CION Investment Corp annual report, Q4 FY2013

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CION Investment Corp. 10-K Summary (Fiscal Year Ended Dec 31, 2013)

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 commenced operations on December 17, 2012, and this filing covers the fiscal year ended December 31, 2013. Its investment objective is to generate current income and, to a lesser extent, capital appreciation by investing primarily in senior secured loans, second lien loans, and mezzanine loans of private U.S. middle-market companies. 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: $144,570,485 at December 31, 2013 (up from $4,487,115 at December 31, 2012).
  • Net Asset Value (NAV) per Share: $9.32 at December 31, 2013 (up from $8.97 at December 31, 2012).
  • Investment Income: $1,862,602 for the year ended December 31, 2013.
  • Net Investment (Loss) Income: $(51,315) for the year ended December 31, 2013. This loss was primarily due to operating expenses exceeding investment income, partially offset by significant expense reimbursements from an affiliate.
  • Total Net Realized and Unrealized Gains: $6,153,190, driven largely by gains on the Total Return Swap (TRS) and unrealized appreciation on investments.
  • Net Increase in Net Assets from Operations: $6,101,875.
  • Distributions: Total distributions declared were $3,974,317 ($0.7162 per share). Approximately 88.6% was funded by realized gains on investments and the TRS, while 11.4% was funded from other sources (including expense reimbursements).
  • Portfolio Composition (Direct Investments): $93,135,244 fair value across 39 portfolio companies. 67% in first lien senior secured term loans, 24% in second lien, 4% in collateralized loan obligations, and 5% in subordinated debt.
  • Total Return Swap (TRS): Notional value of $148,199,937 covering 62 portfolio companies. The TRS generated net realized gains of $3,489,036 and unrealized appreciation of $1,536,222.
  • Liquidity: Cash and cash equivalents were $449,912. Short-term investments (U.S. Treasury Obligations Fund) totaled $11,383,669.
  • Debt/Leverage: The company utilizes a TRS for leverage. For BDC asset coverage ratio purposes, borrowings were $107,496,160. The asset coverage ratio was 2.34x.

Material Changes vs. Prior Period

  • Portfolio Growth: Direct investment portfolio fair value increased from $1,980,044 in 2012 to $93,135,244 in 2013. The number of portfolio companies grew from 2 to 39.
  • TRS Expansion: The TRS notional amount expanded significantly from $2,883,100 in 2012 to $148,199,937 in 2013, becoming a primary driver of returns.
  • Expense Reimbursements: The company received $3,958,903 in expense reimbursements from ICON Investment Group, LLC (IIG) in 2013, compared to $116,706 in 2012. Without these reimbursements, the company would have reported a significantly larger net investment loss.
  • Capital Raised: Gross proceeds from the continuous public offering increased from $3.6 million (inception to Dec 2012) to $157.1 million (through Dec 2013).

Guidance, Outlook, Risks, and Unusual Items

  • Outlook: The company intends to continue its continuous public offering and deploy capital into private U.S. middle-market debt. It expects to complete a liquidity event (listing or liquidation) within three to five years after the offering stage concludes.
  • Liquidity Program: Beginning in Q1 2014, the company initiated quarterly tender offers to repurchase shares at 90% of the offering price, providing limited liquidity to shareholders.
  • Expense Support: A significant portion of distributions and operating expenses in 2013 were supported by IIG. The company has a conditional obligation to reimburse IIG if future net investment income and capital gains exceed distributions paid. This support is not guaranteed to continue indefinitely.
  • Risks: Key risks include the illiquidity of private debt investments, reliance on CIM and AIM for investment decisions, potential conflicts of interest with affiliates, and the impact of interest rate changes on floating-rate loans. The company also faces risks related to maintaining RIC tax status and BDC regulatory compliance.
  • Unusual Items: The net investment loss in 2013 despite positive total returns is an unusual item driven by the timing of expense recognition versus the substantial expense reimbursements received from affiliates.

Key Facts for Investor Verification

  • Sustainability of Distributions: Verify the extent to which future distributions will rely on expense reimbursements from IIG versus actual investment income, given the conditional nature of the reimbursement agreement.
  • TRS Counterparty Risk: Confirm the terms and counterparty (Citibank) of the Total Return Swap, which represents a significant portion of the company's leverage and returns.
  • Portfolio Quality: Review the credit ratings and performance of the 39 direct portfolio companies and the 62 companies underlying the TRS, noting that all were graded as "2" (performing as expected) as of year-end.
  • Liquidity Event Timeline: Monitor progress toward the stated goal of a liquidity event within three to five years of the offering's completion, as the stock is currently unlisted.
  • Expense Ratio Trends: Track the ratio of operating expenses to average net assets as the company scales, to determine when expense reimbursements from IIG may cease.