CION Investment Corp quarterly report, Q3 FY2014

CION Investment Corp. 10-Q Summary

Business Context and Reporting Period

CION Investment Corp. is an externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC). The company invests primarily in senior secured loans and second lien loans of U.S. middle-market companies. This report covers the quarterly period ended September 30, 2014.

Key Financial Metrics

Metric Three Months Ended Sep 30, 2014 Nine Months Ended Sep 30, 2014
Total Investment Income $5,081,560 $10,916,368
Net Investment Income $2,573,568 $2,387,817
Net Increase in Net Assets from Operations $4,138,080 $13,336,901
Net Asset Value (NAV) per Share $9.31 $9.31
Total Assets $439,986,140 $439,986,140
Total Liabilities $44,028,414 $44,028,414
Cash and Cash Equivalents $14,845,190 $14,845,190
Asset Coverage Ratio 2.49x 2.49x

Portfolio Composition (Fair Value): Senior Secured First Lien (24.0%), Senior Secured Second Lien (65.2%), Collateralized Securities (10.8%), and Short-Term Investments (8.6% of total investments).

Material Changes vs. Prior Period

  • Revenue Growth: Total investment income increased significantly from $494,701 in Q3 2013 to $5,081,560 in Q3 2014, driven by portfolio expansion and the deployment of capital from a continuous public offering.
  • Expense Reimbursements: In Q3 2013, the company received $1,296,834 in expense reimbursements from its sponsor (IIG). In Q3 2014, there were no new reimbursements; instead, the company recorded a recoupment of $22,530.
  • Unrealized Gains/Losses: The company recorded a net unrealized depreciation on investments of $1,629,436 in Q3 2014, compared to appreciation of $220,148 in Q3 2013, primarily due to widening credit spreads.
  • Total Return Swap (TRS): The notional amount of the TRS increased from $148.2 million at year-end 2013 to $365.5 million as of September 30, 2014, significantly increasing leverage and exposure.

Guidance, Outlook, and Risks

  • Distributions: The company declared distributions of $0.5477 per share for the nine months ended September 30, 2014. A substantial portion of these distributions was funded by expense reimbursements from IIG, which are subject to recoupment if the company achieves certain income thresholds.
  • Capital Raising: The company continues a continuous public offering. As of November 10, 2014, it had raised gross proceeds of $476.5 million. The offering price is $10.45 per share.
  • Share Repurchases: The company conducted tender offers in Q3 2014, repurchasing 15,611 shares at $9.41 per share.
  • Risks:
    • Expense Recoupment: Future distributions may be reduced if the company is required to repay expense reimbursements previously provided by IIG.
    • Interest Rate Risk: 99.5% of the portfolio pays variable interest rates. Rising rates increase income but also increase the cost of the TRS.
    • Valuation Uncertainty: Most investments are Level 3 assets valued using unobservable inputs, subject to management judgment.

Investor Verification Checklist

  • Verify the sustainability of distributions given the reduction in expense reimbursements from IIG and the potential for recoupment.
  • Review the impact of widening credit spreads on the unrealized depreciation of the portfolio.
  • Confirm the terms and leverage implications of the expanded Total Return Swap (TRS) facility with Citibank.
  • Monitor the pace of capital deployment from the continuous offering to ensure efficient use of raised capital.
  • Check the status of unfunded loan commitments ($21.7 million as of Sept 30, 2014) and potential future cash outflows.