Cion Investment Corp (CION) 2021 Q4 法說會逐字稿

Greetings and welcome to the CION Investment Corp. fourth-quarter and fiscal year-end 2021 earnings conference call. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the conference over to our host, a representative from the company, Jeehae Linford. Thank you. You may begin.

Thank you. Good morning and welcome to CION Investment Corporation's fourth-quarter and fiscal year-ended December 31, 2021, earnings conference call. An earnings press release was distributed earlier this morning before market open. 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's Resources section and should be reviewed in conjunction with the company's Form 10-K 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.

We caution you to not place undue reliance on forward-looking statements, which reflect management's view only as of the date of this call. CION Investment Corporation undertakes no obligation to update or revise any such forward-looking statements unless required by law.

Speaking on today's call will be Mark Gatto and Michael Reisner, CION Investment Corporation's Co-Chief Executive Officers; Gregg Bresner, President and Chief Investment Officer; and Keith Franz, Chief Financial Officer.

With that, I would now like to turn the call over to Mark Gatto. Please go ahead, Mark.

Thank you, Jeehae. Good morning, everyone, and thank you for joining us. Before we begin, I would like to take a brief moment and mention that we recognize the tragic events unfolding in Eastern Europe. And that above all, our thoughts are with those that are affected by these events. We have been monitoring the rapidly evolving situation, and currently we are not aware of any direct impact to any of our portfolio companies at this time.

While these events have impacted and will continue to impact the US and global economies and may create some headwinds for the direct lending industry, we believe our business model and approach to lending should serve us well in this type of environment. With a portfolio consisting of 92% first lien senior secured investments and a diversified origination strategy, it is our view that our portfolio will demonstrate its resiliency during these times and that our ability to originate quality investment opportunities will continue to be an important source of differentiation.

For our call today, I will start with an overview of our fourth-quarter and year-ended December 31, 2021, results. Michael will continue the discussion, focusing on our recently announced corporate developments. Following that, Gregg will describe our investment activity during the quarter and full year, and Keith will provide additional detail on our financial results. We'll then open the call for Q&A.

2021 was a transformative year for CION. Following nine years as a nontraded BDC, we listed the company's shares on the New York Stock Exchange on October 5, following significant preparation to be a more public-facing company. As we consider the future and pathways to grow CION, at the end of 2021, we were pleased to announce two corporate developments. First, we announced we received shareholder approval to reduce our asset coverage ratio requirement from 200% to 150%, which will provide CION the same flexibility and access to increase leverage as our peers.

Additionally, we announced the formation of a new joint venture with a long-standing partner, EagleTree Capital, to pursue and manage subordinated and other high-yielding investments. My partner Michael will provide more detail on these topics in his remark.

Turning back to 2021, throughout the year, we continued to deliver solid results on the investment side. We ended the year with a net asset value of $16.34 per share compared to $15.50 per share at the end of 2021 and generated a total return on equity of 13.5% for our shareholders. We recorded new investment commitments of $949 million, funded $920 million, and grew our investment portfolio by 11.4% from $1.5 billion at year-end 2020 to $1.7 billion at year-end 2021.

Furthermore, over the course of the year, we materially increased the percentage of first lien debt investments from 82% of our portfolio at year-end 2020 to 92% of our portfolio at year-end 2021, thereby improving the risk profile of our investment portfolio without diminishing the net investment income profile of our portfolio. We were pleased to have achieved our solid portfolio of growth, net investment income generation, and distribution payments, all while maintaining a target leverage change of only 0.8x to 0.9x during the year.

This morning, we reported fourth-quarter net investment income of $0.32 per share. This resulted in full-year net investment income of $1.31 per share, which exceeded our distributions totaling $1.26 per share for the full year. Net asset value at year end was $16.34 per share compared to $16.52 at the end of the third quarter and reflects a special distribution of $0.20 per share that was paid in December of 2021.

