CION Investment Corp Q2 FY2025 Earnings Call

Greetings, and welcome to the CION Investment Corporation Second Quarter 2025 Earnings Call. This conference is being recorded. It is now my pleasure to introduce Charlie Arestia, Managing Director and Head of IR. Thank you, sir. You may begin.

Good morning, and welcome to CION Investment Corporation's Second Quarter 2025 Earnings Conference Call. An earnings press release was distributed earlier this morning before market open. A copy of the release, along with the supplemental earnings presentation, is available on the company's website at www.cionbdc.com in the Investor Resources section. It 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. 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 Michael Reisner, CION Investment Corporation's Co-Chief Executive Officer; Gregg Bresner, President and Chief Investment Officer; and Keith Franz, Chief Financial Officer. With that, I would like to now turn the call over to Michael Reisner. Please go ahead, Michael.

Thank you, Charlie, and good morning, everyone. Thank you all for joining our call today. This morning, CION reported $0.32 in quarterly net investment income for the second quarter, mainly impacted by two positions, including our restructuring of Anthem Entertainment, which we discussed in the prior quarter, and the exit of our position in several hospital loans, which Gregg will discuss. Excluding this one-time impact, our quarterly net investment income would have exceeded our base dividend level of $0.36 per share. As I will touch upon in a bit, we are keeping our dividend steady at this time. Our net asset value increased 1.5% quarter-over-quarter to $14.50, up from $14.28 in the first quarter, driven by fair value increases in our equity positions in Longview Power, David's Bridal and several other smaller positions. We also continued to repurchase shares in the open market during the quarter, which remains accretive to our NAV. Longview Power is our second largest equity position and saw improved valuation this quarter due to better-than-expected financial performance and strong capacity auction results. As we have noted on prior calls, we expect some quarterly volatility in the fair value marks of our equity positions in David's Bridal, given the relative size of the position and the nature of its business. This quarter, our positions in David's were marked higher due to improved trading performance of comparable companies, increased clarity around the potential impact of tariffs, and the continued growth of its higher multiple Pearl digital marketplace. We are pleased with the continued credit performance of our portfolio as underlying fundamentals remain encouraging. We are seeing weighted average adjusted EBITDA growth at the portfolio company level in the mid-single digits on an LTM basis, reflecting sustainable growth and healthy operations. Following our quarterly valuation process, we downgraded investments in seven portfolio companies on our internal risk rating scale and upgraded investments in four portfolio companies. Several of our rating upgrades were due to anticipated repayments subsequent to the quarter following portfolio company sales or other transactions where we have received notification of a pending payoff. Investments risk rated 4 or 5 represent less than 2% of the portfolio at fair value, similar to the prior quarter. Overall, nonaccruals remain low at 1.37% of the portfolio at fair value. Capital markets were especially volatile in early Q2, and our share buyback activity accelerated as a result. We repurchased approximately 699,000 shares of our common stock at an average price of $9.37 during the quarter. We are excited to announce that our Board has authorized a $20 million upsize to our share repurchase program, which was renewed at our quarterly Board meeting earlier this week. We continue to believe that our share buyback preserves strong alignment with our shareholders, along with our insider purchasing, and remains a prudent use of capital as long as it is accretive to NAV. When we spoke with you last quarter, investors were attempting to digest a whirlwind of macroeconomic challenges, including the initial wave of steep tariff declarations on various trading partners around the globe. Since then, improved clarity around both the strategy behind the tariffs as well as negotiated deals has led to a broader market rally and stronger sentiment. While it is too soon to say whether this trend will continue into the back half of the year, initial discussions with our portfolio companies remain positive. Repayments accelerated this quarter, and we expect additional repayments in the third quarter, which should allow us to deploy into our forward pipeline while balancing our overall leverage profile. Overall, we are pleased with our growth in NAV and continued steady credit performance in our portfolio. Regarding earnings, I want to share some incremental context around our dividend policy, given our net investment income for the period. We are maintaining our dividend at $0.36 per share for a couple of reasons. The first, what we believe is a nonrecurring nature of the impact to our earnings this quarter as a result of the two positions I mentioned. And second, we are currently leading the recapitalization of one of our larger portfolio companies in a transaction that we expect to close in the third quarter, which we believe will be highly accretive to both earnings and NAV. As we have mentioned in the past, we encourage investors not to overly focus on any particular 90-day window when evaluating our performance, as this does not reflect how we manage our investment and portfolio management processes. As we outlined at our Investor Day earlier this year, we see our opportunistic investing strategy as a strong complement to our core direct lending strategy, allowing CION to enhance shareholder returns while remaining focused on a conservative first lien position. While we acknowledge that this can introduce some volatility into our earnings on a quarter-to-quarter basis, we believe this volatility tends to skew meaningfully to the upside and thus should be evaluated on a longer-term perspective. With that, I'll now turn the call over to Gregg to discuss our portfolio and investment activity during the quarter.

