Cion Investment Corp
NYSE:CION
Earnings Call Analysis
Q4-2023 Analysis
Cion Investment Corp
The company has reported a strong performance in the fourth quarter of 2023, showcasing solid credit performance and increased net asset value. The net income per share saw an 8% quarter-over-quarter increase, adding to the robust financials with net investment income of $0.40 per share, outearning the base dividend. With the return on equity (ROE) for the quarter at 23.4% and 11% for the year, investors can be confident in the company's profitable operations.
A significant midyear supplemental dividend is on the horizon, set to boost shareholder returns. Although the exact amount will be shared next quarter, investors should note July 12 as the payment date to shareholders of record on June 28. This announcement indicates a commitment to returning value to shareholders.
The company maintains a defensive stance with nonaccruals representing a low 0.9% of fair value and high-credit-risk names below 1% of the portfolio at fair value. This conservative risk profile is supported by 99% of the book being rated as risk-weight 3 or higher, illustrating the company's careful credit risk management.
Net asset value per share has increased by $0.43 to $16.23, influenced by market adjustments and a share repurchase program that has seen approximately 2.8 million shares bought back for $27 million, enhancing shareholder value.
The company boasts a weighted average EBITDA of $34 million in its portfolio, with a focus on lender protection and covenants. Its weighted average spread stands at 750 basis points over the base rate, indicating a strong spread over borrowings, which should appeal to prudent investors.
With new investment commitments of $152 million across new and existing portfolio companies and a net increase in funded activity of $71 million, the firm is actively managing and growing its portfolio in a balanced manner. The net debt-to-equity ratio at 1.10x signals a cautiously leveraged position, promoting stability.
Year-over-year net investment income rose by 23% to $105 million or $1.92 per share, underscoring the company's revenue-generating abilities. Additionally, total distributions have been incremented by 11% year-over-year to $1.61 per share, further underlining the company's shareholder-friendly approach and strong operating results.
With a debt capital cost of about 8.5% and a debt mix of approximately 60% senior secured and 40% unsecured, the company has fortified its balance sheet while ensuring that the majority of debt is floating rate, matching its investment approach.
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Good morning, and welcome to CION Investment Corporation's Fourth Quarter and Year-End 2023 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 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.
Speaking on today's call will be Michael Reisner, CION Investment Corporation's Co-Chief Executive Officer; Greg Bresner, President and Chief Investment Officer; and Keith France, Chief Financial Officer.
With that, I would now like to turn the call over to Michael Reisner. Please go ahead, Michael.
Thank you. Good morning, everyone, and thank you for joining us. As mentioned, I'm joined today by Greg and Keith as well as other members of [indiscernible] management. I will start our call today with an overview of our fourth quarter and year-end results. Greg will review our investment activity during the quarter, and Keith will provide additional detail on our financial results. After Keith's prepared remarks, we will open the call to questions.
As we reported this morning, we had a very strong fourth quarter and 2023 overall, which saw us continue to demonstrate solid credit performance with an increase of almost 3% to our net asset value quarter-over-quarter and almost 2% year-over-year and net income of $0.94 per share, an increase of 8% quarter-over-quarter.
Our ROE was 23.4% for the quarter and 11% for the year. Our net investment income ROE was 10% for the quarter and 12.1% for the year. Our net investment income of $0.40 per share, once again outearned our base dividend. Because of our continued ability to outearn our base dividend, coupled with our ability to drive returns by our yield enhancement features and opportunistic buying of lightly syndicated deals at discounts, which Greg will speak more about. We are announcing today our intention to declare a midyear supplemental dividend payable July 12 to shareholders of record as of June 28.
The exact amount of the supplemental dividend will be announced next quarter. Our portfolio continued to deliver resilient credit performance as a percentage of our portfolio on nonaccrual is now below 1% of fair value, perhaps an even better indication of our credit performance, the percentage of names that we have risk rated 4 or 5, which represents our higher credit risk names is also below 1% of the portfolio at fair value, which compares favorably to many other BDCs.
