CION Investment Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Business context
CION is an externally managed business development company (BDC) and regulated investment company (RIC). It primarily lends to U.S. middle-market companies, with a portfolio concentrated in senior secured debt. Its objective is current income and, to a lesser extent, capital appreciation.
Financial and portfolio highlights
| Metric | Q3 2022 | Nine months 2022 | Comparable 2021 period |
|---|---|---|---|
| Investment income | $54.2 million | $139.4 million | $42.6 million / $116.9 million |
| Net investment income after taxes | $25.6 million | $64.3 million | $19.6 million / $55.9 million |
| Net realized investment and currency gains (losses) | $(17.2) million | $(17.1) million | $19.7 million / $16.0 million |
| Net change in unrealized appreciation (depreciation) | $25.6 million | $(6.7) million | $(14.2) million / $30.8 million |
| Net increase in net assets from operations | $34.0 million | $40.6 million | $25.1 million / $102.8 million |
At September 30, total investments at fair value were $1.807 billion; total assets were $1.886 billion; net assets were $914.9 million; and NAV was $16.26 per share, versus $16.34 at December 31, 2021. The portfolio included 119 companies; first-lien debt was 89.8% of portfolio fair value and 82.9% of the portfolio (excluding short-term investments) paid floating rates. Non-accrual investments were 0.4% of portfolio fair value, down from 0.7% at year-end 2021.
Cash was $43.7 million and short-term investments were $9.8 million. Operating cash flow was $(29.7) million for the nine months; financing activities provided $69.6 million. Principal debt outstanding totaled $957.5 million ($950.5 million net of issuance costs), with $72.5 million available under financing arrangements. Asset coverage was 1.96x, compared with 2.12x at year-end 2021.
Distributions declared for the first nine months totaled $0.87 per share, reported as covered 100% by net investment income on a GAAP basis. A fourth-quarter distribution of $0.31 per share was declared after quarter-end. The filing reports a 6.98% ratio of net investment income to average net assets for the nine months; it does not present a conventional operating margin.
Material changes versus comparable periods
- Q3 investment income rose about 27% and net investment income after taxes rose about 30% year over year. Management attributed higher investment income partly to portfolio growth and higher LIBOR and SOFR rates.
- For the nine months, investment income and net investment income increased, but net increase in net assets from operations fell to $40.6 million from $102.8 million. The swing reflected realized losses and lower unrealized results; management cited investment write-offs, restructurings, widening credit spreads and lower equity-market multiples.
- Nine-month interest expense increased to $32.8 million from $23.6 million, reflecting higher average borrowings and rates. Subordinated incentive fees rose to $13.6 million from $2.9 million; management fees declined to $20.4 million from $24.5 million following advisory-fee changes effective in 2021.
- Investments at fair value increased to $1.807 billion from $1.754 billion at year-end, while cash and short-term investments together declined to $53.5 million from $91.7 million. Debt principal increased to $957.5 million from $830.0 million.
Outlook, risks and unusual items
- No earnings or investment-return guidance was provided. Management said cash, short-term investments and available debt were expected to support near-term investing and operations, while noting future funding availability and terms cannot be assured.
- Management identified inflation, supply-chain disruptions, rising rates, tighter financial conditions and recession risk as potential pressures on portfolio-company margins and credit quality. Its rate sensitivity analysis estimates that a 100-basis-point increase would increase annual net interest income by $6.8 million, assuming no changes in defaults, prepayments or portfolio composition; higher rates also increase borrowing costs and incentive fees.
- Portfolio fair values rely substantially on Level 3 inputs and significant unobservable assumptions. Actual sale proceeds may differ materially from reported values. The filing also reports PIK income, which may be recognized before cash is received, and says distributions may be funded from sources beyond current-period investment income.
- Unfunded investment commitments were $83.9 million at quarter-end and $81.0 million as of November 3, 2022. The company reported covenant compliance and no material legal proceedings; it reported no material change to previously disclosed risk factors.
- The company repurchased 695,476 shares during Q3 for $6.7 million at an average $9.65 per share. It repurchased another 836,218 shares for $7.5 million at an average $8.97 from October 1 through November 3. Shareholders had authorized below-NAV issuance for 12 months, but the company said it was not then discussing such an issuance.
Important facts for investors to verify
- Portfolio-company credit quality, including exposures rated 3–5, non-accrual loans, write-offs and restructurings.
- Valuation assumptions for Level 3 investments and the sensitivity of NAV to credit spreads, company performance and market multiples.
- Whether floating-rate investment income continues to outpace rising financing costs and related incentive fees.
- Liquidity available to meet unfunded commitments, debt maturities, distributions and share repurchases while maintaining required asset coverage.
- Distribution sustainability and the potential effects of PIK income, below-NAV share issuance authority and further repurchases.