CION Investment Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. CION is an externally managed business development company investing primarily in debt and, to a lesser extent, equity of U.S. middle-market companies. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / prior period |
|---|---|---|
| Investment income | $73.6 | $65.0 |
| Operating expenses, including tax | $41.0 | $35.1 |
| Net investment income after tax | $32.6; $0.60 per share | $29.9; $0.54 per share |
| Net realized and unrealized investment losses | $26.1 | $60.9 |
| Net change in assets from operations | +$6.4; $0.12 per share | -$31.0; -$0.56 per share |
| Net asset value per share | $16.05 | $16.23 at Dec. 31, 2023 |
| Investment portfolio fair value | $1,870.8 | $1,954.3 at Dec. 31, 2023 |
| Cash and short-term investments | $178.6 | $121.9 at Dec. 31, 2023 |
| Operating cash flow | +$96.4 | +$0.3 |
Investment income increased 13.2%, primarily from higher base rates, origination fees, restructured investments and repayment-related yield enhancements; lower dividend income partly offset the increase. Net investment income rose 9.2%, but interest expense also increased, to $24.3 million from $19.3 million. Net investment income was about 44% of investment income, compared with about 46% a year earlier. The company reported a 3.71% quarterly net investment income-to-average-net-assets ratio; filing ratios are not annualized. Q1 distribution declarations were $0.34 per share, covered by reported net investment income of $0.60 per share.
At March 31, total financing-arrangement principal was $1,069.8 million; the balance-sheet carrying amount, net of unamortized issuance costs, was $1,060.5 million. Asset coverage was 1.81x, versus the 1.50x regulatory minimum. Cash plus short-term investments and $175 million of available secured financing provided reported near-term liquidity. Net cash from operations exceeded cash used in financing activities ($56.3 million), including distributions paid of $29.1 million, share repurchases of $4.7 million and debt repayments of $22.5 million.
Portfolio and changes versus comparable periods
- At quarter-end, 84.2% of the investment portfolio, excluding short-term investments, was first-lien debt; equity was 13.8%. Floating-rate investments were 79.1% of that portfolio. The reported gross annual portfolio yield was 11.52%, before expenses and cost of leverage, down from 12.12% at year-end.
- Portfolio fair value fell $83.4 million from year-end, alongside $95.985 million of net sales and principal repayments over purchases and drawdowns. The portfolio included 109 companies, compared with 111 at year-end.
- Credit-rating composition weakened in some areas: rating 3 investments increased to 10.4% of portfolio fair value from 6.5%; rating 1 declined to nearly zero from 5.3%. Rating 4 was 0.7% and rating 5 was 0.4%. Non-accrual investments remained 0.9% of portfolio fair value.
- Q1 realized losses were $9.7 million and unrealized depreciation was $16.4 million. Unrealized depreciation was substantially lower than Q1 2023’s $56.4 million, while realized losses were higher than the prior-year $4.5 million. The company attributed realized losses principally to restructurings.
- Q1 2024 net investment income increased year over year, but higher expenses—including interest and incentive fees—absorbed part of the improvement. Interest expense rose with higher benchmark rates and average borrowings.
Outlook, risks and unusual items
- Management said cash, short-term investments and available borrowing capacity were expected to be sufficient for near-term operations and investing needs, while cautioning that future funding may not be available in acceptable amounts or on acceptable terms. No earnings or portfolio-return guidance was provided.
- Management highlighted inflation, high interest rates, recession risk, portfolio-company performance, financing availability, valuation uncertainty and conflicts of interest as risks. A modeled 100-basis-point rate decrease would reduce annual net interest income by $4.552 million; a 100-basis-point increase would raise it by $4.552 million, assuming no portfolio changes, defaults or prepayments.
- Unfunded investment commitments rose to $60.6 million at quarter-end and $82.9 million as of May 1, 2024, including a $20 million commitment to controlled investment David’s Bridal. Commitments may not be drawn, but funding needs could affect liquidity.
- Significant non-cash and collection considerations include $9.5 million of capitalized PIK interest and a $5.6 million unrealized loss reported by the CION/EagleTree joint venture for the quarter. The company’s investment valuations are predominantly Level 3 and rely on significant unobservable inputs; realized values may differ from reported marks.
- On May 6, 2024, management declared a $0.36-per-share Q2 base distribution. The company repurchased 424,031 shares in Q1 for $4.7 million, at an average $11.01 per share. No material legal proceedings were reported, and management said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the increase in rating 3 exposures, portfolio marks and restructurings signals further credit deterioration; review individual non-accrual and impaired positions.
- How much reported income is cash versus PIK or non-recurring fees, and the collectability of PIK balances and restructured investments.
- Whether leverage, debt maturities, floating-rate funding costs and the $82.9 million of post-quarter-end unfunded commitments leave adequate liquidity and covenant headroom.
- Whether recurring net investment income can sustain distributions, particularly after the Q2 distribution increase, and how much distributions depend on future portfolio performance.
- The assumptions and sensitivity of Level 3 valuations, including material holdings and the CION/EagleTree investment.