99% of our book is risk-weighted 3 or higher, again, a favorable benchmark when looking at our peers. At quarter end, we were still levered conservatively on a net basis at 1.1x. Our net asset value increased to $0.43 per share to $16.23 [ owing ] in part to mark-to-market adjustments to the portfolio as well as the accretive nature of our share repurchase program.
Our NAV continues its recent improvement and is now back to where it was 2 years ago. Despite the higher interest rate environment we have been operating in, and compares favorably with the net asset values of our peers, which have mostly experienced decreasing to flat net asset values over the same period. During Q4, we repurchased approximately 280,000 shares at an average price of $10.35 per share for a total repurchase amount of $2.9 million. We have repurchased a total of approximately 2.8 million shares for a total repurchase amount of $27 million since the beginning of the repurchase program we put in place in August 2022 through the end of 2023, and we intend to continue to be active repurchasing our shares the coming quarters.
While many consider this the Golden Age of private credit or more of our BDC peers continue to depart from their traditional niche of lending to true middle market companies as banks retrenched in 2023. However, as banks start to resume lending activity, we believe that having a defensible niche in the middle market is paramount. As I mentioned last quarter, many BDCs are going after larger companies where leverage is higher, spreads are lower and covenants, if even present are looser.
At that end, just recently, a Bloomberg article was titled "private credit cuts pricing to fend off Wall Street deal grab. " As many large BDCs participated in alone, with a spread of only 475 basis points over the base rate with 1.5% OID, one of the cheapest private credit deals in recent memory. The company in question has an EBITDA of approximately $500 million. By comparison, the weighted average EBITDA of our portfolio is $34 million. We almost always receive meaningful lender protection and covenants. Our weighted average spread is 750 basis points over the base rate and our average OID has been between 2% and 3%.
While there is nothing wrong in and of itself with a deal I referenced, we believe from a risk-adjustment perspective, our style of lending is superior. At almost $2 billion in total assets, we are large enough to be an impactful player to borrowers in the middle market without being so large that we are forced to buy the market or sacrifice economics or borrower protections in effort to put money to work.
Finally, before I turn the call to Gregg, I wanted to announce that we are welcoming a new member to our senior management team this week. As Charlie Arestia has joined us as a Managing Director and Head of Investor Relations. Charlie was previously part of the IR team at Focus Financial Partners and before that, was an analyst at JPMorgan.
With that, I'll now turn the call over to Gregg.
Thank you, Michael, and good morning, everyone. Our Q4 net investment income benefited from a diverse combination of the direct pass-through of higher floating interest rates from our loan assets, origination and amendment fees and other prepayment premiums and other yield-enhancing provisions embedded within our primarily first lien portfolio. As Michael referenced, there remains a clear distinction between the increased levels of competition in the large cap markets between the larger asset management platforms and money center banks and the direct middle market private credit sector where we strategically focus.
The middle market direct lending sector remains robust and continues to take market share from the lower-rated single B syndicated markets, which is consistent with what we are experiencing with our platform as our private direct transaction sourcing remains vibrant. We continue to see attractive direct investment opportunities for which we remain highly selective. While M&A activity remains subdued in Q4, we saw an increase in refinancing opportunities, particularly in conjunction with add-on acquisitions where additional debt capital was required that was beyond the capacity of the incumbent lender groups or the private equity sponsor chose to refinance to provide an additional 2 years to pursue M&A or sales strategies.
We do expect M&A activity to increase in 2024 as we believe buyers and sellers are now accepting the higher prolong reality regarding interest rates. In addition, we continue to benefit from technically driven disruptions in the syndicated loan market, where we acquire a 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 can expect to have active roles in the processes that drive the refinancing or restructuring of the investments.
