CION Investment Corporation (NYSE:CION) Q3 2024 Earnings Call Transcript

CION Investment Corporation (NYSE:CION) Q3 2024 Earnings Call Transcript November 9, 2024

Operator: Greetings. And welcome to the CION Investment Corporation’s Third Quarter 2024 Conference Call. At this time, all participants are in a 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 you to your host, Charlie Arestia, Managing Director and Head of Investor Relations. Thank you, Charlie. You may begin.

Charlie Arestia: Good morning. And welcome to CION Investment Corporation’s third quarter 2024 earnings conference call. An earnings press release was distributed earlier this morning before market opened. A copy of the release along with a 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 Mark Gatto, 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 Mark Gatto. Please go ahead, Mark.

Mark Gatto: Thank you, Charlie. Good morning, everyone, and thanks for joining our call today. I am pleased with CION’s quarterly results as we continue to navigate a highly competitive credit environment with persistent uncertainty in the broader capital markets. The Fed’s rate cut during the quarter, the first such move in four years, represented the first steps towards a potentially more normalized inflation and lower interest rate environment. However, we continue to maintain a conservative and prudent outlook as we have for the past several quarters heading into the end of the calendar year. As Keith will discuss later on the call, we were very active in managing the right-size of our balance sheet in the third quarter, which resulted in unsecured debt making up the majority of our overall debt funding mix for the first time.

These transactions have given us a more flexible balance sheet that we believe is better positioned to withstand any potential volatility in the capital markets heading into next year without meaningfully increasing our cost of capital. We were also pleased with the execution of our public baby bond offering, which was more than 3 times oversubscribed and saw strong interest from both existing and new institutional investors, as well as a strong showing from retail investors. Our offering is the largest standalone baby bond in the publicly listed BDC space today. This is a significant step in the evolution of CION as a public company and we were thrilled to see the strong investor support. Moving now to our quarterly results, CION reported $0.40 in quarterly net investment income for the third quarter, driven primarily by a mix of interest income from our portfolio, as well as transaction fees from our quarterly investment activity, more than covering our $.36 base quarterly dividend.

Q&A Session

Our net asset value declined quarter-over-quarter to $15.73, down from $16.08 in the second quarter, driven primarily by fair value marks in our equity portfolio, somewhat offset by over-earning our base dividend and accretive share repurchases. As we have discussed in prior calls, we anticipate some volatility in the equity book given the relatively large size of our David’s Bridal position. Gregg will provide some additional details later in the call. Over the longer term, we are pleased with our track record of preserving CION’s net asset value since listing as a public company in 2021. We also remain pleased with the credit performance of our portfolio as our borrowers continue to navigate an unpredictable macroeconomic environment.

Following an extensive review process utilizing both our internal valuation team and external specialists, we downgraded six loans, offset by upgrading three loans on our internal risk rating scale. We added one new loan to non-accrual status during the quarter, bringing total non-accruals to 1.85% of the portfolio at fair value, up modestly from 1.36% last quarter. At the end of the quarter, loans rated 4 or 5 comprised less than 2% of our overall portfolio at fair value. Once again, we were active purchasers of our common stock in Q3, buying back approximately 166,000 shares at an average price of $12.09. Early in the quarter, we renewed our share repurchase authorization through 2025, reflecting our view that shares remain undervalued and preserving our strong alignment with shareholders.

Since the inception of our buyback through the end of the third quarter, we have repurchased over 3.5 million shares at an average price of $10.09. The market environment during the third quarter remained highly competitive, and many of the trends we have observed in earlier quarters have continued to affect deal volumes, pricing and lender protections. However, we are also seeing some green shoots as our deal pipeline continues to rebuild following the typical late summer slowdown and a broader thaw in the M&A market has been constructive following an extensive period of more sluggish activity. As Gregg will discuss later, we are certainly seeing a healthy amount of deal opportunities, but we remain highly selective with regards to deploying into new transactions given these dynamics.

Additionally, we believe the increased flexibility of our balance sheet and sufficient liquidity should allow CION to remain nimble and take advantage of opportunities that may arise in a higher volatility environment. With that, I will now turn the call over to Gregg to discuss our portfolio and investment activity during the quarter.

Gregg Bresner: Thank you, Mark, and good morning, everyone. Our Q3 net investment income benefited from a diverse combination of coupon income, transaction fees and yield-enhancing provisions such as MOICs and prepayment premiums. We remain highly selective with new investments as we were effectively at full investment during most of the quarter as we successfully achieved our targeted leverage level of 1.25 times. In addition, we have been passing on a historically higher percentage of potential investments based on credit and pricing considerations. As Mark discussed in his remarks, market conditions remain competitive as capital inflows continue to chase transactions, resulting in lower coupon spreads, higher leverage attachment levels and easing credit terms throughout the leverage loan markets.