Overall, investment activity was strong in the fourth quarter and allowed us to deliver a consistent level of investment income. In Q4, new investment commitments totaled $350 million and sales and repayments were $319 million. Notably, in this heavy repayment environment, we took advantage of the robust inflows into the syndicated loan market and rotated out of previously less-liquid syndicated credits and utilized the proceeds to fund more attractively yielding middle-market investments which we expect to provide incremental benefit to our future net investment income. Gregg will provide some additional detail on this ship in his remarks.

The overall credit quality of the portfolio remained consistent quarter to quarter, with 85% of total investments at fair value rated a 1 or 2, our highest internal credit ratings, approximately the same percentage as the third quarter. During the quarter, we added new investment to nonaccrual status. As a result, investment on nonaccrual status amounted to 0.72% of total investment at fair value and approximately 2.5% at amortized cost, remaining relatively consistent with the prior quarter.

As mentioned, in 2021, we paid total cash distributions of $1.26 per share, inclusive of a special distribution of $0.20 per share in December. Taking into account the distributions paid through 2021 plus the change in net asset value per share, we are pleased that our total return on equity for the year was 13.5%. These returns were driven primarily by consistent net investment income generation and mark-to-market valuation increases.

We are particularly pleased with this return performance in light of over $3 million of nonrecurring expenses incurred by the company related to the listing of the company's shares on the New York Stock Exchange and seeking shareholder approval related to the reduction of our asset coverage ratio in December. Looking ahead in 2022, we expect a more normalized level of operating expenses.

On March 8, 2022, we approved a base quarterly distribution for the second quarter of 2022 of $0.28 per share. This regular distribution is consistent with the first quarter of 2022 distribution of $0.28 per share that was previously announced.

With that, let me turn the call over to Michael.

Thank you, Mark. Good morning, everyone. Before I dive into more detail about our recently announced corporate actions, I'll provide a brief overview of CION for those who may be new to our story, given our recent listing.

CION Investment Corporation has been in operation since 2012 and is part of our broader CION Investment Group platform, vertically integrated alternative investment manager, and retail distribution organization with over $4 billion in AUM as of December 31. As a BDC, we are focused on the core US middle market, which we generally define as companies generating between $25 million and $75 million in annual EBITDA. And we are focused on providing senior secured loans to these companies, primarily first lien.

Based on our size, reach, and relationships, we believe that we operate in a unique position in the middle-market lending space. We utilize our strong relationships with public and private lenders, select middle-market private equity sponsors, and, on a limited basis, large private equity sponsors to source and originate attractive opportunities while leveraging our flat organizational structure to officially vet and underwrite compelling investment opportunities. With approximately $1.8 billion in total assets, our size affords us the ability to invest meaningful amounts in club opportunities and also lead select direct opportunities as well, which we believe makes us a valuable and impactful partner.

As the BDC is the sole focus of our investment team, we're able to provide tremendous focus and efficiency to sourcing, underwriting, and portfolio management for the benefit of our shareholders. After operating as a nontraded BDC for over nine years, we made the strategic decision to list our shares on the New York Stock Exchange in order to provide our long-term existing shareholders with enhanced liquidity and also position the BDC for the opportunity to further grow.

Now turning to some recent announcements on the corporate front, as mentioned by Mark. In December, we announced a newly formed strategic joint venture with an affiliate of EagleTree Capital, to which EagleTree made a firm level investment with proprietary capital. The JV will jointly pursue debt opportunities and special situation, crossover, subordinated, and other junior capital investments that leverage our and EagleTree's combined sourcing and portfolio management capabilities. We are very excited for this partnership.

By way of background, EagleTree is the leading middle-market private equity firm, and the principles of EagleTree and CION have worked and partnered together on transactions for over 25 years. This JV with EagleTree allows us to evaluate investment opportunities that include special situation, subordinated, and other junior capital investments with a highly experienced partner.

