CION Investment Q3 2024 Earnings Report

CION Investment EPS Results

• Actual EPS: $0.40
• Consensus EPS: $0.38
• Beat/Miss: Beat by +$0.02
• One Year Ago EPS: $0.55

CION Investment Revenue Results

• Actual Revenue: $59.63 million
• Expected Revenue: $57.75 million
• Beat/Miss: Beat by +$1.88 million
• YoY Revenue Growth: N/A

CION Investment Announcement Details

• Quarter: Q3 2024
• Date: 11/7/2024
• Time: Before Market Opens
• Conference Call Date: Thursday, November 7, 2024
• Conference Call Time: 11:00AM ET

CION Investment (NYSE:CION) is a business development company. It specializes in investments in senior secured loans, including unitranche loans, First Lien, second lien loans, long-term subordinated loans, and mezzanine loans; equity interests such as warrants or options; and corporate bonds; and other debt securities in middle-market companies. The firm invests in growth capital, acquisitions, leveraged buyouts, market/product expansion, refinancing and recapitalization. The fund also invests up to 30 percent of their assets opportunistically in other types of investments, including the securities of larger public companies and foreign securities. It also makes investments in the secondary loan market. The fund does not invest in start-up companies, turnaround situations, or companies with speculative business plans. The fund prefers to invest in high tech industries, healthcare, pharmaceuticals, business services, media, chemicals, plastic, rubber, telecommunication, consumer services, advertising, printing and publishing, consumer goods, durables, diversified financials, and other industries. It also invests in homebuilding, restaurants, beverage and tobacco bars, broadcasting, distributors, Non-durable good distribution, food beverage and tobacco, energy, oil gas and consumables fuels, insurance, aerospace and defense, industrial machinery, paper and forest product machinery, information technology, metals and mining, and real estate. It primarily seeks to invest in the United States. The fund seeks to invest between $5 million and $50 million in companies with an EBITDA between $25 million and $75 million with average targeted hold of $25 million. It also purchases minority interests in the form of common or preferred equity in the target companies, typically in conjunction with its debt investments or through a co-investment with a financial sponsor. The fund seeks to exit its investments through an initial public offering of common stock, a merger, a sale, or other recapitalization.

CION Investment Q3 2024 Earnings Call Transcript

[Operator]

As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Charlie Aristia, Managing Director and Head of Investor Relations.

[Operator]

Thank you, Charlie. You may begin.

[Speaker 1]

Good morning, and welcome to Scion Investment Corporation's Q3 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.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.

[Speaker 1]

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, Scion Investment Corporation's Co Chief Executive Officer Greg 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.

[Speaker 2]

Thank you, Charlie. Good morning, everyone, and thanks for joining our call today. I am pleased with Scions' 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 4 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.

[Speaker 2]

As Keith will discuss later on the call, we were very active in managing the right side of our balance sheet in the Q3, 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 Scion as a public company and we were thrilled to see the strong investor support.

[Speaker 2]

Moving now to our quarterly results. Scion reported $0.40 in quarterly net investment income for the Q3, 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 $0.36 base quarterly dividend. Our net asset value declined quarter over quarter to $15.73 down from 16.08 in the Q2, 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 Bridal's position. Greg will provide some additional details later in the call.

[Speaker 2]

Over the longer term, we are pleased with our track record of preserving Sion'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 6 loans, offset by upgrading 3 loans on our internal risk rating scale. We added 1 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.

[Speaker 2]

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 Q3, we have repurchased over 3,500,000 shares at an average price of $10.09 The market environment during the Q3 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 our broader thought in the M and A market has been constructive following an extensive period of more sluggish activity. As Greg 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 Scions to remain nimble and take advantage of opportunities that may arise in a higher volatility environment.

[Speaker 2]

With that, I will now turn the call over to Greg to discuss our portfolio and investment activity during the quarter.

[Speaker 3]

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've 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.

[Speaker 3]

We continue to strategically focus on 1st lien investing at the top of the capital structure and prefer to utilize secured yield enhancing provisions such as pick 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 1st lien loans at higher spreads when compared to the overall loan markets during the quarter. The weighted average coupon for our total funded 1st lien debt investments for the quarter was the equivalent of SOPR 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 1st lien 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 1st lien restructured reorganized transactions as our realized weighted average total recoveries have been excess of the amortized cost of those investments at the time of the restructuring.

[Speaker 3]

During the quarter, we successfully exited our restructured 1st lien 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 3 year period and exited with a significant realized gain of several $1,000,000 The majority of our annual pick income is strategically derived from highly structured situations such as our litigation finance investments, where we can attain higher yields by matching flexible pick timing features with strict cash flow sweeps upon collections or through coupon structures where pick is incremental to our cash interest. Over 60% of our pick 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 pay downs within our litigation finance investments.

[Speaker 3]

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 Q3 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.

