CION Investment Corporation (NYSE:CION) Q1 2024 Earnings Call Transcript May 9, 2024
CION Investment Corporation beats earnings expectations. Reported EPS is $0.604, expectations were $0.41. CION isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the CION Investment Corporation First Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Charlie Arestia, Managing Director and Head of Investor Relations at CION Investment Corporation. Thank you. You may begin.
Charlie Arestia: Good morning, and welcome to CION Investment Corporation’s first quarter 2024 earnings conference call. An earnings press release was distributed earlier this morning before market open. A copy of the release, along with the supplemental earnings presentation is available on the company’s website at www.cionbdc.com in the Investor Resources section and should be reviewed in conjunction with the company’s Form 10-Q filed with the SEC. As a reminder, this conference call is being recorded for replay purposes. Please note that today’s conference call may contain forward-looking statements, which are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described in the company’s filings with the SEC.
Joining me on today’s call will be Michael Reisner, CION Investment Corporation’s Co-Chief Executive Officer; Gregg Bresner, President and Chief Investment Officer; and Keith Franz, Chief Financial Officer. With that, I would like to now turn the call over to Michael Reisner. Please go ahead, Michael.
Michael Reisner: Thank you, Charlie, and good morning, everyone. We reported another strong quarter this morning, continuing our momentum from 2023. The earnings power of our conservatively positioned portfolio remains robust, generating an annualized net investment income ROE of approximately 15% in Q1. Since our direct listing in 2021, CION has continued to generate a strong net investment income ROE, in line with many of our BDC peers that are trading at or above their net asset value. While our net asset value declined modestly quarter-over-quarter, driven mostly by unrealized mark-to-market adjustments in the equity portion of our portfolio, we have grown net asset value over 6% versus the same quarter last year, driven by sustained earnings, disciplined portfolio management, and accretive share repurchases.
Net investment income for the quarter totaled $0.60 per share, up sharply from $0.40 last quarter, driven by strong underlying performance of our portfolio companies and yield-enhancing provisions that we noted on our previous earnings call, and realized during the quarter. As a result, we once again out-earned our base dividend of $0.34 per share in the quarter. Given our strong distribution coverage, and outlook for the long-term earnings power of our portfolio, I am pleased to announce an increase to our quarterly base dividend to $0.36 per share, up from $0.34 last quarter. Additionally, as mentioned on our last call, we intend to declare a supplemental dividend next month. Underlying credit performance in our portfolio remained strong in Q1, with nonaccruals improving at 0.86% of fair value.
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Q&A Session
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At a high level, we remain optimistic about the credit performance in our portfolio, with only 1% of our portfolio, risk-rated four or five on our internal risk rating scale. With recent Fed commentary suggesting that interest rates may remain elevated for longer, there is a persistent focus on closely monitoring the underlying fundamentals of our borrowers. Our portfolio remains highly diversified, and largely avoid cyclical industries that would be more susceptible, to a broader economic slowdown. Our borrowers remain fundamentally healthy with stable EBITDA trends and a weighted average interest coverage ratio of 1.98 times and weighted average leverage of 4.98 times. We remain conservatively levered on a net basis at 1.03 times, down from 1.1 times in the previous quarter, and we have ample liquidity on hand to take advantage of new investment opportunities.
We remained active repurchasers of our common stock during the quarter, buying back about 424,000 shares, at an average price of about $11 per share, for a total repurchase of approximately $4.7 million. This represents a significant acceleration from last quarter’s buyback activity. We believe our stock remains deeply undervalued, given the resilience of our credit performance, and strong operating performance. More broadly, many traded BDCs are trading at, or near the high end of their historical ranges on a price to NAV basis, potentially limiting upside for investors, while CION continues to generate an attractive, well-covered dividend yield, and offers a compelling total return opportunity. We expect to remain active in repurchasing shares in the coming quarters.
Additionally, the CION team has been active buyers of our stock. We believe is active as any BDC team, and no member of the CION management team, has ever sold CION stock. Looking at the space more broadly. Many investors and analysts have focused on the outlook for returns for BDCs, given increased competition for deals and the resulting erosion of more lender-friendly conditions. While we have certainly observed these trends in larger deals, we believe our middle market focus has generally insulated CION from the spread compression and looser covenants that have characterized larger, more commoditized deal opportunities. Just recently, CION funded a first lien term loan to a true middle market borrower with annual EBITDA of approximately $55 million at SOFR plus 7.25% with our traditional covenant package.
