CION Investment Corporation — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. CION is an externally managed business development company (BDC) that has elected regulated investment company (RIC) tax treatment. It invests mainly in senior secured debt of U.S. middle-market companies. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where indicated.
Financial and portfolio highlights
| Metric | 2022 | 2021 |
|---|---|---|
| Investment income | $194.9 million | $157.3 million |
| Operating expenses and income taxes | $106.7 million | $83.0 million |
| Net investment income after taxes | $88.2 million | $74.3 million |
| Net realized investment and foreign-currency gain (loss) | $(32.8) million | $0.8 million |
| Net change in unrealized investment appreciation (depreciation) | $(5.3) million | $43.6 million |
| Net increase in net assets from operations | $50.1 million | $118.8 million |
| Net investment income per share | $1.56 | $1.31 |
| Net asset value (NAV) per share at year-end | $15.98 | $16.34 |
| Cash provided by (used in) operating activities | $35.3 million | $(49.2) million |
- Net investment income was about 45% of investment income; the filing does not present a conventional operating margin for this investment company.
- At December 31, 2022, total investments were $1.760 billion at fair value, versus $1.804 billion amortized cost. The portfolio comprised 113 companies; first-lien debt was 90.3% of portfolio fair value and 84.5% of investments were floating-rate.
- Portfolio gross annual yield based on purchase price was 11.80%; this is not a shareholder return and excludes expenses and leverage costs.
- Non-accrual investments were 1.3% of portfolio fair value, up from 0.7% in 2021. Investments rated 4 rose to 2.2% from 0.5%; rating 5 was less than 0.1% versus 0.2%.
- Cash was $82.7 million and short-term investments were $10.9 million. Outstanding borrowings at par were $957.5 million, with $72.5 million of available capacity. Asset coverage was 192%, down from 212% and above the 150% regulatory minimum.
- Shareholders’ equity was $883.6 million. Annual distributions declared were $1.45 per share, totaling $81.6 million; the filing reports these as 100% covered by GAAP net investment income.
Changes versus the prior year
- Investment income increased 24%, reflecting a larger average investment portfolio and higher LIBOR and SOFR rates. Net investment income rose 19%.
- Interest expense increased to $49.6 million from $31.8 million, reflecting higher average borrowings and rates. Incentive fees rose to $18.7 million from $6.9 million; management fees decreased to $27.4 million from $31.1 million, principally following advisory-fee reductions.
- Operating results weakened despite stronger recurring income: realized losses were $32.8 million, compared with a $0.8 million gain, and unrealized depreciation was $5.3 million, compared with $43.6 million of appreciation in 2021. Management attributed the changes mainly to write-offs and underperformance in certain investments.
- NAV per share declined 2.2% to $15.98. NAV-based total investment return was 10.44%, while market-value total investment return was negative 14.87%. At March 8, 2023, the stock closed at $10.52, a reported 34.2% discount to year-end NAV.
- Operating cash flow turned positive at $35.3 million. Financing activities included $127.5 million of net borrowings, $66.6 million of cash distributions paid, and $15.4 million of share repurchases.
Outlook, risks and notable items
- The filing provides no formal earnings or return guidance. Management stated that cash, short-term investments and available debt were expected to meet near-term investment and operating needs, while noting that future funding sources may not be available on acceptable terms.
- Management highlighted inflation, rising interest rates, tighter credit conditions and recession risk. Rising rates may lift income on floating-rate assets but also increase borrowing costs and portfolio-company debt burdens; the filing’s sensitivity analysis estimates that a 100-basis-point increase would raise annual net interest income by $6.8 million, assuming no portfolio changes, defaults or prepayments.
- Valuation is a key uncertainty: $1.716 billion of investments were classified as Level 3, requiring significant unobservable inputs and judgment. The independent auditor identified Level 3 valuation as a critical audit matter, while issuing an unqualified opinion on the financial statements.
- PIK interest and other noncash accruals can increase reported income without producing current cash. PIK interest and dividends capitalized in 2022 totaled $31.4 million; these accruals can complicate cash distribution and RIC tax requirements.
- Unfunded investment commitments were $71.4 million at year-end and $61.8 million as of March 8, 2023. They may require funding if conditions are met, though they may also expire undrawn.
- In February 2023, CION issued approximately $80.7 million of Series A unsecured notes due in 2026, bearing interest at SOFR plus 3.82%; net proceeds were approximately $77.9 million. The notes add leverage and include covenants, including minimum equity of $525 million and minimum asset coverage of 150%.
- Shareholders had approved a below-NAV share issuance authority in 2022; CION said it intended to seek renewed approval in 2023. Any issuance below NAV could dilute existing shareholders. The company also repurchased $15.4 million of shares in 2022 under its post-listing program.
- The company reported no material pending legal proceedings. Management and the auditor concluded that disclosure controls and internal control over financial reporting were effective as of year-end.
Most important facts for investors to verify
- Whether portfolio-company performance, non-accruals and lower-rated investments have deteriorated further since year-end, and whether valuation marks reflect current conditions.
- Cash earnings and cash collections versus accrued income, particularly PIK, and the sustainability of distributions relative to recurring net investment income.
- Debt costs, asset coverage, financing availability and compliance with facility and Series A note covenants as rates and credit conditions change.
- The current status and terms of any proposed below-NAV equity issuance, share repurchases and the market discount to NAV.
- How the $71.4 million year-end unfunded commitments have changed, and the liquidity available to fund any drawdowns.