CION Investment Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. CION is an externally managed business development company (BDC) and regulated investment company (RIC) focused primarily on senior secured debt of U.S. middle-market companies. Dollar amounts below are in millions except per-share data.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Investment income | $43.6 | $38.0 | $85.2 | $74.3 |
| Net investment income after taxes | $19.3 | $18.7 | $38.8 | $36.3 |
| Net realized gains (losses) | $0.2 | $0.4 | $0.1 | $(3.7) |
| Net unrealized appreciation (depreciation) | $(20.7) | $8.8 | $(32.3) | $45.1 |
| Net increase (decrease) in net assets from operations | $(1.3) | $28.0 | $6.6 | $77.7 |
| Net investment income per share | $0.34 | $0.33 | $0.68 | $0.64 |
At June 30, total investments at fair value were $1,805.5, total assets $1,874.8, total liabilities $969.5, and shareholders’ equity $905.2. NAV was $15.89 per share, down from $16.34 at December 31, 2021. Senior securities outstanding totaled $947.5 principal, with an asset coverage ratio of 1.96x. Cash was $42.5 and short-term investments were $14.3, versus $3.8 and $87.9, respectively, at year-end.
Cash from operations was $(30.5) in Q2 and $(45.1) for the first half; financing provided $55.5 and $83.9, respectively. First-half cash increased $38.8 to $42.5. Distributions were $0.28 per share each quarter, or $0.56 for the first half; the company reported these distributions as 100% sourced from net investment income. After quarter-end, management declared a $0.31-per-share Q3 distribution.
Portfolio and changes versus comparable periods
- Investment income rose 14% year over year in Q2 and 15% for the first half, reflecting a larger average portfolio and higher LIBOR/SOFR rates. First-half net investment income increased 7%.
- Q2 results were sharply affected by $20.7 of unrealized depreciation, compared with $8.8 of unrealized appreciation a year earlier. Management cited wider credit spreads, lower equity-market multiples, and weaker performance at certain portfolio companies. First-half unrealized depreciation was $32.3, versus appreciation of $45.1 in 2021.
- Interest expense rose to $10.8 in Q2 from $7.8 and to $19.3 in the first half from $15.4, due primarily to higher average borrowings and rates. Management fees fell, reflecting the post-listing reduction in the annual base fee from 2.0% to 1.5%; subordinated income incentive fees were $4.1 in Q2 and $8.2 for the first half.
- At June 30, the portfolio included 121 companies; 92.7% of portfolio fair value was first-lien debt and 84.9% of investments, excluding short-term investments, had floating rates. Gross annual portfolio yield based on purchase price was 8.90%, versus 8.62% at year-end.
- Non-accrual investments represented 1.5% of portfolio fair value, up from 0.7% at December 31, 2021. Portfolio investments rated 4 or 5 were 1.5% of fair value, compared with 0.7% at year-end.
Outlook, liquidity, and risks
The filing provides no formal earnings guidance. Management identifies inflation, supply-chain disruption, higher energy prices, geopolitical events, and possible tighter monetary policy as risks to portfolio-company margins and performance. It also cautions that COVID-19 effects remain uncertain. Rising rates may increase income on floating-rate assets but also raise borrowing costs and incentive fees; the filing’s sensitivity analysis estimates a $7.3 increase in annual net interest income for a 100-basis-point rise, versus a $2.2 decrease for a 100-basis-point decline, assuming no portfolio changes or changes in defaults and prepayments.
Principal financing included a $600.0 JPM facility borrowing, $142.5 under the UBS facility, $125.0 of 2026 senior unsecured notes, a $30.0 fixed-rate term loan, and a new $50.0 unsecured SOFR-based term loan drawn in April 2022. The company reported compliance with applicable financing covenants. Unfunded investment commitments were $96.1 at June 30 and $81.4 on August 4; the company says it monitors liquidity to fund them. The board expanded its post-listing repurchase authorization to $60 million, but no shares had been repurchased under that policy through August 5; a Rule 10b5-1 plan was planned but not yet in place.
Most portfolio investments are Level 3 and valued using significant unobservable inputs; actual realizations may differ materially from reported fair values. PIK interest income was $9.2 for the first half and may be recognized without current cash collection. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether portfolio marks and the higher non-accrual share remain supportable, particularly given Level 3 valuation uncertainty and market pressures.
- Whether net investment income and cash collections cover distributions, incentive fees, and rising financing costs as rates change.
- Liquidity available for $81.4 of August 4 unfunded commitments, alongside $947.5 of senior securities and an asset coverage ratio of 1.96x.
- Execution and actual size of any share repurchases under the $60 million authorization, and any renewed below-NAV share issuance authorization.
- Collection of PIK interest and performance of portfolio companies exposed to inflation, supply-chain issues, and weaker economic conditions.