CION Investment Corporation (NYSE:CION) is a leading publicly-traded business development company (BDC) that specializes in providing financing solutions to middle-market companies in the United States. The company's investment objective is to generate current income and, to a lesser extent, capital appreciation for its investors.
Business Overview and History
CION was incorporated in Maryland on August 9, 2011 and commenced operations on December 17, 2012 after successfully raising over $2.5 million from unaffiliated outside investors, meeting the minimum offering requirement. The company elected to be regulated as a BDC under the Investment Company Act of 1940 and to be treated as a regulated investment company (RIC) for federal income tax purposes.
CION's initial continuous public offering commenced on July 2, 2012 and ended on December 31, 2015. This was followed by a follow-on continuous public offering from January 25, 2016 to January 25, 2019. During this period, the company raised significant capital, selling 53.36 million shares of common stock for net proceeds of $1.12 billion, which included $237.45 million from reinvested shareholder distributions.
CION's investment portfolio is primarily comprised of senior secured debt instruments, including first-lien loans, second-lien loans, and unitranche loans, as well as collateralized securities, structured products, unsecured debt, and equity investments in private and thinly-traded U.S. middle-market companies. As of September 30, 2024, the company's investment portfolio had a fair value of $1.75 billion, with 85.3% allocated to senior secured first-lien debt.
CION is externally managed by CION Investment Management, LLC (CIM), a registered investment adviser and an affiliate of the company. Pursuant to an investment advisory agreement, CIM oversees the management of CION's activities and is responsible for making investment decisions for the company's portfolio. In July 2017, CION terminated its investment sub-advisory agreement with Apollo Investment Management, L.P. (AIM) as part of a new joint venture between AIM and CION Investment Group, LLC (CIG), an affiliate of CION. As a result of this restructuring, AIM became a member of CIM, with each owning a 50% economic interest.
On October 5, 2021, CION's shares of common stock began trading on the New York Stock Exchange (NYSE) under the ticker symbol "CION," providing shareholders with enhanced liquidity. The company also listed its Series A Notes on the Tel Aviv Stock Exchange in February 2023. In October 2024, CION issued $172.5 million of 7.5% unsecured notes due 2029, which was the largest standalone "baby bond" offering in the publicly listed BDC space to date, further diversifying its capital structure.
Throughout its history, CION has faced various challenges, including navigating a highly competitive credit environment and volatile capital markets. The company has maintained a conservative and prudent approach, selectively deploying capital and actively managing its balance sheet. While CION's investment portfolio has generally performed well with low non-accrual levels, it has experienced some volatility in its equity holdings, particularly its investment in David's Bridal.
Financial Overview and Liquidity
For the fiscal year ended December 31, 2023, CION reported net income of $95.31 million, with net investment income of $104.97 million and total revenue of $251.01 million. The company's net asset value (NAV) per share was $16.23 as of December 31, 2023.
As of September 30, 2024, CION had total assets of $1.92 billion and total equity of $839.19 million, with a net debt-to-equity ratio of 1.18x. The company had $29.77 million in cash and $53.50 million in short-term investments, as well as $162.50 million in available borrowing capacity under its financing arrangements.
During the third quarter of 2024, CION was actively managing its balance sheet, effectively refinancing 90% of its debt capital and extending the weighted average maturity by three years through 2027. The company's debt mix is now approximately 60% unsecured and 40% secured, with over 70% in floating-rate instruments, providing increased financial flexibility and reduced interest rate risk.
CION's liquidity position and conservative balance sheet management have positioned the company to navigate potential market volatility and capitalize on investment opportunities that align with its investment strategy and risk profile.
For the most recent quarter (Q3 2024), CION reported revenue of $59.63 million, a decrease of 11.7% year-over-year, primarily driven by a decrease in transaction fees on investments received. Net income for the quarter was $379,000, with operating cash flow and free cash flow both at $52,000. The company's debt-to-equity ratio stood at 1.23x as of September 30, 2024, with a current ratio and quick ratio of 1.78x.
Portfolio Performance and Credit Quality
CION's investment portfolio has demonstrated solid credit performance, with non-accrual loans representing 1.8% of the portfolio at fair value as of September 30, 2024, up slightly from 1.4% as of June 30, 2024. The company's risk-rated portfolio, with 98% of investments rated 3 or better on its internal scale, indicates a high-quality, defensively-positioned portfolio.
