CION Investment Corp. 10-Q Summary (Period Ended September 30, 2019)
Business Context and Reporting Period
CION Investment Corporation is an externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC) under the 1940 Act. The company invests primarily in senior secured debt of private and thinly-traded U.S. middle-market companies. This report covers the quarterly period ended September 30, 2019, and the nine months ended on that date.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2019 | Nine Months Ended Sept 30, 2019 |
|---|---|---|
| Total Investment Income | $49.8 million | $150.5 million |
| Net Investment Income | $21.7 million | $64.9 million |
| Net Realized and Unrealized Losses | ($23.9 million) | ($42.5 million) |
| Net Increase in Net Assets from Operations | ($2.2 million) | $22.3 million |
| Net Asset Value (NAV) per Share | $8.34 | $8.34 |
| Total Assets | $1.81 billion | $1.81 billion |
| Total Financing Arrangements (Debt) | $837.4 million | $837.4 million |
| Cash and Short-Term Investments | $33.2 million | $33.2 million |
Material Changes vs. Prior Period
- Operating Results: For the three months ended September 30, 2019, the company reported a net decrease in net assets of $2.2 million, compared to a net increase of $15.4 million in the same period in 2018. This decline was driven primarily by a net change in unrealized depreciation of $23.6 million (vs. $10.0 million in 2018) due to mark-to-market declines in loan pricing, lower LIBOR rates, and reduced market liquidity.
- Investment Income: Total investment income decreased to $49.8 million in Q3 2019 from $54.4 million in Q3 2018. The decrease was attributed to a smaller average portfolio size and the absence of $5.5 million in non-recurring prepayment premiums received in 2018.
- Expense Trends: Total operating expenses decreased slightly to $28.1 million in Q3 2019 from $29.5 million in Q3 2018. However, for the nine-month period, expenses increased to $85.6 million from $70.4 million, driven by higher interest expense ($38.4 million vs. $32.7 million) and subordinated incentive fees ($14.5 million vs. $5.6 million) as the company exceeded its hurdle rate in Q1 and Q2 2019.
- Portfolio Composition: The portfolio consists of 135 companies. Senior secured first lien debt represents 80.9% of the portfolio by fair value. The asset coverage ratio remained stable at 2.12x.
Guidance, Outlook, and Risks
- Market Conditions: Management noted that unrealized losses were driven by mark-to-market declines due to lower LIBOR rates and increased volatility in the overall market. The company expects these valuation fluctuations to continue as market conditions evolve.
- Liquidity and Capital Resources: As of September 30, 2019, the company had $64.9 million in unfunded commitments. The company maintains liquidity through cash on hand, short-term investments, and available capacity under its financing arrangements (Citibank, JPM, UBS, and Morgan Stanley).
- Subsequent Event: On October 2, 2019, the company formed a joint venture, CION SOF Funding, LLC, with BCP Special Opportunities Fund I, LP, to invest in senior secured loans. The company committed up to $87.5 million to the venture.
- Risks: Key risks include interest rate fluctuations (93.2% of the portfolio is floating rate), credit risk of portfolio companies, and the potential for further unrealized depreciation if market liquidity remains constrained.
Investor Verification Checklist
- Unrealized Depreciation: Verify the magnitude of the $38.9 million unrealized depreciation for the nine-month period and its impact on NAV.
- Non-Accrual Status: Review the 1.3% of the portfolio on non-accrual status and specific portfolio companies contributing to this figure (e.g., Charming Charlie, F+W Media).
- Debt Covenants: Confirm compliance with asset coverage ratios and other covenants across the four major financing facilities (Citibank, JPM, UBS, Morgan Stanley).
- Unfunded Commitments: Assess the $64.9 million in unfunded commitments against current liquidity and borrowing capacity.
- Expense Support: Review the status of the expense support agreement with CIM and any potential future reimbursement obligations.