CION Investment Corp. 10-Q Summary: Period Ended June 30, 2018
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for CION Investment Corporation, a non-diversified closed-end management investment company regulated as a Business Development Company (BDC). The report covers the quarterly and six-month periods ended June 30, 2018. The Company's investment objective is to generate current income and, to a lesser extent, capital appreciation, primarily through senior secured debt investments in U.S. middle-market companies. As of August 2, 2018, the Company had temporarily suspended the sale of shares pending a post-effective amendment to its registration statement.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Investment Income | $80,319 | $63,390 |
| Net Investment Income | $39,431 | $36,675 |
| Net Increase in Net Assets from Operations | $37,751 | $45,420 |
| Net Asset Value (NAV) per Share | $9.11 | $9.15 |
| Total Assets | $2,010,140 | $1,815,923 |
| Total Investments (Fair Value) | $1,982,605 | $1,714,195 |
| Financing Arrangements (Debt) | $891,334 | $705,447 |
| Cash and Cash Equivalents | $8,963 | $56,354 |
| Asset Coverage Ratio | 2.17x | 2.78x |
| Portfolio Turnover Rate | 25.90% | 27.34% |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately $268 million (15.6%) compared to the prior year period, driven by the deployment of proceeds from financing arrangements and the follow-on continuous public offering.
- Increased Leverage: Financing arrangements increased by $185.9 million (26.4%) to $891.3 million. This was primarily due to drawing down on existing facilities (Citibank, JPM, UBS, and Morgan Stanley) to fund new investments.
- Expense Increase: Total operating expenses rose to $40.9 million from $26.7 million. Interest expense more than doubled to $19.8 million due to higher average borrowings, and management fees increased to $16.5 million due to the larger asset base.
- Realized Losses: The Company reported a net realized loss on investments of $3.1 million for the six months ended June 30, 2018, compared to a loss of $2.3 million in the prior year period. This was offset by a net change in unrealized appreciation of $1.4 million.
- Total Return Swap (TRS): Unlike the prior year period which included significant activity related to the termination of a TRS (resulting in a $13.9 million realized loss and $15.4 million unrealized gain), the current period had no TRS activity as the agreement expired in April 2017.
Guidance, Outlook, and Risks
- Offering Suspension: The Company suspended the sale of shares on May 1, 2018, while working with the SEC on a post-effective amendment. No guidance was provided on the resumption date other than "as promptly as practicable."
- Leverage Capacity: Recent legislation (March 2018) allows BDCs to reduce the minimum asset coverage ratio from 200% to 150%, potentially increasing debt-to-equity ratios to 2:1. The Company has not yet determined if it will utilize this additional leverage.
- Unfunded Commitments: As of June 30, 2018, the Company had $155.8 million in unfunded commitments, which decreased to $99.9 million as of August 2, 2018. These commitments do not necessarily represent future cash requirements as they may expire undrawn.
- Interest Rate Risk: Approximately 93.7% of the portfolio pays variable interest rates. A rise in interest rates is expected to increase net investment income but could reduce the fair value of fixed-rate investments (3.3% of the portfolio).
- Asset Quality: Investments on non-accrual status represented 1.2% of the portfolio at fair value. The majority of the portfolio (84.7%) was rated "2" (similar risk to origination), with 13.2% rated "3" (increased risk but full return expected).
Investor Verification Checklist
- Offering Status: Verify the current status of the SEC post-effective amendment and the resumption of the continuous public offering.
- Liquidity Position: Review the cash balance of $8.9 million against the $99.9 million in unfunded commitments to assess liquidity adequacy.
- Debt Covenants: Confirm compliance with asset coverage ratios and other covenants across the four major financing facilities (Citibank, JPM, UBS, Morgan Stanley).
- Non-Accrual Trends: Monitor the 1.2% non-accrual rate and the specific portfolio companies contributing to this figure (e.g., Charming Charlie, F+W Media, TexOak Petro).
- Distribution Sustainability: Note that distributions of $0.3658 per share for the six months were fully covered by net investment income, but verify future coverage given the increase in interest expenses.