[Speaker 3]

We additionally completed add on investments for portfolio companies including David's Bridle, StatenMed, Community Tree Service, K and N, American Clinical Services and Stengel Architecture. We also completed 1st lien refinancings for portfolio companies, including Senex and Avison Young and an incremental secondary equity investment in Longview Power. During Q3, we made a total of $97,000,000 in new investment commitments across 1 new and 10 existing portfolio companies, of which $78,000,000 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 $15,000,000 of previously unfunded commitments.

[Speaker 3]

We had sales and repayments totaling $154,000,000 for the quarter, which consisted of the full pay down of investment tranches in WIS, Global Tel Link, Homer City, Newcycle, USALCO and Fluid Control, the refinancing of our 1st lien investments in Cenex and Avison Young and the sale of our investments in Powers Presents and Heritage Power. Approximately $49,000,000 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 $61,000,000 during the quarter. In terms of portfolio performance, our net asset value per share decreased from $16.08 in Q2 to $15.73 per share in Q3, driven primarily by unrealized net mark declines of approximately $22,000,000 which represents approximately 1% of our total $1,800,000,000 portfolio.

[Speaker 3]

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 marked 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 Scion Eagletree joint venture, Longview Power and Burl Lips, all of which were driven by stronger underlying performance trends.

[Speaker 3]

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 STATMed. Scion led a super senior financing for STATMed 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 STATMed term loan mark valuation, which is a primary driver of our decision to place on non accrual for now. There are several names, including STATMed that we continue to reevaluate for potential return to accrual status based on financial performance, transaction related and other positive developments.

[Speaker 3]

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 1st 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.

[Speaker 4]

Okay. Thank you, Greg, and good morning, everyone. As Mark mentioned, we reported another quarter of solid financial results driven by a combination of income generated from our quarterly investment activity, including amendment and other transaction fees realized during the period. During the quarter, net investment income was $21,600,000 or $0.40 per share compared to $22,900,000 or $0.43 per share reported in the 2nd quarter, a decrease of $1,300,000 or $0.03 per share. Total investment income was $59,600,000 during Q3 as compared to $61,400,000 reported in Q2.

[Speaker 4]

The decrease of $1,800,000 was driven by lower dividend income recorded during the period, which was slightly offset by higher transaction fees compared to the Q2. On the expense side, total operating expenses were $38,000,000 as compared to $38,400,000 reported in the 2nd quarter. The decrease was primarily driven by lower advisory fees and interest expense 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 $839,000,000 with total debt outstanding of $1,070,000,000 53,400,000 shares outstanding. At the end of the quarter, our net debt to equity ratio was 1.18x, which is slightly higher than 1.13x at the end of Q2.

[Speaker 4]

Our portfolio fair value ended the quarter at 1,750,000,000 dollars down $70,000,000 from the 2nd 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 cost was 12.2% at September 30, which is down from 12.8% or about 60 basis points from the 2nd quarter. At September 30, our NAV was 15 point $7.3 per share as compared to $16.08 per share at the end of June. The decrease of $0.35 per share or 2.2 percent 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 our distributions and the accretive nature of our share repurchase program during the quarter. We ended the 3rd quarter with a strong and flexible balance sheet with over $800,000,000 in unencumbered assets, a strong debt service capacity and solid liquidity.

[Speaker 4]

We had over $90,000,000 in cash and short term investments and an additional $162,000,000 available under our credit facilities to further finance our investment pipeline continue to support our existing portfolio companies. At September 30, 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 2nd quarter. In terms of our debt structure, during the quarter, we were very active in the debt capital markets. We recently closed 4 debt transactions, effectively refinancing 90% of our debt capital, while extending the weighted average maturity wall by 3 years through 2027 and raised almost $300,000,000 in new unsecured debt from new and existing institutional investors.

[Speaker 4]

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 JPMorgan for an additional 2 years with more constructive operating provisions and better economics. The effective credit spread was reduced by 45 basis points. We also refinanced our $30,000,000 unsecured fixed rate term loan for a new 3 year unsecured floating rate term loan with a credit spread of 3.8%. And we also upsized our unsecured notes due 2027 by issuing $100,000,000 of 3 year unsecured floating rate branch fee notes with a credit spread of 3.9%.

[Speaker 4]

And more recently, post quarter end, we completed a public baby bond offering issuing $172,500,000 of new unsecured 7.5 percent fixed rate notes due 2029, which were listed and commenced trading on the New York Stock Exchange under the ticker symbol CICB on October 9. After completing these 4 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 Q3, we paid a base distribution to our shareholders of $0.36 per share, which is the same base distribution we paid in Q2.

[Speaker 4]

The trailing 12 month distribution yield through the Q3 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 our 4th quarter base distribution of $0.36 per share, which is the same as the 3rd quarter. The 4th quarter base distribution will be paid on December 16 to shareholders of record on December 2. Okay. With that, I will now turn the call back to the operator, who will open the line for questions.

[Operator]

Thank you. We will now be conducting a question and answer session. All right. There are no questions at this time. I'd like to pass the call back over to Mark for closing remarks.

[Speaker 2]

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 Scion 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 Scion'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.

[Speaker 2]

Thank you all for your continued support of Scion and we look forward to speaking again next quarter.