We remain highly selective with new investments as we are still cautious with respect to the U.S. consumer, particularly in light of recent global developments and the persistence of higher interest rates and inflation levels. We continue to strategically focus on first lien investing and prefer to utilize yield enhancement provisions, such as [ PIK ] features, call protection, make-hole provisions and Molex to incrementally enhance yields at the top of the capital structure rather than reaching deeper into capital structures for mezzanine and equity co-investments to achieve incremental yield.
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.
Approximately 85% of our PIK investments are in portfolio companies risk rated either 1 or 2 and 97% risk rated 3 or better. Turning now to our Q4 investment and portfolio activity. During Q4, we completed an attractive mix of first lien investments. We completed private direct first lien financing tranches for new platforms, including Nova compression, North Star travel and Tactical Air support where we act in as co-lead arranger. We also completed a number of first lien add-on investments for portfolio companies, including work Genius, HW Lochner, David's Bridal, Usalco and Moss. The weighted average coupon for our direct investments was approximately so far plus 8% for the quarter.
We additionally continued our purchases of the lightly syndicated first lien tranches of companies such as Pure Star, YacMat, Avison Young and Avalon at discounts. These purchases proved to be attractive as Pure Star, YacMat and Avalon have been recently refinanced and we have received significant investment income from OID acceleration in Q1 of this year.
Avison Young announced a comprehensive recapitalization and deleveraging transaction that is expected to close in Q1 of 2024 and positions the company for future growth and investment. Upon closing, we expect to realize significant accretion to the blended cost of our first lien investment in Avison Young. During Q4, we made $152 million in new investment commitments across 5 new and 15 existing portfolio companies, of which $147 million was funded. These investments were diversified across direct and secondary opportunities with approximately 72% in direct private investments. We also funded a total of $7 million of previously unfunded commitments. We had sales and repayments totaling $83 million for the quarter, which primarily consisted of the full repayment of our investments in Cadence, Archer Systems, NWM and associated asphalt.
As a result, net funded investment activity increased by approximately $71 million during the quarter. The repayment trend has continued into 2024 as M&A activity has fueled recent Q1 repayments that have resulted in significant OID acceleration and incremental investment income from yield enhancement provisions such as [indiscernible] premiums, [indiscernible] and Molex attached to our first lien portfolio.
Our nonaccruals declined slightly from 1% of fair value at 9/30/23 to 0.9% of fair value at 12/31/23. We added 1 new name, our second lien investment in TriMark Ambrosia with approximately $1.5 million of fair market value to nonaccrual this quarter. TriMark was in the process of a voluntary restructuring process in Q4 that did not close until January of 2024. As a result of the restructuring, we participated in the Backstop group and received a package of backstop fee take back debt and equity for our first lien and second lien positions in the company. Given the closing of the transaction, we expect to remove TriMark from nonaccrual status in Q1 of 2024. Overall, our portfolio remains defensive in nature with 85% in first lien investments and 87% in senior secured investments.
I'll now turn the call over to Keith.
Okay. Thank you, Gregg, and good morning, everyone. As Michael mentioned, we reported another quarter of solid financial results driven by the benefits of higher base rates in our mostly floating rate portfolio and fees generated from a quarterly investment activity. During the fourth quarter, net investment income was $21.8 million or $0.40 per share as compared to $30 million or $0.55 per share reported in the third quarter.
For the full year, net investment income was $105 million or $1.92 per share as compared to $88.2 million or $1.56 per share for the prior year. This is an increase of $0.36 per share with 23% year-over-year. On the expense side, total operating expenses were $38.2 million as compared to $37.6 million reported in the third quarter.
The increase was driven by higher interest expense under our financing arrangements due to an increase in our average debt outstanding when compared to the prior quarter. At December 31, we had total assets of approximately $2 billion and total equity or net assets of $880 million and total debt outstanding of $1.1 billion and 54.2 million shares outstanding.
