CION Investment Corp. 10-K Summary (Fiscal Year Ended Dec 31, 2017)
Business Context and Reporting Period
CION Investment Corp. 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 targets current income and capital appreciation by investing primarily in senior secured debt (first and second lien loans) of private U.S. middle-market companies. The reporting period covers the fiscal year ended December 31, 2017. The company is managed by CION Investment Management, LLC (CIM), a joint venture between CION Investment Group, LLC and Apollo Investment Management, L.P. (AIM).
Key Financial Metrics
| Metric | 2017 Value | 2016 Value |
|---|---|---|
| Total Investment Income | $144,988 | $80,590 |
| Net Investment Income | $79,866 | $47,711 |
| Net Increase in Net Assets from Operations | $85,899 | $119,673 |
| Net Asset Value (NAV) per Share (End of Period) | $9.14 | $9.11 |
| Total Distributions Declared | $82,061 ($0.7316/share) | $77,459 ($0.7316/share) |
| Total Investments (Fair Value) | $1,714,195 | $1,089,478 |
| Financing Arrangements (Debt) | $705,447 | $221,211 |
| Asset Coverage Ratio | 249% | 304% |
Note: All dollar amounts are in thousands unless otherwise noted.
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased significantly from $1.09 billion in 2016 to $1.71 billion in 2017, driven by the deployment of proceeds from a follow-on continuous public offering and new financing arrangements.
- Financing Restructuring: The company terminated its Total Return Swap (TRS) with Citibank in April 2017. It replaced this with traditional senior secured credit facilities with Citibank, JPMorgan Chase, UBS, and Morgan Stanley. Outstanding borrowings increased from $221 million to $705 million.
- Income Growth: Net investment income rose 67% year-over-year, primarily due to the larger investment portfolio and the shift from the TRS structure to direct lending.
- Realized Gains/Losses: The company recorded a net realized loss of $18.8 million in 2017, compared to a net realized gain of $30.9 million in 2016. This was largely due to a $14.0 million realized loss on the TRS upon its termination and refinancing.
- Expense Support: The company recouped all remaining expense support from its sponsor (CIG) by the end of 2016. No expense support was received in 2017.
Guidance, Outlook, and Risks
Outlook and Liquidity: The company does not intend to list its securities on an exchange in the foreseeable future. Liquidity for shareholders is provided through quarterly tender offers (share repurchases) at estimated NAV. The company intends to seek a liquidity event (listing or liquidation) within three to five years after the completion of its offering stage.
Management Commentary: Management highlighted the successful transition from the TRS to traditional credit facilities, which provides more stable leverage. The portfolio yield remains attractive, with a gross annual portfolio yield of 9.24% based on purchase price.
Risks and Contingencies:
- Liquidity Risk: Shares are not publicly traded; shareholders rely on quarterly repurchase offers which are limited to 15% of shares outstanding annually.
- Interest Rate Risk: 92.2% of the portfolio pays variable interest rates. Rising rates increase borrowing costs but also increase investment income.
- Credit Risk: Investments are in private middle-market companies. As of Dec 31, 2017, 15.5% of the portfolio (excluding short-term investments) was rated 3, 4, or 5 (indicating increased risk to cost basis).
- Regulatory Risk: The company must maintain BDC and RIC status, requiring specific asset coverage ratios and distribution levels (90% of taxable income).
Key Facts for Investor Verification
- Distribution Sustainability: Verify the source of distributions. In 2017, 93.4% of distributions were funded by net investment income, a significant improvement from 2016 where a large portion came from TRS income.
- Asset Coverage Ratio: Confirm the ratio remains above the 200% regulatory minimum (currently 249%) to ensure the ability to pay distributions and incur additional debt.
- Portfolio Quality: Review the breakdown of investment ratings (1-5 scale). Note that 2% of the portfolio is rated 4 or 5, indicating significant risk of loss.
- Debt Maturities: Verify the maturity dates of the new credit facilities (Citibank, JPM, UBS, MS) to assess refinancing risk in the near term.
- Expense Support: Confirm that no new expense support is being provided by CIM, as the company is now expected to cover all operating expenses from its own income.