CION Investment Corp. 10-Q Summary (Period Ended September 30, 2017)
Business Context and Reporting Period
CION Investment Corporation (CION) 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, 2017, and the nine months ended on that date. As of November 8, 2017, there were 114,398,359 shares of common stock outstanding.
Key Financial Metrics
| Metric | Nine Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2016 |
|---|---|---|
| Net Investment Income | $58,077 | $32,000 |
| Net Increase in Net Assets from Operations | $65,801 | $90,290 |
| Net Asset Value (NAV) per Share | $9.15 | $9.02 |
| Total Investments (Fair Value) | $1,691,855 | $1,089,478 |
| Financing Arrangements (Debt) | $625,385 | $221,211 |
| Cash and Restricted Cash | $21,915 | $28,490 |
| Portfolio Turnover Rate | 46.07% | 20.04% |
| Asset Coverage Ratio | 2.66 | 2.85 |
Note: All figures in thousands except per share data and ratios.
Material Changes vs. Prior Period
- Portfolio Growth: Total investments increased by approximately 55% from $1.09 billion to $1.69 billion, driven by the deployment of proceeds from a follow-on continuous public offering and new financing arrangements.
- Leverage Increase: Financing arrangements (debt) surged from $221 million to $625 million. This was primarily due to the establishment of new credit facilities with Citibank ($281.7M outstanding) and UBS ($125M outstanding) to replace a Total Return Swap (TRS) and fund new investments.
- TRS Refinancing: The company terminated its TRS with Citibank in April 2017. This resulted in a net realized loss on the TRS of $13.79 million for the nine-month period, contrasting with a gain of $23.8 million in the prior year. However, this was offset by a reversal of unrealized depreciation of $15.4 million upon refinancing.
- Operating Expenses: Net operating expenses rose to $43.7 million from $21.8 million, largely due to increased interest expense ($15.5M vs $0.8M) and management fees ($21.7M vs $14.3M) associated with the larger asset base and new debt.
- Investment Income: Total investment income more than doubled to $101.8 million from $53.8 million, reflecting the expanded portfolio size.
Guidance, Outlook, and Risks
Management Commentary: Management attributes the increase in net investment income to economies of scale achieved through the follow-on offering and financing arrangements. The company expects its investment portfolio to continue growing. The termination of the TRS and transition to traditional credit facilities is expected to stabilize financing costs.
Distributions: The company declared weekly cash distributions of $0.014067 per share for October through December 2017. For the nine months ended September 30, 2017, total distributions were $61.1 million, primarily sourced from net investment income (90.3%).
Risks and Contingencies:
- Interest Rate Risk: 93.3% of the portfolio pays variable interest rates. Rising rates increase borrowing costs but may increase net investment income if the spread widens.
- Unfunded Commitments: As of September 30, 2017, the company had $75.8 million in unfunded commitments, increasing to $83.1 million by November 9, 2017.
- Valuation Risk: The majority of the portfolio (Level 3 assets) is valued using significant unobservable inputs, introducing subjectivity to fair value measurements.
- Expense Support: The company did not receive expense support from its sponsor (CIG) or sub-adviser (AIM) during the period, nor did it recoup any previously provided support.
Key Facts for Investor Verification
- Debt Structure: Verify the terms and covenants of the new Citibank, JPM, and UBS facilities, specifically regarding leverage limits and collateral requirements.
- TRS Transition Impact: Confirm the long-term impact of the TRS termination on realized gains/losses and the stability of the new financing costs compared to the previous swap structure.
- Portfolio Quality: Review the breakdown of investment ratings; 82.7% of the portfolio is rated "2" (similar risk to origination), while 3.9% is rated "4" or "5" (increased risk of loss).
- Distribution Sustainability: Assess whether the current distribution rate is fully covered by net investment income without reliance on capital gains or expense support.
- Unfunded Commitments: Monitor the company's liquidity position relative to its $83 million in unfunded commitments to ensure it can meet drawdowns without diluting shareholders or breaching debt covenants.