At the end of the quarter, our net debt-to-equity ratio was 1.10x, which is slightly higher than 1.03x at the end of Q3. During the year, our total debt outstanding increased by $134 million or 14% from the prior year, reflecting the measured growth of our portfolio using additional debt capital. Our portfolio at fair value ended the quarter at $1.8 billion, up $113 million from the third quarter reflecting the combination of net funding and net unrealized gains from the portfolio. The weighted average yield on our debt and other income-producing investments at amortized cost was 13.4% at December 31, which increased 36 basis points from 13.04% at the end of Q3 and increased over 100 basis points from the prior year-end.
At December 31, our NAV was $16.23 per share as compared to $15.80 per share at September 30, an increase of $0.43 per share or 2.7%. The increase was driven by mark-to-market price increases in our portfolio and the accretive nature of a share repurchase program during the quarter, which was offset by our year-end special and fourth quarter supplemental distributions totaling $0.20 per share. For the quarter, we experienced a significant mark-to-market price increase to the value of our common equity investment in David's Bridal. Given the overall largest size of this position relative to our other equity investments and the seasonal nature of its end markets, we do expect to have a higher-than-average mark-to-market price volatility and in the fair market value of this investment on a quarter-to-quarter basis.
Year-over-year, our NAV was up $0.25 per share or 1.6% increasing from $15.98 per share at the end of 2022 to $16.23 per share at the end of 2023, reflecting the strong credit quality of our portfolio. We ended the quarter with a strong and flexible balance sheet with over $600 million in unencumbered assets, lower net leverage relative to our peers, a strong debt servicing capacity and solid liquidity. We have over $120 million in cash and short-term investments and access to an additional $150 million under our credit facility to further finance our investment pipeline and continue to support our existing portfolio companies.
During the quarter, the cost of our debt capital was about 8.5%. In terms of our debt structure, as we previously discussed, in October, we closed on a $33 million follow-on to our Series A unsecured floating rate notes to certain institutional investors in Israel with the same terms as the existing notes issued earlier in the year. And in November, we completed a $100 million private offering of floating rate unsecured notes to certain U.S. institutional investors. The addition of these unsecured notes to our debt capital brings additional strength and flexibility to our balance sheet and aligns well with our mostly floating rate investments. After completing these 2 financing transactions, our debt mix is now about 60% in senior secured and 40% in unsecured with about 85% in floating rate.
Now turning to our distributions. During the fourth quarter, we paid total distributions to our shareholders of $0.54 per share, which includes a base distribution of $0.34 per share, a year-end special distribution of $0.15 per share in a previously declared fourth quarter supplemental distribution of $0.05 per share. For the full year 2023, we declared total distributions of $1.61 per share as compared to total distributions of $1.45 per share during 2022, an increase of $0.16 per share or 11% year-over-year.
As a result, our distribution yield based on the year-end average NAV was 9.9%, and our distribution yield based on the year-end market price was 14.2%. As announced this morning, we declared our first quarter base distribution of $0.34 per share, which is the same amount as the base distribution declared during the fourth quarter of 2023. The first quarter distribution will be paid on March 28 to shareholders of record on March 22.
Okay. With that, I will now turn the call back over to Michael for some closing remarks.
Thanks, Keith. As a final thought before we open the line for questions, we would like to reiterate our message that we believe CION is undervalued, continues to perform well and is well positioned to continue to provide solid returns to its shareholders.
And with that, operator, we're ready to take any questions.
[Operator Instructions] Our first question is from Erik Zwick from Hovde Group.
I wanted to start with a question following the fourth quarter actions towards the [indiscernible] unsecured debt, you noted that the mix is now kind of 60/40 secured versus unsecured. And curious, have you kind of reached your target mix there? Or do you anticipate [indiscernible] making some additional changes in 2024?
Erik, this is Keith. So in terms of our debt capital, we continue to work with our commercial banking partners on extending our current arrangements. Those conversations continue we had today. So we'll probably have a better update for you over the next couple of weeks or months. And at the same time, we continue to explore opportunities in the debt capital markets, which would further diversify our mix between unsecured and also expand our lending partners that we do business with. So yes, we -- I don't think we're done. I think we'll continue to explore opportunities as they present themselves.
