CION Investment Corp. 10-Q Summary (Period Ended June 30, 2020)
Business Context and Reporting Period
CION Investment Corporation (CION) is an externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC) under the Investment Company Act of 1940. The company's investment objective is to generate current income and, to a lesser extent, capital appreciation by investing primarily in senior secured debt of private and thinly-traded U.S. middle-market companies. This report covers the quarterly period ended June 30, 2020, and the six months ended June 30, 2020.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | As of June 30, 2020 |
|---|---|---|---|
| Net Asset Value (NAV) per Share | $7.43 (End of Period) | $8.54 (End of Period) | $7.43 |
| Total Investments (Fair Value) | $1,571,728 | $1,852,723 | $1,571,728 |
| Net Investment Income | $35,577 | $43,200 | N/A |
| Net Realized and Unrealized Gains (Losses) | ($124,902) | ($18,637) | N/A |
| Net Increase (Decrease) in Net Assets from Operations | ($89,325) | $24,563 | N/A |
| Total Financing Arrangements Outstanding | N/A | N/A | $739,918 |
| Cash and Cash Equivalents | N/A | N/A | $1,688 |
| Asset Coverage Ratio | N/A | N/A | 2.13x |
Material Changes vs. Prior Period
- Significant Decline in Net Assets: Net assets decreased by approximately $110.1 million (11.6%) from December 31, 2019, to June 30, 2020. This was primarily driven by a net decrease in net assets resulting from operations of $89.3 million.
- Unrealized Depreciation: The company recorded a net change in unrealized depreciation of $109.7 million for the six months ended June 30, 2020, compared to $15.3 million in the prior year period. Management attributes this primarily to the outbreak and spread of COVID-19, which caused significant uncertainty and volatility in credit markets.
- Investment Income Decline: Total investment income decreased to $81.6 million from $100.7 million in the prior year period, reflecting a smaller average portfolio size and the impact of the pandemic on portfolio company performance.
- Expense Reductions: Total operating expenses decreased to $46.0 million from $57.5 million. This reduction was driven by lower interest expense (due to lower LIBOR rates and lower average borrowings) and a decrease in the subordinated incentive fee on income.
- Portfolio Composition: The portfolio size decreased, with the number of portfolio companies dropping from 136 at year-end 2019 to 131 at June 30, 2020. The gross annual portfolio yield based on purchase price decreased to 7.96% from 9.33% at year-end 2019.
Guidance, Outlook, and Risks
- COVID-19 Impact: Management states that the pandemic has negatively impacted business operations and portfolio companies. They expect certain portfolio companies to continue experiencing economic distress, which could lead to further reductions in investment income or impairments. The company cannot currently estimate the full duration or magnitude of these impacts.
- Distribution Suspension: On March 19, 2020, the company temporarily suspended the payment of distributions to shareholders. On July 15, 2020, the board determined to recommence distributions, declaring a regular monthly cash distribution of $0.04413 per share for August 2020.
- Share Repurchase Suspension: The share repurchase program was temporarily suspended commencing with the second quarter of 2020 to preserve liquidity. Future repurchases will be reevaluated based on prevailing circumstances.
- Liquidity Management: To improve cash position, the company deferred the payment of subordinated incentive fees to its investment adviser in the amount of $3.3 million. The company maintains short-term investments of $31.7 million and has unfunded commitments of approximately $66.9 million.
- Financing Arrangements: The company amended its JPM Credit Facility in May 2020, increasing the aggregate principal amount available to $700 million and extending the maturity date to May 15, 2023. It also repaid its Citibank and Morgan Stanley credit facilities using proceeds from the JPM facility.
Key Facts for Investor Verification
- NAV Decline: Verify the magnitude of the NAV decline from $8.40 (Dec 31, 2019) to $7.43 (June 30, 2020) and the specific portfolio companies contributing to the $109.7 million in unrealized depreciation.
- Distribution Sustainability: Assess the sustainability of the resumed distribution of $0.04413 per share given the net loss from operations and the reliance on deferred incentive fees to preserve cash.
- Portfolio Quality: Review the investment rating scale distribution, noting that 31.2% of the portfolio (Ratings 3, 4, and 5) is considered to have increased risk or expected loss of principal/interest, up from 17.4% at year-end 2019.
- Leverage and Covenants: Confirm compliance with asset coverage ratios (currently 2.13x) and review the terms of the amended JPM Credit Facility, including the non-usage fee and maturity extension.
- Unfunded Commitments: Monitor the $66.9 million in unfunded commitments and the company's ability to fund these draws without further diluting shareholders or increasing leverage beyond current levels.