We continue to strategically focus on first-line investing at the top of the capital structure and prefer to utilize secured yield-enhancing 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 capital structures for mezzanine and equity co-investments. We believe our continued investment selectivity and proportional deployment levels relative to our fund size helped us to invest in first-line loans at higher spreads when compared to the overall loan markets during the quarter. The weighted average coupon for our total funded first-line debt investments for the quarter was the equivalent of SOFR plus 6%. We also continued our highly selective focus on secondary investments where we see attractive risk-return profiles or the opportunity to acquire lightly syndicated first-line loan tranches at significant discounts to par due to technical reasons where we expect to have active roles in the processes that drive the refinancing or restructuring of the investments.

Historically, we’ve been able to realize healthy recoveries on our first-line restructured reorganized transactions as our realized weighted average total recoveries have been in excess of the advertised cost of those investments at the time of the restructuring. During the quarter, we successfully exited our restructured first-mean term loan investment in Heritage Power that we acquired at approximately 58% of par value. We ultimately achieved an unlevered total cash return of approximately 1.4 times our gross investment cost over a three-year period and exited with a significant realized gain of several million dollars. The majority of our annual PIK income is strategically 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 60% of our PIK investments are in portfolio companies risk rated either 1 or 2 and 95.4% risk rated 3 or better. As a result, we believe this PIK income may not compare to restructured PIK driven by a deterioration in credit. During the quarter, we received significant par paydowns within our litigation finance investments. We expect that trend to continue over the next several quarters. Litigation finance investments now comprise approximately 17% of our PIK income. Turning now to our Q3 investment and portfolio activity, our third quarter pipeline consisted of add-on and refinancing investment opportunities for our portfolio companies, as well as a new platform acquisition transaction. We completed a new private direct first-lien financing for Ascension Property Services where we served as co-lead arranger.

We additionally completed add-on investments for portfolio companies including David’s Bridal, STATinMED, Community Tree Service, K&N, American Clinical Services, and Stengel Architecture. We also completed first-lien re-financings for portfolio companies including Senex and Avison Young and an incremental secondary equity investment in Longview Power. During Q3, we made a total of $97 million in investment commitments across one new and 10 existing portfolio companies of which $78 million was funded. Approximately 23% were direct first-lien loans to new portfolio companies, 76% primary first-lien loans to existing portfolio companies and 1% for equity investments in existing portfolio companies. We also funded a total of $15 million of previously unfunded commitments.

We had sales and repayments totaling $154 million for the quarter which consisted of the full pay down of investment tranches in WIS, Global Telink, Homer City, New Cycle, USALCO, and Fluid Control, the refinancing of our first lien investments in Senex and Avison Young, and the sale of our investments in Powers Presents and Heritage Power. Approximately $49 million or nearly 40% of our total repayments for the quarter occurred on the last day of the quarter. We expect to redeploy these proceeds into our active Q4 pipeline. As a result of all these activities, our net funded investments decreased by approximately $61 million during the quarter. In terms of portfolio performance, our net asset value per share decreased from $16.08 per share in Q2 to $15.73 per share in Q3 driven primarily by unrealized net mark declines of approximately $22 million which represents approximately 1% of our total $1.8 billion portfolio.

Approximately 75% of our net portfolio decline was driven by declines in the unrealized value of our equity investments, of which 90% related to our equity investments in David’s Bridal. As we mentioned on previous quarterly calls, we expect to see significant quarter-to-quarter volatility in the marks of David’s Bridal’s equity due to the larger overall relative size of our investment, as well as the highly seasonal nature of the company’s operations and working capital profile. Of note, we also saw declines in the unrealized mark value of our equity investments in TMK TriMark and Healthway. TriMark’s revenue demand from its diversified restaurant base is still experiencing the lingering macro effects of higher inflation and interest rates.

In terms of unrealized mark gains, we had mark increases in the unrealized value of our debt investments in IWCO and Homer City Generation, as well as our equity investments in Carestream Health, our CION EagleTree joint venture, Longview Power, and Burl Lips, all of which were driven by stronger underlying performance trends. From a portfolio credit perspective, our non-accruals increased from 1.4% of fair value in Q2 to 1.8% in Q3. We added one name to the non-accrual this quarter, our term loan investment in STATinMED. CION led a super senior financing for STATinMED in partnership with the company’s private equity sponsor to help fund the growth of its new subscription-based offering to the pharmaceutical industry, which we expect to grow rapidly.

The terms of the priority super senior round are initially dilutive to the STATinMED term loan mark valuation, which is the primary driver of our decision to place on non-accrual for now. There are several names, including STATinMED, that we continue to reevaluate for potential return to accrual status based on financial performance, transaction related and other positive developments. On an absolute basis, non-accruals continue to be largely in line with historical experience and we are pleased with the continued credit performance of our portfolio, particularly in the current interest rate environment. Overall, our portfolio remains defensive in nature with 85% in first-lien investments. Approximately 98% of our portfolio remains risk rated 3 or better.

Our risk rated 3 investments, which are investments where we expect full repayment, but are either spending more engagement time and/or have seen the increased risk since the initial asset purchase increased from approximately 9.1% of the portfolio in Q2 to 11.8% in Q3, driven primarily by our investments in Hollander and TriMark. I will now turn the call over to Keith.

