CION Investment Q3 2023 Earnings Call Transcript

There are 5 speakers on the call.

Operator

Good morning, and welcome to Scion Investment Corporation's Third Quarter 2023 Earnings Conference Call. An earnings press release was distributed earlier this morning before market open. A copy of the release, along with the supplement earnings presentation is available on the company's website at www.scionbdc.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.

Operator

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, Scion Investment Corporation's Co Chief Executive Officer Greg Bresner, President and Chief Investment Officer and Keith Franz, Chief Financial Officer. And with that, I would now like to turn the call over to Michael Reisner. Thank you. Please go ahead, Michael.

Speaker 1

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 senior management, including my co CEO, Mark Gatto. I will start our call today with an overview of our Q3 results. Greg will review our investment activity during the quarter and Keith will provide additional detail on our financial results.

Speaker 1

After Keith's prepared remarks, we will open the call to questions. As we reported this morning, we had a very strong Q3, which saw a continued resilient credit profile and over 3% increase to our net asset value quarter over quarter and strong net income of $0.87 per share, an increase of 70.6 percent quarter over quarter and 45% year over year. Our net investment income of 0.55 dollars per share continues to outperform our dividend. As we did last year, we expect to be in a position to declare a year end special dividend, while keeping our base dividend steady for now. The special dividend would be in addition to the 2 supplemental dividends previously announced.

Speaker 1

We previously declared a supplemental dividend of $0.05 per share for both the 3rd and 4th quarters. Our net investment income of $0.55 per share is up 22% year over year and 27.9% sequentially, driven on balance by higher interest income from our floating rate loan assets, Origination and other transaction fees, prepayment and other yield enhancing features within the portfolio and the reversal of non accruals from restructured transactions. Our portfolio delivered resilient credit performance as a percentage of our portfolio on non accrual fell to 1.03 percent of fair value, down from 1.69% the previous quarter. Perhaps an even better indication of our credit performance, the percentage of names that we have risk rated 4 or 5 Has remained consistent at around 1% of the portfolio, which compares favorably to many other BDCs. 99% of our book is risk Again, a favorable benchmark when looking at our peers.

Speaker 1

Furthermore, interest coverage ratios and leverage ratios at the portfolio company level remains consistent quarter over quarter. On the financing side, we successfully issued $33,000,000 of additional floating rate Series A unsecured notes in Israel this quarter and just yesterday closed on a bilateral $100,000,000 unsecured floating rate note with certain large institutional investors, which Keith will touch upon further. The completion of these financings Naturally matches the predominantly floating rate nature of our assets and allows us to continue to increase our percentage of unsecured debt relative to secured To methodically increase our leverage towards our net leverage target of 1.25 times, provides us ample dry powder to take advantage of a favorable vintage of investments and allows us the flexibility to increase the pace of our 10b5-1 share buyback program in coming quarters. At quarter end, we were still levered conservatively on a net basis at 1.03x, but anticipate that now should increase in coming quarters as opportunities present themselves. Our net asset value increased $0.49 a share to $15.80 owing in part to the share repurchase program as well as out earning our dividend and an increase in marks from our illiquid book.

Speaker 1

During Q3, we repurchased approximately 168,023 shares at an average price of $10.71 per share For a total repurchase amount of $1,800,000 We have repurchased a total of 2,500,000 shares For a total repurchase amount of $24,100,000 since the beginning of the repurchase program we put in place in August 2022 through the end of Q3 and intend to continue to be active repurchasing our shares in the coming quarters. Before I turn the call over to Greg, I wanted to finish with some thoughts. Direct lending to support sponsors buying companies, albeit a proven business model has become somewhat commoditized with a lot of new entrants focused on the large cap Going deeper and cheaper is the name of that game to win market share. Most BDCs historically lent to middle market companies, which which was traditionally defined as those with an average EBITDA of $50,000,000 Those companies who had limited access to more borrower friendly syndicated loan alternatives due to deal sizes and perceived tranche liquidity. The traditional middle market loans tend to be less borrower friendly.

Speaker 1

With all the capital now flown into private credit, dollars 150,000,000 EBITDA is the new $50,000,000 EBITDA. The same participants now focused on scale And emphasizing that bigger is better, we're singing a far different tune a few short years ago. While we don't believe it's a bad thing BDCs are taking The share from the investment banks, we are very proud that we continue to stick to our knitting of lending to truly middle market companies. The median EBITDA of our portfolio is $33,700,000 We believe investors are well served sticking with BDCs that have established true middle market ecosystems and have not engaged in deviations from their long term focus and track record histories. In our 12 years of investing over $7,800,000,000 in predominantly middle market loan assets, we are proud to have achieved a 3 basis points Annualized loss rate.