The JV was initially capitalized through the contribution of a portfolio of investments from CION and proprietary firm-level cash from EagleTree in exchange for an 85% and 15% ownership in the JV, respectively. We believe that this JV with EagleTree provides a key benefit to CION in that it provides us the opportunity to supplement our core investment strategy of senior secured first lien loans with enhanced capabilities in sourcing, execution, and portfolio management of high-yielding and special situation investment opportunities. We look forward to providing further updates on the JV in the future.

In other important news, on December 30, 2021, we received shareholder approval to reduce our asset coverage ratio requirement from 200% to 150%, in line with other listed BDCs, which allows us to increase the maximum amount of leverage that we are permitted to incur. Over time, we plan to prudently increase our targeted debt-to-equity ratio in the range of 1 to 1.25 in order to support investment income growth and to broaden the company's portfolio.

As a reminder, we have typically targeted a leverage range of 0.8 to 0.9 based on historical 1-to-1 leverage limitations, which we had to be mindful of during our robust Q4 2021 period. Despite operating within this conservative level of leverage, one of the lowest in the public BDC sector, we have always generated the investment earnings necessary to fully cover our distribution to shareholders.

Finally, as we noted on our previous call, our Board approved a $50 million share repurchase policy last year. In order to implement such policy, we intend to establish a 10b5-1 trading plan to facilitate share repurchases in the future based in part on historical trading data with respect to our shares. And we will provide updates on this front as they occur.

Now I'd like to turn it over to Gregg for an overview of the investment market and our investment activity for the quarter and year.

Thank you, Michael. Good morning, everyone. I will start by sharing some data on the backdrop of the current US credit markets before moving to our investment activity for the quarter and the year.

The US leveraged loan sector broke nearly all records in 2021 on the backdrop of a market awash in liquidity where investor demand significantly eclipsed supply. New loan issuance surged to $615 billion, shattering the prior annual high of $503 billion in 2017. When combined with high yield, total leveraged finance issuance topped $1 trillion for the first time on record with an astounding $1.08 trillion, a 39% increase above the prior annual peak of $778 billion in 2013, anchoring the record shattering 2021 levels with the prospects of rising interest rates and nearly $34 billion of net inflows into loan funds, a sharp reversal from the $19 billion of outflows in 2020.

Q4 2021 inflows set a new quarterly record with $67.6 billion. The massive investor liquidity resulted in a highly competitive loan market characterized by lower spreads, higher secondary prices, and $362 billion of loan repayment activity, which represented 30% of 2020 year-end loans outstanding. The S&P Leveraged Loan Index achieved a 5.21% return in 2021, up from 3.12% in 2020. S&P middle-market loan yields declined from 5.87% at year end in 2020 to 5.36% at the end of 2021, a 51-basis-point decline.

Turning now to our investment activity, Q4 of 2021 was a solid quarter for the company as we had record originations of direct middle-market loans. During the quarter, we made 18 new investment commitments totaling $353 million across 13 new portfolio companies and 5 existing portfolio companies. Of the $353 million in new investment commitments made during the quarter, $339 million were funded and $14 million were unfunded. Fundings of previously unfunded commitments totaled $10 million for the quarter.

Despite the highly competitive market conditions and spread compression across the BSL and middle-market loan indexes, CION continued to originate direct middle-market debt investments at a significant yield premium to the S&P Middle Market Index. CION funded approximately $308 million of new debt commitments at a weighted average yield to cost of approximately 10%. Approximately 94% of these new debt fundings were in first lien investments. Consistent with the overall loan market, CION experienced higher repayment and other sale activity totaling $319 million, driven by the full sale or repayment of 25 portfolio companies.

During the quarter, we took advantage of the highly robust liquidity and secondary price conditions to sell over 100 million of previously less-liquid syndicated names at a weighted average price of approximately 99.63% of par and rotated those proceeds into higher-yielding direct middle-market loans while still maintaining our 0.8x to 0.9x debt-to-equity leverage target within our 1x debt-to-equity leverage limitation. Accordingly, net funded investment activity increased by $30 million for the quarter.

