CION Investment Corp. 10-Q Summary (Period Ended June 30, 2013)
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). The company commenced operations on December 17, 2012, and this filing covers the quarterly period ended June 30, 2013. The company's investment objective is to generate current income and, to a lesser extent, capital appreciation, primarily through senior secured loans to U.S. middle-market companies. It utilizes a Total Return Swap (TRS) to gain economic exposure to additional loans without direct ownership.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2013 | Three Months Ended June 30, 2013 |
|---|---|---|
| Investment Income | $313,620 | $245,494 |
| Net Investment Income | $108,209 | $154,893 |
| Net Realized and Unrealized Gains | $1,209,565 | $543,737 |
| Net Increase in Net Assets from Operations | $1,317,774 | $698,630 |
| Net Asset Value (NAV) per Share | $9.17 (End of Period) | $9.17 (End of Period) |
| Total Assets | $42,803,135 | $42,803,135 |
| Total Liabilities | $7,481,217 | $7,481,217 |
| Cash and Cash Equivalents | $11,819 | $11,819 |
| Short-Term Investments | $8,643,970 | $8,643,970 |
| TRS Notional Amount | $37,683,784 | $37,683,784 |
Material Changes vs. Prior Period
As the company commenced operations on December 17, 2012, there are no comparable operating results for the three or six months ended June 30, 2012. Significant growth occurred during the six months ended June 30, 2013:
- Portfolio Expansion: Investments at fair value grew from $3.8 million at December 31, 2012, to $30.5 million at June 30, 2013. The company deployed approximately $20.7 million in new investments.
- TRS Utilization: The notional amount of the Total Return Swap increased from $2.9 million to $37.7 million, significantly expanding the company's leverage and exposure to the loan market.
- Share Issuance: The company issued 3,352,966 shares during the six-month period, raising gross proceeds of approximately $33.6 million (including reinvested distributions).
- Expense Reimbursement: The company received $1.97 million in expense reimbursements from its affiliate, ICON Investment Group, LLC (IIG), which significantly reduced net operating expenses.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook: Management expects the investment portfolio to continue growing as the company deploys proceeds from its continuous public offering. The company intends to maintain its status as a Regulated Investment Company (RIC) to avoid corporate-level federal income taxes by distributing at least 90% of its taxable income.
Expense Support and Distributions: A significant portion of the company's distributions ($110,901 or 15.2% of total distributions for the six months) was funded by expense reimbursements from IIG. These reimbursements are conditional and subject to recoupment within three years if the company's net investment income and capital gains exceed distributions paid. Without this support, distributions may have been characterized as a return of capital.
Risks and Contingencies:
- TRS Risks: The company's exposure to the TRS is limited to the cash collateral posted ($10.3 million). If the value of underlying loans depreciates significantly, the company may be required to post additional collateral or face termination of the swap.
- Valuation Uncertainty: A significant portion of the portfolio (Level 3 assets) relies on unobservable inputs and management judgment for fair value determination.
- Interest Rate Risk: 100% of the portfolio investments and TRS underlying loans bear floating interest rates. Rising rates increase income but also increase the cost of the TRS financing.
Key Facts for Investor Verification
- Distribution Sustainability: Verify the extent to which future distributions rely on IIG expense reimbursements versus organic investment income, as reimbursements are subject to recoupment.
- TRS Collateral Requirements: Monitor the "Due from counterparty" balance and the notional value of the TRS to assess potential margin calls if loan values decline.
- Portfolio Yield vs. Cost of Funds: Compare the estimated gross annual yield on investments (7.50% as of June 30, 2013) against the cost of the TRS (floating rate + 1.25%) to assess net spread.
- Qualifying Asset Test: Confirm continued compliance with the 1940 Act requirement that 70% of assets be qualifying assets, noting that the TRS is treated on a "look-through" basis.
- Expense Ratios: Note that the ratio of expenses reimbursed from IIG to average net assets was 9.88% for the six months ended June 30, 2013, indicating heavy reliance on affiliate support to maintain distribution levels.