Speaker 1

We believe we have demonstrated that we can drive shareholder returns by being highly diversified in predominantly senior secured floating rate 1st lien loans while remaining conservatively levered. We have consistently demonstrated that our robust, Unique and diversified deal sourcing funnel is capable of originating high quality senior secured investments to true middle market companies. We have successfully and very strategically accessed the financing markets in a methodical incremental manner to grow our portfolio And continue to increase our portion of unsecured versus secured. We believe that through our predominant focus on 1st lien investments To companies with institutionally backed sponsors, we provide a higher quality of earnings with a superior risk return profile than other BDCs that often have much higher portions of the portfolio in the equity investments. At the end of Q3, we had 87.8% of our portfolio in Senior secured loans and 11.3 percent in equity positions.

Speaker 1

Our portfolio benefits from EBITDA growth and financial support from equity sponsors. This coupled with a robust deal pipeline, a conservative balance sheet and the fact that our investing team singular focuses on our BDC And not conflicted or distracted by competing strategies or products makes us feel very good about our Q3 results and our position going forward. With that, I'll now turn the call over to Greg.

Speaker 2

Thank you, Michael, and good morning, everyone. Our Q3 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, Prepayment premiums and other yield enhancing provisions embedded with our primarily 1st lien portfolio. There remains a clear distinction between the large cap syndicated markets and the direct private credit market where we strategically focus. The private direct lending sector remains robust, which is consistent with what we are experiencing with our platform. As our private direct transaction sourcing remains strong, we are seeing many direct investment opportunities for which we remain highly selective.

Speaker 2

We have seen an increase in refinancing opportunities, particularly in conjunction with tack on acquisitions where additional debt capitals are acquired what is beyond the capacity of the incumbent lender groups. In addition, we have benefited from technically driven disruptions in the syndicated loan market, where we continue to acquire lightly syndicated 1st lien loan tranches at substantial discounts to par due to issues such as ratings changes, Maturity extensions, exchanges or restructurings, which are not suitable for the existing syndicate holders. 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.

Speaker 2

M and A activity remains relatively subdued and we have seen a number of circumstances where valuation gaps and lengthy negotiations are not ultimately being converted into closed transactions. These dynamics have resulted in several of our planned investment closing slipping from Q3 to Q4. Turning now to our Q3 investment and portfolio activity. During Q3, we continued our focus on higher yielding first lien opportunities in both the directly sourced And likely syndicated loan markets, our focus in the likely syndicated markets remains targeted on a higher yielding illiquid opportunities such as investments at valuation distress where we expect to have active roles and the processes that drive the refinancing or restructuring of the investments. During the quarter, we completed an attractive mix of direct and lightly syndicated 1st lien investments such as our lead arranger exit financing for David's Bridal, Co lead arranger financings for the sponsor acquisitions of Fluid Control and Stengel Hill Architecture and the discounted purchases Of the likely syndicated 1st lien tranches of Avison Young, Juice Plus and YakMAT and the incremental direct term loan upsizes The finance tuck in acquisitions for Gold Medal Holdings and Work Genius.

Speaker 2

Overall, we have seen roughly a 100 to 100 and basis point increase in spreads year over year for new direct investments that meet our investment criteria. During Q3, we made $97,000,000 in new investment commitments across 3 new and 11 existing portfolio companies of which $93,000,000 was funded. These investments were diversified across direct and secondary opportunities. We also funded a total of $10,000,000 of previously unfunded commitments. We had sales and repayments totaling $96,000,000 for the quarter, which primarily consisted of the full repayment of our investments in Circus Trix, Fusion Connect, Pitney Bowes DMT, Analogic and the DIP loan to Williams Industrial Services Group.

Speaker 2

As a result, net funded investment activity increased by $7,000,000 during the quarter. Our non accruals decreased from 1.7 percent of fair value at sixthirtytwenty 3 to approximately 1% at ninethirtytwenty 3. We removed David's Bridle from non accrual status this quarter as the result of our successful restructuring of the business where we worked for Bank of America and David's Bridal Management to lead the emergence of David's Bridal from bankruptcy in July. As a result of the transaction, we are now You're the lender and majority equity owner of David's Bridal. We added one new portfolio company, Williams Industrial to non accrual this quarter.

Speaker 2

We added the remaining residual amount of the 1st lien term loan of Williams Industrial to non accrual as the majority of the loan was repaid from the bankruptcy sale And we expect to receive the remaining residual amount over an extended period of time from the bankruptcy estate. We received full repayment of our Williams DIP loan. Overall, our portfolio remains defensive in nature with 88% in senior secured investments that are highly diversified across industries and issuers. I'll now turn the call over to Keith.

Speaker 3

Okay. Thank you, Greg, and good morning, everyone. As Michael mentioned, we reported another quarter of solid investment performance driven by an increase in LIBOR and SOFR rates, Fees generated from a quarterly investment activity, prepayment premiums and other yield enhancing features within our portfolio. During the quarter, net investment income was $30,000,000 or $0.55 per share as compared to $23,400,000 or $0.43 per share reported in the Q2, an increase of $6,600,000 or $0.12 per share. Total investment income was $67,500,000 during Q3 as compared to $58,500,000 reported during the 2nd quarter, an increase of $9,000,000 or 15%.

