Yes. The majority of our variable rate loans do have floors. We are not obviously at those floors yet. So as interest rates decline, our interest income will decline. That's part of the reason why for our strategy right now, we do intend to rely on our floating rate debt somewhat more.

Q: Just looking at the investment in IMX Power Holdings, just curious if you are seeing in your origination funnel more opportunities for AI and data center-related opportunities and just how you kind of view this trend, if it's likely a longer-term trend or if you're watching it more cautiously.

A: We do not directly invest in data centers. We do see some of the spend from those projects coming through in our portfolio. We are very cautious about the sustainability. There's an awful lot of folks jumping into that market. And we are watching the reliance on that end of the market as we think about the play. But we are not directly investing what I would say is a significant reliance on the continuation of that investment spend.

Q: You noted the increase in PIK. It's kind of gone up over the past couple of quarters. Could you just kind of generally talk about what's driving that?

A: There's a couple of credits that are in that category. One, which is undergoing a more systematic or scaling up of the underlying business and the working capital consumption that is behind that growth is stressing the free cash flows and given the underlying business performance we provided them the flexibility in the case of PIK. Obviously, we are closely monitoring the EBITDA and the enterprise value as we increase our exposure to that situation. And feel that we are more than adequately covered. In the second one, the company is in the process of liquidating a portion of their underlying business that has been underperforming. And the proceeds are more than ample to cover some of the accumulation of that PIK exposure.

Q: Why did the diluted share count change quarter over quarter so much?

A: So part of that is because, just the accounting requirement for how you do the calculation in the initial period. So the only thing that's impacting our diluted shares is the convertible debt. So we do a calculation to show on the gift converted method you know, what it would be. But that's really the only factor coming into play there.

Q: Have you guys given that you're sort of co-located near Washington DC, have you heard anything in terms of updates for the regulatory structures affecting BDCs, specifically the AFFE rule?

A: AFFE has been under discussion for what seven or ten years now. Obviously, there's a general relaxation in the market. But I don't think there's anything particularly concrete. And frankly, I think it's a two-stage process even if it were relieved it doesn't mean that it's going to very quickly change the way the index is our underlying calculation. So it would take probably a number of years to roll out whatever might come.

Q: On the discussion of the pipeline, sounds obviously quite positive for this quarter. And you said activity surprising. How much is any of that actually kind of spillover from Q4? Or are these deals that kind of came to you in with January launches, so to speak, with the expectation they'd always be a March deal?

A: Yes, there's definitely a few of those deals that spilled over. I would generally say in today's marketplace, given volatility, trade flows, tariffs, I think, most of the private equity that we're working with is pretty you know, pretty vigilant on diligence and diligence periods can take time. Some of the transactions we're working on, you know, have been in the works for probably three quarters now.

Q: You pointed out unrealized depreciation with shutdown impact. Has your appetite for businesses that work for the federal government softened?

A: The situation that I referenced that shutdown was implicated or impacted was a very unique circumstance. Generally speaking, we don't do government contracts. That said, we do have a company in the portfolio that actually, believe it or not, does dredging activity that works for the army corps of engineers that is general recurring maintenance, maintaining, you know, ports and, and clearances for vessels. And the fact of the matter was there was an interruption or disruption in the army corps contracting for general maintenance services. And it caused a bit of a hole. Now that has already been corrected.

Q: Do you currently have an estimate of remaining SOFR exposure and basis points before the majority of your embedded floors kicked in?

A: I think our average what's our average floor? Probably one twenty? Yeah. Or one twenty. So the right now, what was average SOFR last quarter is three ninety? Average SOFR last quarter is roughly three ninety, so we're roughly running what is about three seventy today. Average floor is probably about one twenty five. So we've got some, you know, material move potentially on that.