Moving on to portfolio composition, at year end, we had 183 investments across 113 portfolio companies with a total fair market value of approximately $1.7 billion, comprised of 93.9% in senior secured loans. This included 91.6% in first lien debt, 2.3% in second lien debt, 4.3% in equity, 1.6% in unsecured debt, and less than 1% in structured products. Approximately 89% of the performing loan portfolio is in floating-rate investments, of which 80% had a LIBOR floor with a weighted average floor of 80 basis points.

We recognize that rising interest rates are foremost in the minds of many on this call and in our industry, and we believe we are positioned well in the face of a rising interest rate environment with a nicely aligned matching of predominantly floating-rate assets with floating-rate liabilities. As of year end, our performing loan portfolio had a gross annual yield prior to leverage of 9.16% as compared to 8.92% at the end of the third quarter with a weighted average purchase price of 98.13% of par and an average investment size of about $14.7 million per portfolio company.

Turning next to credit quality, the underlying performance of our portfolio companies in the fourth quarter remained consistent from Q3. The weighted average net debt to EBITDA of our portfolio companies was 4.52x at year end, which remained consistent with the third and second quarters. The weighted average interest coverage of our portfolio companies also remained stable at 3.4x, consistent with the prior quarter.

As of December 31, investments on nonaccrual status were 0.72% and 2.5% of the total investment portfolio at fair value and at amortized cost, respectively, compared to 0.9% and 2.5% as of the end of the third quarter. During the quarter, we removed one investment and placed one new investment on nonaccrual status, resulting in 8 total investments on nonaccrual status at year end.

The second lien term loan to Country Fresh Holdings was removed from nonaccrual status as a result of writing the investment down to no value. The new investment placed on nonaccrual status was a $1.8 million first lien term loan to Deluxe Entertainment Services, which we currently have valued at approximately 61% of par. Our investments with internal risk ratings of 4 and 5 continue to make up less than 1% of the total portfolio, with over 85% of our portfolio rated 2 or higher.

I'll now turn the call over to Keith.

Okay. Thank you, Gregg, and good morning, everyone. As Mark mentioned, we finished the year with a solid fourth quarter, marked by consistent earnings and elevated investment activity. During the fourth quarter, net investment income was $18.4 million or $0.32 per share compared to $19.6 million or $0.35 per share in the third quarter. For the full year, net investment income was $74.3 million or $1.31 per share.

Total investment income during the quarter was $40.4 million compared to $42.6 million in the third quarter and $157.3 million for the full year. Investment income was higher during the third quarter due to the very successful exit of our equity investment in Conisus, which resulted in higher dividend income during that quarter.

On the expense side, management and incentive fees in Q4 reflect the previously announced changes to the advisory fees that were approved by shareholders in 2021. As a reminder, the base management fee was reduced from 2% to 1.5% and further reduced to 1% on assets financed below 200% asset coverage. In addition, the incentive fee on income was reduced from 20% to 17.5%, a hurdle rate of 6.5%, and the capital gains incentive fee was also reduced from 20% to 17.5%. The new advisory fee structure became effective on the listing and puts more in line with our listed peers.

During the quarter, operating expenses decreased by approximately $300,000 or about 9% when compared to the third quarter due to nonrecurring expenses incurred relating to the listing. As Mark mentioned, we do expect our base operating expenses to further normalize during 2022.

At the end of the quarter, we had total assets of $1.8 billion and total equity or net assets of $931 million with total debt outstanding of $830 million and 56.9 million shares outstanding. As a result, at the end of the quarter, our debt-to-equity ratio was 89% compared to 86% at the end of the third quarter. At December 31, our NAV was $16.34 per share compared to $15.50 per share in the prior year, which is an increase of $0.84 per share or an increase of about 5.4%. Our NAV was down $0.18 per share from the third quarter, primarily due to the special year-end distribution of $0.20 per share that was paid at the end of December.

