CION Investment Corporation — Q3 2023 Form 10-Q
Business context and period. CION is an externally managed business development company (BDC) and regulated investment company (RIC) investing primarily in debt and, to a lesser extent, equity of U.S. middle-market companies. This unaudited report covers the quarter and nine months ended September 30, 2023; dollar amounts below are in millions unless stated otherwise.
Financial and portfolio highlights
- Q3 results: Investment income was $67.5, up from $54.2 a year earlier. Net investment income after tax was $30.0, or $0.55 per share, versus $25.6, or $0.45 per share. Net realized losses of $8.1 were more than offset by $25.6 of unrealized appreciation, producing a $47.5 increase in net assets from operations, or $0.87 per share.
- Nine-month results: Investment income rose to $191.0 from $139.4; net investment income after tax increased to $83.3 from $64.3, or $1.52 per share versus $1.13. Net realized losses widened to $31.6 from $17.1, and unrealized depreciation was $7.4 versus $6.7. The resulting increase in net assets from operations was $44.3, compared with $40.6.
- Expenses and margins: Nine-month interest expense increased to $61.5 from $32.8, primarily due to higher benchmark rates and average borrowings. Subordinated income incentive fees rose to $17.7 from $13.6. Reported nine-month ratios to average net assets were 9.69% for net investment income and 12.54% for net operating expenses; the filing states these ratios are not annualized.
- Balance sheet and leverage: At September 30, total assets were $1,896.3, total liabilities $1,035.6, and net assets $860.8. NAV was $15.80 per share, down from $15.98 at December 31, 2022. Financing arrangements had $1,008.2 of principal outstanding and $102.5 available; the balance-sheet carrying amount, net of issuance costs, was $1,000.2. Asset coverage was 1.85x, versus 1.92x at year-end.
- Liquidity and cash flow: Cash was $6.8 and short-term Treasury-fund investments were $116.9. Operating activities used $42.5 of cash in the first nine months; financing activities used $33.4, including $70.8 of distributions paid, partly offset by net borrowing. Management said cash, short-term investments, and available debt were expected to meet near-term needs, while noting future funding availability cannot be assured.
- Portfolio: Investments at fair value totaled $1,844.9, including $116.9 of short-term investments. First-lien debt was 85.7% of the investment portfolio excluding short-term investments; equity was 11.3%. The portfolio included 109 companies, and 81.2% of investments excluding short-term holdings were floating-rate. Non-accrual investments were 1.0% of portfolio fair value, down from 1.3% at year-end. Most investment valuations rely on Level 3 inputs and significant judgment.
Material changes and notable items
- Higher SOFR and LIBOR rates lifted investment income but also drove higher borrowing costs. Management attributed the year-over-year rise in investment income chiefly to higher benchmark rates.
- Nine-month net portfolio activity was negative $21.3: purchases and drawdowns were below sales and principal repayments. The portfolio’s fair value increased in the quarter but declined modestly from year-end excluding short-term investments.
- Equity investments at cost increased to $171.2 from $79.6 at year-end, while equity fair value increased to $194.5 from $107.1. The company reported $105.1 of portfolio restructurings as non-cash activity during the nine months.
- Distributions declared for the first nine months totaled $1.07 per share ($58.6), compared with $0.87 per share ($49.5) in the comparable 2022 period. The filing attributes all reported distributions in both periods to net investment income on a GAAP basis. A supplemental $0.05 per share for Q3 was paid in October; a further $0.05 supplemental distribution for Q4 and a regular $0.34 Q4 distribution were declared after quarter-end. Management cautions that future distributions depend on performance and are not assured.
- After quarter-end, CION issued $33.1 of additional Series A notes, netting $32.3, and issued $100.0 of 2027 notes at 99.25% of principal, netting approximately $99.0. The latter proceeds were intended primarily to repay secured financing, with other proceeds for investments and general purposes. On October 27, CION also repaid $25.0 under its JPM facility.
Outlook, risks, and contingencies
The filing provides no formal earnings or portfolio guidance. Management’s outlook is that liquidity and capital sources are adequate for short- and long-term requirements, but financing may not remain available on acceptable terms. Key risks include inflation, recession, rising rates, borrower performance, portfolio valuation uncertainty, and financial-market or banking-sector disruption. Rising rates can increase portfolio income but also borrowing costs and incentive fees; the filing’s sensitivity analysis estimates that a 100-basis-point rate increase would raise annual net interest income by $5.2, assuming no portfolio changes, defaults, or prepayments.
Unfunded investment commitments were $59.2 at quarter-end and $57.6 as of November 3; they may require funding if conditions are met, though they may also expire undrawn. CION reported compliance with financing covenants and no material legal proceedings. It also disclosed a new risk concerning cash balances above FDIC insurance limits and potential financial-institution disruption. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether higher investment yields continue to exceed rising financing costs, and how leverage and incentive fees affect net investment income.
- The collectability and valuation of Level 3 investments, particularly restructured, non-accrual, and PIK-paying loans; PIK income may be recognized without cash collection.
- Liquidity after distributions, unfunded commitments, post-quarter debt issuance and repayments, and upcoming financing maturities and covenant requirements.
- Whether distributions remain covered by recurring cash income; declared distributions are not guaranteed and may be funded from sources other than current cash earnings.
- The quarter-end NAV and asset-coverage position, including the sensitivity of fair values and income to interest rates and borrower credit conditions.