CION Investment Corporation — Q1 2023 Form 10-Q
Business context and reporting period
CION is an externally managed business development company (BDC) and regulated investment company (RIC), focused primarily on lending to U.S. middle-market businesses. This unaudited report covers the three months ended March 31, 2023; year-over-year comparisons are to Q1 2022 unless noted. The common stock began trading on the Tel Aviv Stock Exchange in February 2023, in addition to its NYSE listing.
Financial and portfolio highlights
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Investment income | $65.0 million | $41.7 million in Q1 2022 |
| Net investment income after taxes | $29.9 million; $0.54 per share | $19.5 million; $0.34 per share |
| Net change in assets from operations | Loss of $31.0 million; $(0.56) per share | Income of $7.9 million; $0.14 per share |
| Realized and unrealized investment losses | $60.9 million total, including $56.4 million unrealized depreciation | $11.6 million total loss in Q1 2022 |
| Net asset value | $830.3 million; $15.11 per share | $883.6 million; $15.98 per share at December 31, 2022 |
| Cash and short-term investments | $96.0 million cash; $66.3 million short-term investments | $82.7 million cash; $10.9 million short-term investments at December 31, 2022 |
| Debt | $1.011 billion principal outstanding; $1.002 billion carrying value net of issuance costs | $957.5 million principal outstanding at December 31, 2022 |
| Asset coverage ratio | 1.82x | 1.92x at December 31, 2022; regulatory minimum is 1.50x |
Investment income rose about 56%, which management attributed mainly to higher LIBOR/SOFR rates and increased dividend income. Interest expense increased to $19.3 million from $8.5 million, primarily due to higher average borrowings and rates. Net investment income was approximately 46% of investment income, compared with 47% in Q1 2022. The operating loss reflects investment valuation depreciation and realized losses despite higher net investment income.
Investments at fair value totaled $1.723 billion, down from $1.760 billion at year-end. First-lien loans represented 88.8% of the investment portfolio excluding short-term investments; 84.0% of that portfolio was floating-rate. The portfolio included 109 companies. Non-accrual investments increased to 3.5% of portfolio fair value from 1.3%. Investments rated 5, indicating expected loss of interest/dividends and some principal, rose to 1.6% from less than 0.1%.
Material changes, outlook, and risks
- Portfolio purchases and drawdowns were $24.2 million, while sales and principal repayments were $66.3 million, resulting in net portfolio outflows of $42.1 million. Portfolio turnover was 1.35%.
- Operating cash flow was $0.3 million. Financing activities provided $13.0 million, including $80.7 million of new borrowings and $27.5 million of repayments. Cash distributions paid were $33.6 million; $18.7 million of distributions were declared for the quarter.
- In February 2023, CION issued $80.7 million of floating-rate Series A unsecured notes due 2026, generating approximately $77.9 million net proceeds. The offering was listed in Israel. Total debt principal increased during the quarter.
- Unfunded investment commitments were $60.2 million at quarter-end and $55.4 million as of May 3. The company reported $100 million available under its financing arrangements at March 31 and said liquidity was expected to support near-term operations, investment activity, and commitments.
- Management declared a second-quarter distribution of $0.34 per share on May 8, payable June 15, 2023. The filing provides no earnings or NAV guidance. Management cautions that distributions depend on future performance and may be funded from sources including borrowings or asset-sale proceeds.
- Interest-rate exposure is two-sided: higher rates can increase income on floating-rate assets, but also increase borrowing costs and incentive fees. The filing estimates a 100-basis-point increase would raise annual net interest income by $4.8 million, while a 100-basis-point decrease would reduce it by $4.9 million, assuming no portfolio changes, defaults, or prepayments.
- Portfolio valuations rely substantially on Level 3 inputs and significant unobservable assumptions; actual proceeds could differ materially from reported fair values. The filing also identifies risks from inflation, rising rates, recession, portfolio-company performance, funding access, and potential banking-sector disruptions. Cash is principally held at one institution and may exceed insured limits.
- The company reported compliance with financing covenants and effective disclosure controls, and disclosed no material legal proceedings or material changes to previously reported risk factors other than the added financial-institution risk.
Important facts for investors to verify
- Whether the sharp increase in non-accrual investments and the $56.4 million unrealized depreciation signal further deterioration in portfolio-company credit quality or fair values.
- How the 1.82x asset coverage ratio, debt maturities, floating-rate borrowing costs, and remaining financing availability evolve, particularly against $55.4 million of commitments reported as of May 3.
- Whether net investment income and cash collections can sustain the $0.34 quarterly distribution, given the quarter’s operating loss and cash distributions paid exceeding operating cash flow.
- The collectability and cash conversion of PIK income and dividends, and the effect of Level 3 valuation assumptions on NAV.
- Portfolio concentration and performance in business services and healthcare, the largest industry exposures, and developments at investments flagged as non-accrual or investment-rated 5.