CION Investment Corporation — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. CION is an externally managed business development company (BDC) and regulated investment company (RIC), focused primarily on lending to U.S. middle-market businesses. Unless noted, dollar amounts below are in millions.
Financial and portfolio highlights
| Metric | FY2023 / December 31, 2023 | Prior comparable period |
|---|---|---|
| Investment income | $251.0 | $194.9 in FY2022 |
| Net investment income after taxes | $105.0; $1.92 per share | $88.2; $1.56 per share in FY2022 |
| Net realized losses on investments and foreign currency | $(31.9) | $(32.8) in FY2022 |
| Change in unrealized investment value | +$22.2 | $(5.3) in FY2022 |
| Increase in net assets from operations | $95.3; $1.74 per share | $50.1; $0.89 per share in FY2022 |
| Net asset value (NAV) per share | $16.23 | $15.98 at December 31, 2022 |
| Net cash from operating activities | $(97.2) | +$35.3 in FY2022 |
| Debt outstanding, at par | $1,092.3 | $957.5 at December 31, 2022 |
| Asset coverage ratio | 181% | 192% at December 31, 2022 |
- Investment income rose approximately 29%, principally due to higher benchmark rates and $8.4 million of dividend income, compared with $1.5 million in FY2022. Operating expenses and income taxes rose to $146.0 million from $106.7 million; interest expense increased to $85.6 million from $49.6 million, reflecting higher rates and average borrowings. Net investment income after taxes was about 42% of investment income, versus 45% in FY2022.
- Total investments at fair value were $1,954.3 million, including $113.4 million in short-term investments; the portfolio comprised 111 companies. First-lien debt represented 85.0% of the investment portfolio and equity 12.6%, compared with 90.3% and 6.1%, respectively, a year earlier. Gross portfolio yield based on purchase price was 12.12%; the filing cautions this is not shareholder return and excludes expenses and leverage costs.
- Cash was $8.4 million, alongside $113.4 million of short-term investments. The company reported $152.5 million available under secured financing arrangements and stated these resources were expected to cover near-term investing and operating needs. Unfunded commitments were $47.3 million at year-end and $53.0 million as of March 6, 2024.
- Shareholders’ equity was $879.6 million. Investment fair value was $21.4 million below amortized cost overall. Investments on non-accrual were 0.9% of the portfolio at fair value, down from 1.3%.
Changes and notable items
- Net investment income increased about 19% year over year, while net increase in net assets from operations rose about 90%, supported by positive unrealized appreciation versus depreciation in 2022. Realized losses remained substantial, primarily due to restructurings in 2023; 2022 losses were driven mainly by investment write-offs.
- Year-end NAV per share increased $0.25. Annual distributions declared rose to $1.61 per share from $1.45; the filing reports that FY2023 distributions were funded 100% by net investment income on a GAAP basis.
- Quarterly results were uneven: first-quarter 2023 operations reduced net assets by $31.0 million, followed by increases of $27.9 million, $47.5 million and $51.0 million in the next three quarters.
- Borrowings increased by $134.8 million at par year over year. New financing included $34.1 million of additional Series A notes and $100 million of 2027 notes; both carry floating rates. The 2027 notes bear SOFR plus 4.75%, subject to a 2.00% SOFR floor. The company reported compliance in all material respects with financing covenants.
- Operating cash flow was negative despite positive earnings, reflecting investment purchases and other working-capital and portfolio cash-flow movements. Financing activities provided $22.8 million, including new borrowings, and cash declined by $74.3 million during the year.
Outlook, risks and contingencies
- No specific earnings or investment-return guidance is provided. Management said liquidity and capital sources were adequate for near- and long-term requirements, but cautioned that future financing may not be available on acceptable terms.
- On March 11, 2024, management declared a regular first-quarter 2024 distribution of $0.34 per share, payable March 28, 2024. Future distributions remain subject to board discretion, earnings, asset-coverage requirements and financing covenants.
- Shareholders approved below-NAV share issuance authority in September 2023 for a 12-month period; no such shares had been issued as of the filing. The company said it intended to seek shareholder approval again in 2024. Any below-NAV issuance could dilute shareholders and reduce NAV per share.
- Key risks include leverage and borrowing-cost exposure, borrower defaults and restructurings, inflation and high interest rates, illiquidity and subjective fair-value estimates, and the possibility that market or portfolio deterioration could constrain distributions or trigger financing covenants. Approximately 80.1% of portfolio investments, excluding short-term investments, paid floating rates; rate sensitivity analysis estimated a 100-basis-point decline would reduce annual net interest income by $4.9 million, assuming no portfolio changes, defaults or prepayments.
- Non-cash PIK income can be recognized before cash is collected, yet may increase distributions and adviser incentive fees; CION warns that this can create liquidity and credit risks. Unfunded commitments and contractual indemnifications are disclosed; maximum exposure under indemnification arrangements is not quantified, and management considers loss risk remote.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified valuation of Level 3 investments—$1.81 billion at year-end—as a critical audit matter because it requires significant judgment and unobservable inputs. No material legal proceedings were reported.
Investor facts to verify
- Review the portfolio schedule and valuation assumptions for significant impaired or restructured positions, including how fair values compare with subsequent collections or exits.
- Assess debt maturities, floating-rate exposure, available facility capacity, asset coverage of 181%, and headroom under each financing covenant.
- Confirm whether portfolio cash generation supports distributions, particularly given negative operating cash flow and PIK income.
- Track unfunded commitments, non-accrual investments and changes in portfolio credit-rating categories; verify available liquidity if commitments are drawn.
- Check any future below-NAV issuance proposals and their dilution impact. As of March 6, 2024, shares closed at $10.88, a reported 33% discount to year-end NAV per share.