Speaker 3

On the expense side, total operating expenses were $38,000,000 compared to $35,000,000 in the 2nd quarter. Total operating expenses reflect an increase in interest expense due to higher LIBOR and SOFR rates as well as higher advisory fees when compared to the prior quarter. At September 30, we had total assets of approximately $1,900,000,000 and total equity or net assets of $861,000,000 With total debt outstanding of 1,050,400,000 shares outstanding. At the end of the quarter, our net debt to equity ratio was 1 0.03x which is slightly lower than our net debt to equity ratio of 1.04x at the end of Q2. At September 30, our NAV was $15.80 per share as compared to $15.31 per share at June 30.

Speaker 3

The increase of $0.49 per share or an increase of 3.2% was primarily due to over earning our distribution, Price increases in the portfolio and the accretive nature of our share repurchase program during the quarter. We ended the quarter with a strong and flexible balance sheet with over $500,000,000 in unencumbered assets, lower net leverage relative to our peers, A strong debt servicing capacity and solid liquidity. We had over $120,000,000 in cash and short term investments and an additional 100,000,000 under our credit facilities to further finance our investment pipeline and continue to support our existing portfolio companies. During the quarter, the weighted average cost of our debt capital was about 8.3%. In terms of our debt structure, as Michael mentioned, in October we closed on a $33,000,000 follow on to the Series A unsecured floating rate notes to certain large Israeli institutional investors with the same terms as the existing notes.

Speaker 3

And yesterday, we pleaded a $100,000,000 private offering A floating rate unsecured notes due 20.27 to certain institutional investors. These notes pay interest at a floating rate equal to the 3 months silver Plus a credit spread of 4.75. The notes are rated investment grade by DBRS. After completing these two financing transactions, our debt mix will now be 60% in senior secured and 40% in unsecured. It also brings additional strength and flexibility to our balance sheet and aligns well with our mostly floating rate investments.

Speaker 3

Turning to distributions, during the Q3, we paid distributions to our shareholders of $0.39 per share, which includes a base distribution of $0.34 per share and a supplemental of $0.05 per share. As announced this morning, we declared our 4th quarter base distribution of $0.34 per share. The 4th quarter distribution will be paid on December 15 to shareholders of record on December 1. In addition, As we announced last quarter, we also declared a supplemental distribution of $0.05 per share for the Q4. The supplemental distribution for the Q4 will be paid on January 15 to shareholders of record on December 29.

Speaker 3

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

Speaker 1

Thanks, Keith. As a final thought before we open the line, We'd like to reiterate our message that we believe Scion is well positioned to provide solid returns to its shareholders despite current market conditions. And with that, operator, we're ready to take any questions.

Operator

Thank you. We will now be conducting a question and answer And the first question comes from the line of Eric Zwick with Hovde Group. Please proceed with your question.

Speaker 4

Good morning, everyone. I wanted to first start on leverage. I know you mentioned kind of a target Range of kind of a target level of 1.25 percent in the past year or so. You've been around 1% or so. So just curious about if you need to see A change in market opportunities, comfort with the economy, that outlook or how you would think about kind of approaching that target range and over what timeframe?

Speaker 1

Yes. Thanks, Eric. It's Michael. So look, we've always said we wanted to get to 1.25x. We're just cautious in How we obtained the additional leverage.

Speaker 1

We wanted to be cognizant of not only rates and the environment, but also the mix between secured and unsecured. And we were happy that we're able to get this $100,000,000 in unsecured and also floating. That was important to us to match the liabilities and assets, especially where rates are at this time.

Speaker 4

Got it. Thanks for the color there. And another one, just as I kind of look through the statistics Provided in the portfolio companies notice that the current median EBITDA at $33,700,000 is down about 10 From the year ago figure, but also do see that the footnote indicates that those median figures are as of EBITDA at the initial investment Period. So curious, 1, if the year over year decline is reflective of you may be kind of targeting some smaller companies. And I know in your Prepared comments you said kind of going deeper into smaller middle market companies.

Speaker 4

And if that is the case, Curious if you could provide any kind of color or commentary over what the average year over year growth in actual EBITDA for your Portfolio companies has been.

Speaker 2

Yes. So Eric, this is Greg. I think there are 2 issues. 1, The median EBITDA number is more a reflection of portfolio in and out than it is any earnings Profile from an organic earnings point of view, our EBITDA is up. We're seeing single digit EBITDA growth And names that we've held over a quarter.

Speaker 2

So what you're seeing in that movement really is a reflection of names coming in, names coming out. This quarter we did a couple of new platforms that had about $17,000,000 of EBITDA. So that brought the number down a bit and we exited something I have had over $100,000,000,000 of EBITDA. So it's more pure math than it is any earnings or strategic decision.

Speaker 4

That makes sense. I appreciate the color there. That's all I had today. Thanks guys.

Speaker 1

Hey, Gar.

Operator

And at this time, there are no further questions. And I'd like to turn it back over to management for any closing comments.

Speaker 1

Great. Well, thank you, everyone, who joined the call today. We appreciate your interest, and we look forward to speaking to you in early March when we announce our Q4 and year end results. Thank you, everyone.

Operator

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

Earnings Conference Call
CION Investment Q3 2023
00:00 / 00:00