Keith Franz: Okay. Thank you, Gregg, and good morning, everyone. As Mark mentioned, we reported another quarter of solid financial results driven by a combination of income generated from a quarterly investment activity, including amendment and other transaction fees realized during the period. During the quarter, net investment income was $21.6 million or $0.40 per share, compared to $22.9 million or $0.43 per share, reported in the second quarter, a decrease of $1.3 million or $0.03 per share. Total investment income was $59.6 million during Q3, as compared to $61.4 million reported in Q2. The decrease of $1.8 million was driven by lower dividend income recorded during the period, which was slightly offset by higher transaction fees compared to the second quarter.

On the expense side, total operating expenses were $38 million, as compared to $38.4 million reported in the second quarter. The decrease was primarily driven by lower advisory fees and interest expense when compared to the prior quarter. At September 30th, we had total assets of approximately $1.9 billion and total equity or net assets, of $839 million, with total debt outstanding of $1.07 billion and 53.4 million shares outstanding. At the end of the quarter, our net debt-to-equity ratio was 1.18 times, which is slightly higher than 1.13 times at the end of Q2. Our portfolio fair value ended the quarter at $1.75 billion, down $70 million from the second quarter, reflecting an increase in repayment activity received at the end of the quarter.

The weighted average yield on our debt and other income-producing investments at amortized costs was 12.2% at September 30th, which is down from 12.8% or about 60 basis points from the second quarter. At September 30th, our NAV was $15.73 per share, as compared to $16.08 per share at the end of June. The decrease of $0.35 per share or 2.2%, was due to mark-to-market price declines in our portfolio, mostly from price volatility in our equity book, which was partially offset by out-earning of distributions and the creative nature of our share repurchase program during the quarter. We ended the third quarter with a strong and flexible balance sheet with over $800 million in unencumbered assets, a strong debt servicing capacity and solid liquidity.

We had over $90 million in cash and short-term investments and an additional $162 million available under our credit facilities to further finance our investment pipeline and continue to support our existing portfolio companies. At September 30th, our current debt mix is about 51% in senior-secured bank debt and 49% in unsecured loans, with about 90% in floating rate. During the quarter, the weighted average cost of our debt capital was about 8.2% which is 20 basis points lower than the second quarter. In terms of our debt structure, during the quarter, we were very active in the debt capital market. We recently closed four debt transactions, effectively refinancing 90% of our debt capital while extending the weighted average maturity wall by three years through 2027 and raised almost $300 million in new unsecured debt from new and existing institutional investors.

The remaining 10% to be refinanced is our UBS facility where we are actively working with them on new terms and expect to go to documents over the next few weeks. During the period, we amended and extended our senior-secured credit facility with J.P. Morgan for an additional two years with more constructive operating provisions and better economics. The effective credit spread was reduced by 45 basis points. We also refinanced our $30 million unsecured fixed rate term loan for a new three-year unsecured floating rate term loan with a credit spread of 3.8%. And we also upsized our unsecured notes to 2027 by issuing $100 million of three-year unsecured floating rate tranche B notes with a credit spread of 3.9%. And more recently, post-quarter end, we completed a public baby bond offering, issuing $172.5 million of new unsecured 7.5% fixed rate notes due 2029, which were listed and commenced trading on the New York Stock Exchange under the ticker symbol CICB on October 9th.

After completing these four financing transactions, our new debt mix will now be approximately 60% in unsecured and 40% in secured with over 70% in floating rate. The increase in the unsecured debt mix to 60% of our total debt capital brings additional strength and flexibility to our balance sheet, aligns well with our mostly floating rate investments and expands our group of institutional lending partners while only slightly increasing our weighted average cost of debt capital when considering the benefits it brings to our balance sheet. Now turning to distributions, during the third quarter, we paid a base distribution to our shareholders of $0.36 per share, which is the same base distribution we paid in Q2. The trailing 12-month distribution yield through the third quarter based on the average NAV was 10.5% and the trailing 12-month distribution yield based on the quarter end market price was 13.9%.

As we announced this morning, we declared a fourth quarter base distribution of $0.36 per share, which is the same as the third quarter. The fourth quarter base distribution will be paid on December 16th to shareholders of record on December 2nd. Okay. With that, I will now turn the call back to the Operator who will open a line for questions.

Operator: Thank you. [Operator Instructions] All right, there are no questions at this time. I would like to pass the call back over to Mark for closing remarks.

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Mark Gatto: Thank you. In closing, we had a strong quarter led by our repositioning of our balance sheet to increase our financial flexibility and took a major step forward as a public company with a highly successful baby bond offering. Heading into the end of the fiscal year, we believe CION is well positioned to navigate market volatility and deploy into opportunities that fit our investment profile. We are pleased with our very strong performance this year, as CION’s total return over the last 12 months remains in the upper echelon of all public BDCs. However, we will remain diligent in educating a broad audience of investors on the ability of our differentiated platform to generate very attractive risk-adjusted returns in a variety of market environments. Thank you all for your continued support of CION and we look forward to speaking again next quarter.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.