CION Investment Corp. 10-Q Summary (Q1 2017)
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2017. 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's investment objective is to generate current income and, to a lesser extent, capital appreciation, primarily through senior secured debt investments in U.S. middle-market companies.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net Investment Income | $16,545 | $10,475 |
| Net Increase in Net Assets from Operations | $15,879 | $4,616 |
| Net Asset Value (NAV) per Share | $9.07 | $8.57 |
| Total Assets | $1,510,705 | $1,261,063 |
| Total Shareholders' Equity | $1,010,010 | $999,763 |
| Credit Facilities Payable (Net) | $451,316 | $221,211 |
| Asset Coverage Ratio | 3.16 | 2.83 |
| Portfolio Turnover Rate | 12.50% | 3.31% |
Note: All dollar amounts in thousands, except per share data.
Material Changes vs. Prior Period
- Portfolio Expansion: Total investments increased from $1.09 billion to $1.46 billion (amortized cost), driven by the deployment of proceeds from a new Citibank credit facility and the follow-on public offering.
- Leverage Increase: Credit facilities payable more than doubled to $451.3 million, reflecting the drawdown of a new $325 million facility with Citibank and an existing facility with JPMorgan Chase.
- Total Return Swap (TRS) Transition: The company significantly reduced its exposure to the TRS with Citibank. The notional amount of underlying loans dropped from $407.8 million to $13.8 million as the company purchased the underlying assets into its direct portfolio via a new subsidiary (Flatiron Funding II) prior to the TRS expiration on April 18, 2017.
- Realized Losses on TRS: The company recorded a net realized loss of $14.3 million on the TRS, primarily due to the purchase of loans previously held in the swap. This was offset by a $15.5 million unrealized appreciation on the remaining TRS position.
- Operating Expenses: Net operating expenses rose to $11.5 million from $6.8 million, largely due to increased interest expense ($2.9 million vs. $0.1 million) and management fees ($6.5 million vs. $4.5 million) associated with the larger asset base.
Guidance, Outlook, and Risks
- Outlook: Management expects the investment portfolio to continue growing due to anticipated equity available from the follow-on continuous public offering. The company aims to maintain its Regulated Investment Company (RIC) status to avoid corporate-level federal income taxes.
- Distributions: The company declared weekly cash distributions totaling $0.1829 per share for the quarter. Sources of distributions included net investment income (76.0%), net interest from the TRS portfolio (16.5%), and realized gains (4.4%).
- Risks:
- Interest Rate Risk: 95.4% of the portfolio pays variable interest rates. While rising rates may increase net investment income, they also increase borrowing costs.
- Valuation Risk: The majority of the portfolio (Level 3 assets) relies on fair value estimates determined by the board, which involves significant judgment and may differ from actual sale prices.
- Liquidity: The company has unfunded commitments of approximately $90.3 million as of March 31, 2017, which it intends to fund from cash on hand, short-term investments, and credit facilities.
Key Facts for Investor Verification
- TRS Expiration: Verify the impact of the Total Return Swap expiration on April 18, 2017, and the successful transition of underlying assets to the direct portfolio.
- Debt Covenants: Confirm compliance with asset coverage ratios and other covenants under the new Citibank and existing JPMorgan credit facilities.
- Unfunded Commitments: Monitor the $90.3 million in unfunded commitments and the company's liquidity position to meet these obligations.
- Expense Support: Note that no expense support was received from affiliates (CIG/AIM) in Q1 2017, indicating the company is currently self-sustaining regarding operating expenses.
- NAV vs. Offering Price: The public offering price was $9.65 per share, while the NAV was $9.07, representing a discount of approximately 6%.