During the third quarter of 2024, CION made $97 million in new investment commitments, with approximately 23% directed towards first-lien loans to new portfolio companies and 76% towards primary first-lien loans to existing portfolio companies. The company also experienced $154 million in sales and repayments, largely driven by full paydowns of several investments.
CION's net asset value per share decreased from $16.08 as of June 30, 2024 to $15.73 as of September 30, 2024, primarily due to unrealized net portfolio markdowns of approximately $22 million, or 1% of the total portfolio. This volatility was largely attributable to the company's equity investments, particularly its position in David's Bridal, which CION has historically noted can experience significant quarter-to-quarter fluctuations.
The company's investment portfolio is diversified across various industry classifications, with the top industry exposures being Services Business, Healthcare Pharmaceuticals, Retail, Media Diversified Production, and Services Consumer. As of September 30, 2024, the investment portfolio consisted of 103 portfolio companies, with an average annual EBITDA of $51.8 million and a median annual EBITDA of $32.8 million.
The senior secured first lien debt investments had a weighted average purchase price of par 97.11 and a gross annual portfolio yield based on the purchase price of 10.88%. According to CION's investment rating system, 85.7% of the investment portfolio was rated as a 2, indicating a level of risk to the initial cost basis that is similar to the risk at the time of origination or acquisition, with the full return of principal and interest or dividend expected. The remaining investments were rated as a 3 (11.8%), 4 (1.5%), or 5 (0.4%), indicating increasing levels of risk to the company's ability to recoup the cost of the investment.
Shareholder Distributions and Share Repurchases
CION has maintained a consistent track record of shareholder distributions, paying a base quarterly distribution of $0.36 per share throughout 2024. The company also declared a mid-year supplemental distribution of $0.05 per share in June 2024 and a year-end special distribution of $0.05 per share in December 2024, resulting in total distributions of $1.52 per share for the full year.
The company has also been an active repurchaser of its common stock, with $9.34 million in share repurchases during the first nine months of 2024 at an average price of $11.33 per share. Since the inception of its share repurchase program in September 2021, CION has repurchased over 3.5 million shares at an average price of $10.09 per share, demonstrating its commitment to enhancing shareholder value.
For the third quarter of 2024, CION reported $0.40 in quarterly net investment income, which more than covered their $0.36 base quarterly dividend. The company's trailing 12-month distribution yield through Q3 was 10.5% based on average NAV, and 13.9% based on quarter-end market price. CION declared a $0.36 per share base distribution for the fourth quarter, maintaining the same level as the previous quarter.
Outlook and Risks
CION's management team remains cautiously optimistic about the company's ability to navigate the current market environment, leveraging its flexible balance sheet, conservative underwriting, and diversified portfolio to capture attractive risk-adjusted returns. The company's increased exposure to unsecured debt financing, with over 70% of its overall debt in floating-rate instruments, is designed to provide more stability and resilience amidst potential interest rate volatility.
However, CION is not immune to broader macroeconomic and market risks. Factors such as persistent inflation, rising interest rates, and potential recessionary pressures could impact the financial performance of the company's portfolio companies and the valuation of its investments. Additionally, the highly competitive nature of the middle-market lending space may continue to exert pressure on deal terms and pricing.
The company's exposure to its equity investments, particularly the sizable position in David's Bridal, also introduces volatility risk that could lead to ongoing fluctuations in CION's net asset value. Careful portfolio management and active risk monitoring will be crucial in navigating these challenges.
The middle-market lending industry has remained highly competitive, with continued pressure on pricing and lender protections. However, CION has been selective in its deployment of capital, focusing on senior secured first lien loans that provide yield enhancement features such as PIK interest, call protection, and make-whole provisions.
Conclusion
CION Investment Corporation has established itself as a flexible and well-capitalized BDC, providing financing solutions to middle-market companies while generating consistent income for its shareholders. The company's proactive balance sheet management, diversified portfolio, and disciplined investment approach have positioned it to weather potential market turbulence. As CION continues to execute on its strategy and leverage its experienced management team, the company remains well-positioned to generate attractive risk-adjusted returns for its investors over the long term.
The company's focus on senior secured debt investments in U.S. middle-market companies, combined with its diversified industry exposure and prudent leverage management, provides a solid foundation for future growth. CION's ability to maintain a strong yield on its investments, coupled with its active share repurchase program and consistent dividend distributions, demonstrates its commitment to creating value for shareholders. As the company navigates the evolving economic landscape, its conservative approach and strategic positioning should help it capitalize on opportunities while managing risks in the competitive middle-market lending space.