And switching gears, just curious if you could provide any commentary on the current pipeline, maybe in terms of the mix of new versus add-on opportunities as well as any -- if you're seeing any particular industries that are stronger and presenting maybe more attractive opportunities today?
Erik, it's Gregg. It really is diversified. There's no one specific industry focus. From what we're seeing B2B remains strong. So you will see that in our business services focus. We're still seeing opportunities, niche opportunities in health care and industrial services. So it's pretty broad-based. I wouldn't say there's one particular thing to it.
Any thoughts on kind of the mix between new and add-on opportunities today?
Yes, we're seeing both. It's healthy on both sides. We do see platform M&A starting to pick up sales of companies but we're also seeing a lot of incremental add-on activity where we step in. So it really is a combination of both.
And then previously, you mentioned that your portfolio companies kind of been growing at a single-digit EBITDA hearing just from anecdotal evidence and talking to some other BDCs that some are starting to see some slowdown in certain pockets of the economy. So just curious if you could provide any kind of insight into what you're seeing with your portfolio companies and whether they continue to grow and improve at this point?
Yes, we're still seeing the single-digit growth. It's -- we haven't seen any pronounced slowdown. It varies industry by industry, but I think that single-digit measure still holds.
And then last 1 for me. Can you provide any comments on what drove the unrealized gains in this past quarter?
Yes. So mark-to-market, obviously, there was some spread compression, which particularly in our [ model ]. So we do see spreads tightened a bit. And also, David's Bridal, was strong in this quarter, and that had to do with really the purchase accounting adjustments associated with closing the transaction. The auditors have the time to perform the revalue inventory, merchandise and things like that. So you saw a mark-to-market increase based on that analysis.
Our next question is from Steven Martin with Slater Capital Management.
Following up on your last response on David's Bridal, can you talk -- is there any incremental information on its performance, its turnaround? I see you extended additional credit, and I assume it's current pay, et cetera.
So it's really no -- not much material information we can share. Part of it too, is you're going through the selling season now. So we'll have a much better view in the next couple of quarters. The incremental debt this quarter was a synthetic letter of credit facility. So it wasn't a general role. It was more to back LCs to free up capacity under traditional [ ADL ]. So it really wasn't a corporate per use loan. It was really to help the company more efficiently on a cost of capital basis backstop standby LCs.
Got it. And were -- are they now complete with all the closings and restructurings that were discussed previously?
Yes.
Okay. The -- just -- and this is probably something you talked about in the third quarter. Interest income from Q2 to Q3 to Q4 went from 57% to 64% and then back down to 64% -- 56%. What was the anomaly in Q3 that accounted for that?
Yes. This is Keith. So in Q3, we had some make-whole fees that we recognized as a result of some exits and some additional income recognized as a result of some restructuring transactions that brought back and recapture some income.
Yes. I figured you had mentioned it, but I just couldn't find a note on it. Where do you stand on PIK sequentially and going forward?
So we discussed some in our conference today. Our PIK income is diversified, and it's usually driven by structured situations where we're picking up enhanced yield for the PIK flexibility. We do expect over time that number to come down as [indiscernible] or refinances or gets repaid in those structured situations. So over time, we do expect it to come down. But again, it's more opportunistic. What we've chosen strategically is we would rather, for special situations, be PIK secure at the top of the capital structure than do equity co-invest in mezz, which are junior securities where you have a lot more capital structure risk. So for us, we find it's a good risk return trade-off.
Okay. And last on -- you did a good job on the nonperforming and nonaccruals. Are there any prospective restructurings that would reduce that further after the quarter -- this quarter or next quarter?
Now other -- it's Michael. Other than that TriMark, as Gregg mentioned, which we expect to take off [indiscernible].
There are no further questions at this time. I'd like to hand the floor back over to management for closing comments.
Great. Well, we thank everyone for tuning in today, and we look forward to talking to you a couple of months after the close of the first quarter. Take care, everyone. Thank you.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.