As we look at our origination pipeline, we continue to see ample opportunities to deploy capital at attractive spreads, to qualified borrowers across a diversified industry base. Over the last 12 months, CION has generated a total return of approximately 45%, based on the market price and reinvested dividends, versus the peer average returning approximately 30%, over the same period. On many metrics that matter for BDC investors, CION continues to perform well, which we believe justifies a valuation closer to our net asset value. With that, I’ll now turn the call over to Gregg to discuss our portfolio and investment activity. Gregg?
Gregg Bresner: Thank you Michael, and good morning everyone. Our Q1 net investment income benefited from a diverse combination of the higher floating interest rates on our loan assets, origination and transaction fees from our investment activity, and a plethora of structured yield-enhancing provisions embedded within our portfolio, such as make-wholes [ph] MOICs and prepayment premiums. We remain highly selective with new investments as market conditions change rapidly at the beginning of 2024 with the market risk on switch, being abruptly flipped as substantial capital inflows into the large-cap direct loan platforms, CLO and syndicated market vehicles has resulted in a dynamic of capital chasing transactions, particularly in the larger cap markets.
This has resulted in lower coupon spreads, higher leverage attachment levels and looser credit terms, throughout the larger capital loan markets. We have seen this dynamic creep into the upper middle market, where spreads have tightened and leverage level expectations have increased for companies with $60-plus millions of EBITDA. We continue to stick to our knitting, and focus on what we consider to be the traditional middle market; companies with $20 million to $50 million of annual EBITDA. We continue to see a nice pipeline of opportunities in this range. While competitive spread levels for new issue have trended 50 to 75 basis points, below the comparable period last year, we still believe favorable versus the 150-plus basis point compression more prevalent in the larger cap market.
We remain defensive and cautious with respect to the U.S. consumer, particularly in light of slowing GDP, and the persistence of higher interest rates and inflation levels. Traditional leverage finance M&A activity began to pick up in Q1, from the relatively subdued market levels of 2023. We continue to see refinancing and add-on acquisition activity, where additional debt capital is required that was beyond the capacity of the incumbent lender groups, or where the private equity sponsor chose to refinance and provide an additional two years to pursue M&A, or sales strategies. We expect the thaw in M&A activity to continue in 2024, as we believe buyers and sellers are more readily accepting, the higher-for-longer reality for interest rates.
We also continued our focus on identifying technically driven disruptions in the syndicated loan market, where we seek to acquire lightly syndicated first lien loan tranches at significant discounts to par, due to issues such as ratings changes, maturity extensions, exchanges or restructurings that were not suitable for the existing syndicate holders, and where we expect to have active roles in the processes that, drive the refinancing or restructuring of the investments. As we noted on our previous earnings call, we benefited from this activity in Q1 as we realized significant investment income from the repayment, refinancing and restructuring of our discounted purchase investments in PureStar, Aveline, YAK MAT and Avison Young. To quickly highlight two transactions, YAK MAT was acquired by United Rentals in Q1.
We realized significant investment income and attractive returns on our discounted first lien loan purchases, through the repayment of our take-back loan at a premium, as well as a MOIC on the preferred equity we received in conjunction, with the restructuring. Avison Young announced a comprehensive recapitalization, and deleveraging transaction that closed in Q1 of 2024, that positions the company for future growth and investment. We realized significant investment income, and an attractive return from the backstop fee and exchange of our discounted loan purchases, into debt and equity of the recapitalized Avison Young. These transactions are representative of our special situations focused where we identify opportunities to drive incremental yields to our investors through first lien investments at the top of the capital structure where we have more active involvement in driving the outcomes of the situations.
We additionally continue to utilize secured yield enhancement provisions, such as PIK features, call protection, make-whole provisions and MOICs, to incrementally enhance yields at the top of the capital structure, rather than reaching deeper into riskier capital structures, for mezzanine and equity co-investments, to achieve incremental investment yield. As a reminder, approximately 60% of our annual PIK income, is derived from highly structured situations such as our litigation finance investments, where we can attain higher yields by matching flexible PIK timing features, with strict cash flow sweeps upon collections, or through coupon structures where PIK is incremental to our cash interest. Over 80% of our PIK investments, are in portfolio companies risk-rated either one or two and 99% risk rated three or better.
