CION Investment Corp annual report, Q4 FY2016

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CION Investment Corp. 10-K Summary (Fiscal Year Ended Dec 31, 2016)

Business Context and Reporting Period

CION Investment Corporation 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 focuses on generating current income and capital appreciation by investing primarily in senior secured debt (first and second lien loans) of private U.S. middle-market companies. The reporting period covers the fiscal year ended December 31, 2016. The company is managed by CION Investment Management, LLC (CIM) with Apollo Investment Management, L.P. (AIM) acting as sub-adviser.

Key Financial Metrics

  • Net Assets: $999.8 million (up from $904.3 million in 2015).
  • Net Asset Value (NAV) per Share: $9.11 (up from $8.71 in 2015).
  • Total Investment Income: $80.6 million.
  • Net Investment Income: $47.7 million.
  • Net Increase in Net Assets from Operations: $119.7 million (compared to a decrease of $1.4 million in 2015).
  • Distributions Declared: $77.5 million ($0.7316 per share).
  • Portfolio Composition (Fair Value):
    • Senior Secured First Lien Debt: 48.1%
    • Senior Secured Second Lien Debt: 42.6%
    • Collateralized Securities/Structured Products: 7.1%
    • Unsecured Debt: 1.7%
    • Equity: 0.5%
  • Leverage: Borrowings for BDC coverage ratio were $488.9 million, resulting in an asset coverage ratio of 304% (well above the 200% regulatory minimum).
  • Cash and Short-Term Investments: $70.5 million.

Material Changes vs. Prior Period

  • Portfolio Growth: The investment portfolio (excluding TRS) grew significantly in fair value from $650.9 million in 2015 to $1.019 billion in 2016, driven by the deployment of proceeds from a new credit facility and the follow-on public offering.
  • Acquisition: In September 2016, the company acquired Credit Suisse Park View BDC, Inc. for $276.9 million, substantially increasing its portfolio size and diversifying its holdings.
  • Financing: The company entered into a new $225 million senior secured credit facility with JPMorgan Chase (JPM) in August 2016, drawing down $224.4 million by year-end. This replaced reliance solely on the Total Return Swap (TRS) for leverage.
  • TRS Reduction: The notional amount of the Total Return Swap with Citibank decreased from $718.0 million in 2015 to $407.8 million in 2016 as the company shifted toward traditional debt financing.
  • Expense Support: The company received no expense support from affiliates in 2016, whereas it received $1.9 million in 2014. However, the company recouped $0.7 million of prior expense support in 2016.
  • Unrealized Gains: The company recorded a net change in unrealized appreciation on investments of $21.6 million in 2016, reversing a depreciation of $27.6 million in 2015, largely due to tightening credit spreads.

Guidance, Outlook, and Risks

  • Outlook: Management expects the investment portfolio to continue growing due to anticipated equity from the follow-on continuous public offering. The company intends to maintain its distribution rate of approximately $0.73 per share annually, subject to earnings and asset coverage tests.
  • Liquidity Event: The company does not intend to list its shares on an exchange in the foreseeable future. It plans to seek a liquidity event (listing or liquidation) within three to five years after the completion of its offering stage, though no assurance is given.
  • Share Repurchase Program: The company conducts quarterly tender offers to provide limited liquidity. As of Q4 2016, repurchases were made at the estimated NAV per share.
  • Risks:
    • Interest Rate Risk: 93.8% of the portfolio pays variable interest rates. Rising rates increase income but may increase borrowing costs and reduce the value of fixed-rate assets.
    • Liquidity Risk: Investments are primarily in private companies with limited secondary markets. Shareholders rely on quarterly tender offers for liquidity.
    • Regulatory Risk: As a BDC, the company is subject to asset coverage tests that may restrict distributions or additional borrowing if asset values decline.
    • Concentration Risk: The company is non-diversified under the 1940 Act, allowing significant exposure to single issuers or industries.

Key Facts for Investor Verification

  • Verify the sustainability of the $0.7316 per share distribution rate against future net investment income, noting that distributions in 2016 were fully covered by net investment income and capital gains.
  • Monitor the transition from the Total Return Swap (TRS) to the JPM Credit Facility and the associated impact on leverage costs and asset coverage ratios.
  • Assess the integration and performance of the acquired Credit Suisse Park View BDC portfolio.
  • Review the company's ability to maintain RIC tax status, which requires distributing at least 90% of investment company taxable income.
  • Track the status of the continuous public offering and the company's ability to deploy capital at attractive yields in a competitive market.