CION Investment Corp. 10-Q Summary (Period Ended September 30, 2015)
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) and taxed as a Regulated Investment Company (RIC). The company invests primarily in senior secured debt of private U.S. middle-market companies. This report covers the quarterly period ended September 30, 2015, and the nine months ended on that date.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2015 | Nine Months Ended Sep 30, 2015 | Dec 31, 2014 (Balance Sheet) |
|---|---|---|---|
| Total Assets | $907.6 million | $907.6 million | $508.1 million |
| Net Assets | $846.9 million | $846.9 million | $496.4 million |
| Net Asset Value (NAV) per Share | $9.13 | $9.13 | $9.22 |
| Investment Income | $14.8 million | $35.7 million | - |
| Net Investment Income | $7.9 million | $14.5 million | - |
| Net Increase in Net Assets from Operations | ($3.6 million) | $24.0 million | - |
| Cash and Cash Equivalents | $12.7 million | $12.7 million | $9.5 million |
| Unfunded Commitments | $43.6 million | $43.6 million | $23.1 million |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased from $361.9 million at year-end 2014 to $702.1 million at September 30, 2015, driven by the deployment of proceeds from the continuous public offering.
- Operating Results: For the three months ended September 30, 2015, the company reported a net decrease in net assets of $3.6 million, compared to a net increase of $4.1 million in the same period in 2014. This decline was primarily due to a net change in unrealized depreciation on investments of $7.8 million and on the Total Return Swap (TRS) of $12.5 million, attributed to widening credit spreads.
- Expense Recoupment: The company recorded a recoupment of expense reimbursements from its sponsor, IIG, of $1.8 million for the quarter and $4.2 million for the nine-month period, increasing net operating expenses.
- TRS Expansion: The notional amount of the Total Return Swap with Citibank increased to $679.1 million from $432.0 million at the end of 2014, providing significant leverage to the portfolio.
Guidance, Outlook, and Risks
- Outlook: Management expects the investment portfolio to continue growing as the company deploys net proceeds from its continuous public offering, which is scheduled to continue until no later than December 31, 2015.
- Expense Support: The company has an expense support and conditional reimbursement agreement with IIG. While no new expense reimbursements were received in the current period, the company is obligated to recoup prior support if certain performance thresholds are met.
- Unfunded Commitments: The SEC staff views unfunded commitments as senior securities under the 1940 Act. The company is reviewing this position and intends to comply by including them in the asset coverage test or segregating liquid assets.
- Market Risk: Approximately 96.7% of the portfolio pays variable interest rates. While rising rates may increase net investment income, they could negatively impact the fair value of fixed-rate investments and the NAV.
- Valuation Risk: A significant portion of the portfolio is classified as Level 3 assets, requiring fair value determination by the board of directors based on unobservable inputs, introducing subjectivity to reported values.
Key Facts for Investor Verification
- NAV Decline: Verify the impact of widening credit spreads on the unrealized depreciation of both direct investments and the TRS, which drove the quarterly loss.
- Expense Recoupment: Confirm the conditions under which the $4.2 million recoupment of IIG expense support was triggered and the remaining liability for future recoupments.
- TRS Exposure: Review the details of the $679 million Total Return Swap, including the collateral requirements and the potential early termination fee estimated at $3.8 million.
- Unfunded Commitments: Assess the liquidity impact of the $43.6 million in unfunded commitments, particularly the $40 million commitment to the joint venture CCSLF.
- Distribution Sources: Note that distributions are funded by net investment income and realized gains; verify the tax characterization of distributions to ensure they are not a return of capital.