CION Investment Corp. 10-Q Summary (Period Ended June 30, 2015)
Business Context and Reporting Period
CION Investment Corporation 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 invests primarily in senior secured debt of private U.S. middle-market companies. This report covers the quarterly period ended June 30, 2015, and the six months ended June 30, 2015.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|
| Net Investment Income | $6,637,000 | ($186,000) Loss |
| Total Net Realized and Unrealized Gains | $20,927,000 | $9,385,000 |
| Net Increase in Net Assets from Operations | $27,564,000 | $9,199,000 |
| Net Asset Value (NAV) per Share | $9.33 | $9.38 |
| Total Assets | $794,875,000 | $508,101,000 |
| Total Shareholders' Equity | $730,451,000 | $496,389,000 |
| Investments at Fair Value | $584,925,000 | $361,914,000 |
| Revolving Credit Facility Outstanding | $22,000,000 | $0 |
| Unfunded Commitments | $45,327,000 | $23,112,000 |
Material Changes vs. Prior Period
- Portfolio Growth: Investments at fair value increased by approximately 61.6% from $361.9 million to $584.9 million, driven by the deployment of proceeds from the continuous public offering.
- Profitability: Net investment income improved significantly from a loss of $186,000 in the prior year period to income of $6.6 million, attributed to portfolio scale and economies of scale.
- Total Return Swap (TRS): The notional amount of the TRS with Citibank increased from $432.0 million to $654.6 million. Net realized gains on the TRS rose to $15.1 million (vs. $7.8 million prior year), contributing substantially to total returns.
- Liquidity and Debt: The company entered a new $40 million revolving credit facility with East West Bank in April 2015, with $22 million drawn as of June 30, 2015. Cash and cash equivalents increased to $11.7 million.
- Expense Recoupment: The company recorded $2.4 million in recoupment of expense reimbursements from its sponsor (IIG), reversing prior support provided to maintain distribution levels.
Guidance, Outlook, and Risks
- Outlook: Management expects the investment portfolio to continue growing as proceeds from the continuous offering are deployed. The company maintains a weekly distribution policy, with distributions funded by net investment income, capital gains, and potentially expense reimbursements (subject to recoupment).
- Expense Support: The company did not receive new expense reimbursements from IIG in the current period. Future distributions may be reduced if the company is required to reimburse IIG for past support, which is contingent on future performance metrics.
- Unfunded Commitments: The SEC staff views unfunded commitments as senior securities. The company is reviewing this position and intends to comply by segregating liquid assets or adjusting the asset coverage test. As of June 30, 2015, unfunded commitments totaled $45.3 million, including a $40 million commitment to a new joint venture (CCSLF).
- Market Risk: Approximately 97.9% of the portfolio pays variable interest rates. Rising rates generally increase net investment income but may increase borrowing costs. The company is exposed to credit risk and valuation uncertainty inherent in private debt markets.
Investor Verification Checklist
- Distribution Sustainability: Verify the source of distributions, noting that a portion of past distributions was funded by sponsor expense support which is now being recouped.
- Asset Coverage Ratio: Confirm the company's compliance with the 1940 Act asset coverage ratio (2.43x as of June 30, 2015) given the treatment of the TRS and unfunded commitments as senior securities.
- TRS Exposure: Review the concentration of returns derived from the Total Return Swap, which generated significant realized gains but carries counterparty and leverage risks.
- Unfunded Commitments: Assess the liquidity impact of the $45.3 million in unfunded commitments, particularly the $40 million commitment to the new joint venture.
- Expense Recoupment: Monitor future quarters for potential cash outflows related to the reimbursement of IIG expense support, which could reduce distributable income.