We ended the quarter with a strong and flexible balance sheet with over $500 million in unencumbered assets, low leverage, strong debt servicing capacity, solid liquidity. We had over $92 million in cash and short-term investments and access to another $50 million under our current credit facilities to finance our investment pipeline. Our current debt mix is 81% senior secured and 19% unsecured. The weighted average cost of our debt capital is about 3.6%, with the majority of our senior secured facilities maturing in 2024 and the majority of our unsecured debt maturing in 2026.

During the fourth quarter, we paid cash distributions to our shareholders of about $26.5 million or $0.46 per share, which consisted of a regular quarterly distribution of $0.26 per share and a special year-end distribution of $0.20 per share, both of which were paid in December. For the year, we paid cash distributions of $71.5 million or $1.26 per share, all of which were fully covered by our taxable income.

As a reminder, on November 12, we declared a regular quarterly distribution of $0.28 per share for the first quarter, which represents an increase of $0.02 per share or 8% from the fourth quarter. This distribution will be paid on March 30 to shareholders of record on March 23.In addition, we announced today that on March 8, we declared a regular quarterly distribution of $0.28 per share for the second quarter. This distribution will be paid on June 8 to shareholders of record on June 1.

And then as a final note, in terms of our distribution policy, we expect to continue to announce future quarterly distributions with each quarterly earnings release. And we expect to declare at least one special distribution per year. In each case, taking into consideration both the company's ongoing performance as well as the general economic outlook.

Okay. With that, I'll turn the call back over to Mark for some closing comments.

Thank you, Keith. In closing, we believe there are a great deal of opportunities for CION in the coming months ahead as we have worked to establish the underlying framework.

With that, operator, we're ready to take any questions.

(Operator Instructions) Finian O'Shea, Wells Fargo.

This is Jordan on for Fin today. I wanted to ask about -- it looks like you guys have maybe a little slightly lower upfront fee as a percentage of your origination this quarter. Was there anything different in the mix this quarter versus last quarter? Or anything you could call out there?

I would say it's just certain deals were a little bit higher coupon, so they were less fee upfront. And also, I would say I think it's indicative of the competitive nature of the environment in Q4. But there's no what I would consider a secular trend there. I think it was just more consistent with the unique transactions we did.

Okay, cool. I was also looking in the portfolio. It looks like your average EBITDA went down a little bit. I guess that's probably because of the sales and the sales down to the JV this quarter?

Yes, that's correct. We sold down some larger cap syndicated names in the quarter and as well as some second lien debt was repaid that tended to skew to the larger cap companies.

Okay. And then just one last one. The JV, which looks really interesting, it doesn't look like you have any uncalled commitments to that. Is that going to be something that you kind of fund on an as-needed basis? Or do you have any kind of outlook for the size of that JV relative to the rest of the portfolio?

So yes, you're correct. It's going to be as needed. And we have capital ready on both sides. It's a question of the deal flow that we account for. It's more special situations-oriented, so our commitment will be reflective of the opportunities that we see.

(Operator Instructions) Casey Alexander, Compass Point.

Yes, hi. Just remind me what was the change in the weighted average yield from the third quarter to the fourth quarter?

The weighted average yield to cost on the entire portfolio went up about 30 basis points from year to year.

Okay. Went up about -- from year to year. What was the change from the third quarter to the fourth quarter? Do you know that?

Yes, it was about -- it looks like it was about 20 or so basis points.

Higher?

Higher, yes. Excuse me, about 30 basis points.

Okay. I probably just didn't hear this. Now that you have the expanded leverage, what is the target leverage ratio going forward?

Close to 1 or 1.25 we think is a --

1 to 1.25, okay. And in the JV, considering the fact that these are some, as you call it, special situation assets, what level of leverage do you intend to use in the JV, if any?

No leverage.

No leverage, okay. Great. All right, thank you. That's all my questions.

Thank you. The Q&A session has ended and I will now turn the call over to management for closing remarks.

Thank you, everyone, who joined the call today. We appreciate your interest in CION and we look forward to speaking to you next quarter.

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.