CION Investment Corporation — Q2 2023 Form 10-Q
Business context and reporting period. CION is an externally managed business development company (BDC) and regulated investment company (RIC), focused primarily on senior secured loans to U.S. middle-market businesses. This unaudited filing covers the quarter and six months ended June 30, 2023; dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Investment income | $58.5 | $43.6 | $123.5 | $85.2 |
| Net investment income after taxes | $23.4 | $19.3 | $53.3 | $38.8 |
| Realized investment gains/(losses) | $(18.9) | $0.2 | $(23.5) | $0.1 |
| Change in unrealized appreciation/(depreciation) | $23.4 | $(20.7) | $(33.0) | $(32.3) |
| Net increase/(decrease) in net assets from operations | $27.9 | $(1.3) | $(3.2) | $6.6 |
| Net investment income per share | $0.43 | $0.34 | $0.97 | $0.68 |
Q2 net investment income was about 40% of investment income, versus about 44% a year earlier; this is a simple ratio, not a company-reported margin. Higher investment income was more than offset by higher expenses in the six-month comparison, leaving operations slightly negative after realized and unrealized losses.
- Portfolio and NAV: Investments at fair value were $1,788.5, including $100.8 of short-term investments, versus $1,760.0 at December 31, 2022. NAV was $15.31 per share, down from $15.98; shareholders’ equity was $836.4. First-lien debt was 87.0% of the investment portfolio excluding short-term investments. Non-accrual investments were 1.7% of that portfolio’s fair value, up from 1.3% at year-end.
- Debt and liquidity: Financing arrangements totaled $985.7 principal outstanding (balance-sheet carrying value, net of issuance costs, was $976.7). The company reported $11.5 cash, $100.8 in short-term investments and $125.0 available under financing arrangements. Asset coverage was 1.85x, versus 1.92x at year-end; the regulatory minimum is 1.50x.
- Cash flow: For the first half, operating activities used $35.7 and financing activities used $35.5; cash declined $71.2 to $11.5. Cash distributions paid were $52.2 in the six-month period.
- Distributions and repurchases: Distributions declared in the first half were $0.68 per share, reported as fully covered by net investment income on a GAAP basis. The company repurchased 666,657 shares for $6.8 during the first half.
Material changes versus comparable periods
- Q2 investment income increased 34% year over year, primarily due to higher LIBOR and SOFR rates. Six-month investment income rose 45%, although the average investment portfolio excluding short-term investments was slightly smaller.
- Q2 interest expense rose to $20.5 from $10.8; for the first half it more than doubled to $39.8 from $19.3. Management attributed the increase to higher benchmark rates and higher average borrowings. Incentive fees also increased as investment income grew.
- Q2 results swung to a $27.9 increase in net assets from operations from a $1.3 decrease a year earlier, as unrealized appreciation offset realized losses. For the first half, operations changed to a $3.2 decrease from a $6.6 increase in 2022, reflecting realized losses and continued unrealized depreciation.
- Portfolio mix shifted: equity rose to 9.6% from 6.1% of the portfolio excluding short-term investments, while first-lien debt declined to 87.0% from 90.3%. First-half net portfolio activity was a $27.9 reduction, compared with a $140.5 increase a year earlier.
Outlook, risks and unusual items
- Management stated that cash, short-term investments and available borrowing capacity were expected to be sufficient for near-term operations and investing needs, while noting that future funding sources may not be available on acceptable terms.
- Interest-rate exposure cuts both ways: 82.6% of investments excluding short-term investments paid floating rates. The company estimated that a 100-basis-point rate increase would raise annual net interest income by $5.6, and a 100-basis-point decrease would reduce it by $5.6, assuming no changes in defaults, prepayments or portfolio composition.
- Portfolio-company credit and valuation risks remain relevant. Most investments are Level 3 and valued using significant unobservable inputs; reported fair values may differ materially from realizable sale values. Several investments are on non-accrual, and some generate paid-in-kind interest, which may be recorded before cash is received.
- Unfunded commitments were $56.4 at June 30 and $54.5 at August 2; they may require funding if conditions are met. Management monitors liquidity against these commitments.
- After quarter-end, CION acquired substantially all assets of David’s Bridal on July 21 in a non-cash transaction following its bankruptcy exit. On August 7, management declared a $0.34-per-share regular Q3 distribution and supplemental distributions of $0.05 per share for both Q3 and Q4. The advisory agreement with CIM was also renewed for 12 months beginning August 9.
- The filing identifies risks from inflation, higher interest rates, recession and financial-market disruption, including banking-sector liquidity risks. It reports no material legal proceedings and no material changes to previously disclosed risk factors other than the added financial-institution risk.
Important facts for investors to verify
- Whether recent investment restructurings, realized losses and non-accrual exposures indicate further credit deterioration; review borrower-level holdings and subsequent developments.
- Whether income growth from floating-rate assets can continue to exceed rising financing costs, incentive fees and any further credit losses.
- Current asset coverage, borrowing availability, covenant compliance and liquidity after funding commitments, distributions and the David’s Bridal transaction.
- Whether portfolio valuations—predominantly Level 3—and the increased equity allocation support reported NAV and future cash realization.
- Whether the declared regular and supplemental distributions remain sustainable from investment income and available cash flows.