CION Investment Corp annual report, Q4 FY2015

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CION Investment Corp. 10-K Summary (Fiscal Year Ended Dec 31, 2015)

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's objective is to generate current income and, to a lesser extent, capital appreciation by investing primarily in senior secured debt (first lien, second lien, and unitranche loans) of private and thinly-traded U.S. middle-market companies. The reporting period covers the fiscal year ended December 31, 2015. The company is managed by CION Investment Management, LLC (CIM) with Apollo Investment Management, L.P. (AIM) acting as sub-adviser.

Key Financial Metrics

  • Net Assets: $904.3 million as of December 31, 2015 (up from $496.4 million in 2014).
  • Net Asset Value (NAV) per Share: $8.71 at year-end 2015 (down from $9.22 in 2014).
  • Investment Portfolio: Total fair value of $1.35 billion, comprising $670 million in direct investments and $683 million in underlying Total Return Swap (TRS) loans.
  • Net Investment Income: $24.8 million for 2015 ($0.32 per share), compared to $6.5 million in 2014.
  • Net Change in Net Assets from Operations: A net decrease of $1.4 million ($0.02 per share) for 2015, driven by significant unrealized depreciation.
  • Distributions: Total declared distributions were $57.3 million ($0.7316 per share) for 2015.
  • Leverage: Borrowings for BDC coverage ratio purposes were $491.7 million, resulting in an asset coverage ratio of 284%.
  • Portfolio Yield: Gross annual portfolio yield based on purchase price was 7.91% (combined direct and TRS).

Material Changes vs. Prior Period

  • Portfolio Growth: The investment portfolio expanded significantly, with direct investments growing from $362 million to $670 million and TRS notional amounts increasing from $432 million to $718 million.
  • Unrealized Depreciation: The company recorded a net change in unrealized depreciation of $27.6 million on direct investments and $30.5 million on the TRS, primarily due to widening credit spreads during 2015. This resulted in a net decrease in net assets from operations, contrasting with a net increase of $16.3 million in 2014.
  • Expense Recoupment: In 2015, the company recouped $4.7 million of prior expense support provided by its sponsor, ICON Investment Group (IIG). No new expense support was received in 2015, whereas $1.9 million was received in 2014.
  • NAV Decline: NAV per share declined 5.5% year-over-year, reflecting the impact of unrealized losses on the portfolio.

Guidance, Outlook, and Risks

  • Offering Status: The initial continuous public offering ended on December 31, 2015. A follow-on continuous public offering commenced on January 25, 2016, with shares sold at $9.40 per share.
  • Liquidity Event: The company intends to seek a liquidity event (listing or liquidation) within three to five years following the completion of its offering stage, though no assurance is given.
  • Share Repurchase Program: The company conducts quarterly tender offers. For Q4 2015, shares were repurchased at a price not less than NAV and not more than 2.5% above NAV. The program was amended for Q1 2016 to repurchase at 90% of the public offering price.
  • Risks: Key risks include the illiquidity of private debt investments, the impact of widening credit spreads on fair value, reliance on the TRS for leverage (counterparty risk with Citibank), and the potential for distributions to exceed earnings (return of capital). The company also faces regulatory constraints as a BDC regarding asset coverage and qualifying assets.

Investor Verification Checklist

  • Source of Distributions: Verify the tax characterization of the $0.7316 per share distribution, specifically the portion funded by expense support recoupment versus actual investment income.
  • Unrealized Losses: Review the specific portfolio companies contributing to the $58 million in total unrealized depreciation to assess credit quality and potential for realized losses.
  • TRS Counterparty Risk: Confirm the status of the Total Return Swap agreement with Citibank, including collateral requirements and early termination fees.
  • Expense Support Agreement: Monitor the amended expense support agreement with IIG and AIM, noting the obligation to reimburse support if certain performance metrics are met.
  • NAV vs. Offering Price: Track the relationship between the declining NAV ($8.71) and the offering price ($9.40) to understand the discount/premium dynamics for new investors.