CION Investment Corp. 10-Q Summary (Period Ended June 30, 2017)
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) and taxed as a Regulated Investment Company (RIC). The report covers the quarterly period ended June 30, 2017, and the six months ended June 30, 2017. 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.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|
| Net Asset Value (NAV) per Share | $9.15 | $8.79 |
| Total Investments (Fair Value) | $1,673,558 | $1,089,478 |
| Net Investment Income | $36,675 | $21,305 |
| Net Increase in Net Assets from Operations | $45,420 | $46,553 |
| Total Financing Arrangements Outstanding | $574,881 | $221,211 |
| Cash and Restricted Cash | $19,473 | $17,046 |
| Portfolio Turnover Rate | 27.34% | 15.09% |
| Asset Coverage Ratio | 2.78x | 2.97x |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately 54% (from $1.09 billion to $1.67 billion) driven by the deployment of proceeds from new financing arrangements and the follow-on continuous public offering.
- Leverage Expansion: Financing arrangements increased significantly from $221 million to $575 million. The Company entered into three new facilities: a $325 million revolving credit facility with Citibank, an amended $225 million facility with JPMorgan Chase, and a $125 million repurchase agreement with UBS.
- Total Return Swap (TRS) Termination: The Company's TRS with Citibank expired on April 18, 2017. A majority of the underlying loans were purchased by a subsidiary (Flatiron Funding II) and funded via the new Citibank credit facility. This resulted in a net realized loss on the TRS of $13.9 million for the six-month period, offset by a $15.4 million reversal of unrealized depreciation.
- Operating Expenses: Net operating expenses rose to $26.7 million from $13.8 million, primarily due to increased management fees (linked to higher gross assets) and interest expense from new borrowings.
- Investment Income: Investment income grew to $63.4 million from $35.1 million, reflecting the larger portfolio size.
Guidance, Outlook, and Risks
- Management Commentary: Management expects the investment portfolio to continue growing due to anticipated equity from the follow-on offering and available borrowing capacity. The Company achieved economies of scale, contributing to increased net investment income.
- Sub-Adviser Change: On July 11, 2017, the Company terminated its investment sub-advisory agreement with Apollo Investment Management, L.P. (AIM). AIM will continue to perform services as a 50% economic partner in the investment adviser (CIM) rather than as a paid sub-adviser.
- Unfunded Commitments: As of June 30, 2017, unfunded commitments were $25.6 million, increasing to $67.9 million as of August 7, 2017. The Company intends to fund these from cash, short-term investments, and borrowings.
- Risks: Key risks include interest rate sensitivity (93.9% of the portfolio is floating rate), credit risk of portfolio companies, and the uncertainty of fair value measurements for Level 3 assets (which comprise the majority of the portfolio).
- Distributions: The Company declared weekly distributions of $0.014067 per share. For the six months ended June 30, 2017, total distributions were $40.5 million, primarily sourced from net investment income (76.9%) and gains from the TRS portfolio.
Investor Verification Checklist
- Debt Service Coverage: Verify the Company's ability to service the increased debt load ($575 million) given the shift from TRS to direct leverage and the associated interest expense.
- Asset Quality: Review the investment rating breakdown; 12.6% of the portfolio (Ratings 3, 4, and 5) is considered to have increased risk to cost basis.
- Unfunded Commitments: Assess liquidity sufficiency to meet the $67.9 million in unfunded commitments as of August 7, 2017.
- Valuation Methodology: Confirm the reliability of Level 3 fair value measurements, which rely on unobservable inputs like discount rates and EBITDA multiples.
- Expense Recoupment: Monitor the status of the expense support agreement with CIG and AIM, noting that no support was provided in the current period but recoupment obligations may exist.