CION Investment Corp. 2018 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: CION Investment Corporation (CION)
Reporting Period: Fiscal year ended December 31, 2018
Structure: Externally managed, non-diversified closed-end management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC).
Investment Objective: Generate current income and, to a lesser extent, capital appreciation by investing primarily in senior secured debt (first lien, second lien, unitranche) of private U.S. middle-market companies.
Management: Managed by CION Investment Management, LLC (CIM), a joint venture between CION Investment Group, LLC (CIG) and Apollo Investment Management, L.P. (AIM).
Key Financial Metrics (Year Ended Dec 31, 2018)
| Metric | 2018 Value | 2017 Value |
|---|---|---|
| Total Investment Income | $188.1 million | $152.4 million |
| Net Investment Income | $90.2 million | $87.3 million |
| Net Increase in Net Assets from Operations | $31.3 million | $85.9 million |
| Total Operating Expenses | $98.0 million | $65.1 million |
| Net Realized/Unrealized (Loss) Gain | $(58.9) million | $(1.4) million |
| Net Asset Value (NAV) per Share (End of Period) | $8.69 | $9.14 |
| Total Distributions Declared | $83.5 million ($0.7316/share) | $82.1 million ($0.7316/share) |
| Portfolio Fair Value | $1.865 billion | $1.714 billion |
| Outstanding Borrowings | $892.6 million | $705.4 million |
| Asset Coverage Ratio | 209% | 249% |
Material Changes vs. Prior Period
- Decline in Net Assets: Net assets decreased by approximately $79.4 million (from $1.059 billion to $979.3 million), driven primarily by a net decrease in net assets from operations ($31.3 million) and net capital share transactions (net repurchases of $97.0 million exceeded new issuances).
- Unrealized Depreciation: The company recorded a net change in unrealized depreciation of $(53.2) million in 2018, compared to appreciation of $9.4 million in 2017. Management attributed this to widening credit spreads negatively impacting fair values.
- Expense Growth: Total operating expenses increased 50% to $98.0 million, primarily due to higher interest expense ($45.6 million vs. $23.1 million) from increased leverage and higher management fees ($35.0 million vs. $29.5 million) due to asset growth.
- Portfolio Composition: Senior secured first lien debt increased to 79.0% of the portfolio (from 73.0% in 2017), while short-term investments decreased significantly from $206.5 million to $12.5 million as capital was deployed.
- TRS Termination: The Total Return Swap (TRS) with Citibank expired in April 2017; consequently, there were no TRS-related realized or unrealized gains/losses in 2018, unlike the $(14.0) million realized loss and $15.4 million unrealized gain recorded in 2017.
Guidance, Outlook, and Risks
- Liquidity Event: The company intends to seek a liquidity event (e.g., listing on an exchange) within three to five years following the completion of its offering stage. The follow-on public offering closed on January 25, 2019. Until a liquidity event occurs, shareholders have limited liquidity via quarterly tender offers.
- Distributions: The company declared regular weekly cash distributions of $0.014067 per share for Q1 2019. Distributions are funded primarily from net investment income; in 2018, 100% of distributions were sourced from net investment income.
- Leverage: Recent legislation allows BDCs to increase leverage (asset coverage ratio from 200% to 150%). The company has not yet determined if it will utilize this additional leverage.
- Key Risks:
- Interest Rate Risk: 94.8% of the portfolio pays variable rates. Rising rates increase borrowing costs but may increase net investment income if the spread widens.
- LIBOR Transition: The phase-out of LIBOR by 2021 creates uncertainty regarding future benchmark rates for assets and liabilities.
- Valuation Uncertainty: Most investments are Level 3 assets valued in good faith by the board, involving subjective judgments that may differ from realized values.
- Conflicts of Interest: CIM and its affiliates (including Apollo) manage other funds and may have conflicts regarding allocation of investment opportunities.
Investor Verification Checklist
- NAV Decline: Verify the impact of the $53.2 million unrealized depreciation on the sustainability of the $0.7316 annual distribution rate.
- Leverage Utilization: Confirm the company's decision regarding the use of the new 150% asset coverage ratio allowance and its impact on risk profile.
- Liquidity Timeline: Monitor progress toward a liquidity event (exchange listing) given the 3-5 year target window post-offering.
- Expense Support: Note that no expense support was received from CIM in 2018; verify if future distributions remain fully covered by operating income without affiliate support.
- Portfolio Quality: Review the 1.4% of the portfolio rated 4 or 5 (higher risk) and the 1.4% on non-accrual status for potential future realized losses.