Thank you, Michael, and good morning, everyone. We remained highly selective with new investments in Q2 as we were effectively at full investment during most of the quarter and worked to maintain our targeted net leverage level, balancing the timing of expected investment pipeline investments versus repayment amounts. During the quarter, we passed on a historically higher percentage of potential investments in new portfolio companies based on credit and pricing considerations, as the continued hangover of record 2024 private debt fundraising still translated into lower coupon spreads, higher leverage levels, and looser credit documents for potential transactions. As Michael discussed in his remarks, market conditions rebounded in Q2 as stronger economic indicators and reduced concerns regarding tariffs have boosted overall economic sentiment and equity markets. We focused our Q2 activities on incremental investments with our portfolio companies, particularly for strategic add-on acquisitions, business development, and other corporate initiatives. We believe our continued investment selectivity and proportional deployment levels helped us to invest in first lien loans at higher spreads when compared to the overall private and public loan markets during the quarter. The weighted average yield for our total funded first lien debt investments for the quarter, based on our investment costs, was the equivalent of SOFR plus 6.96%. As we discussed in previous quarters, the majority of our annual PIK income is strategically derived from highly structured first lien investments or where PIK income is incremental to our cash coupon. For example, we invest in litigation finance portfolios where we are first lien lenders against a diverse mix of thousands of mass tort or single event cases. We are able to attain higher yields with attractive loan-to-value structures by matching flexible PIK timing features with strict cash flow sweeps upon collections from settlements. These investments represent approximately 17% of our PIK income. We have begun to experience increasing repayments from our litigation portfolios as the long court docket delays from COVID are starting to thaw and cases are being resolved, settled, and distributed. Recent higher-profile cases that have settled include Gilead, Zantech, and Astroworld. Approximately 68% of our PIK investments are on portfolio companies risk rated either 1 or 2, and 96% are 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. Turning now to our Q2 investment and portfolio activity. Our Q2 investment activity consisted of add-on investment commitments and secondary purchases in existing portfolio companies, including American Clinical, Anthem Sports, Aspira, Avison Young, Berlitz, Carestream Health, Community Tree Services, David's Bridal, Juice Plus, and Securus Aventiv. During Q2, we made a total of approximately $41 million in investment commitments across 10 existing portfolio companies, of which $29 million was funded. Over 99% of the investment commitments were in the form of first lien loans. We also funded a total of $10 million of previously unfunded commitments. We had sales and repayments totaling $88 million for the quarter, which consisted of the full repayment of first lien loans for American Lawyer Media, Manus Bio, and Mimeo. We expect Q3 repayment activity to be consistent with or greater than the level we received in Q2, as we have already received the full repayments of H.W. Lochner and Rogers Mechanical in early Q3, and expect several other companies to fully repay prior to the end of Q3. As a result of all these activities, our net funded investments decreased by approximately $49 million during the quarter. As Michael referenced, our NAV increase during the quarter was driven primarily by net increases in the unrealized mark-to-market value of the portfolio as improved market conditions and reduced tariff concerns positively impacted comparable public company valuations and the overall projected macroeconomic outlook. Four notable portfolio companies for the quarter were Longview Power, David's Bridal, 4Wall Entertainment, and our residual secured loans in two regional hospitals. Our equity investment in Longview Power increased primarily due to a strong financial outlook, higher baseload capacity auction pricing, and a projected stronger multiyear demand outlook for power production driven by data centers, AI, and other consumer consumption. As we mentioned on previous quarterly calls, we expect to see significant quarter-to-quarter volatility in the marks of David's Bridal equity due to the larger overall relative size of our investment, as well as the highly seasonal nature of the company's operations. The mark-to-market increase in David's Bridal for the quarter was driven primarily by improved comparable public trading multiples and the continued growth in David's Pearl marketplace business as a percentage of the total business mix. We experienced a mark-to-market decline in our first lien debt investment in 4Wall Entertainment, a leading full-service lighting, video, and rigging company serving the live entertainment and TV film production sectors. The decline was driven primarily by lower trailing earnings performance resulting from the far-reaching industry effects of the 2023 Writers Guild strike and LA fire activity that greatly impacted TV and film production activities. The company expects rebounding trends to continue into 2026. Lastly, we exited our residual secured loans to two hospitals within the CarePoint system. In conjunction with CarePoint's bankruptcy process, our lender group agreed to forward-sell our remaining first lien interest at a discount to par plus accrued interest in exchange for an expedited cash payment, as opposed to restructuring into new relatively small tranches with long-term maturities. From a portfolio credit perspective, our nonaccruals increased from 1.2% of fair value in Q1 to 1.37% in Q2. This increase was due to the initial classification of our new Term Loan C investment in Anthem Sports as nonaccrual this quarter. During the quarter, Anthem Sports completed a significant acquisition where CION co-led a new financing tranche. In conjunction with the acquisition, Anthem recapitalized its debt structure by the exchange and bifurcation of its previous term loans into new B and C tranches. The contractual interest component of the new tranche C consists of a nominal PIK payment and a MOIC to be paid upon exit or refinance. Given the deferred payment profile of the tranche C, we have elected to initially place the investment on nonaccrual immediately upon closing of the transaction, and intend to reevaluate based on the accreted value level of the tranche over time. On an absolute basis, nonaccruals 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 approximately 85% in first lien investments. Over 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 requiring more engagement time or have seen increased risk to the initial asset purchase, increased from approximately 10.3% in Q1 to 11.6% in Q2, driven primarily by increased engagement time in several names due to transaction-related activity. I will now turn the call over to Keith.

Okay. Thank you, Gregg, and good morning, everyone. During the second quarter, net investment income was $16.9 million or $0.32 per share compared to $19.3 million or $0.36 per share reported in the first quarter. Total investment income was $52.2 million during the second quarter as compared to $56.1 million reported during the first quarter. This is a decrease of $3.9 million or about 7% quarter-over-quarter. The decrease in total investment income was driven primarily by a decrease in interest income resulting from certain investments being restructured during the quarter, as well as lower transaction fees earned from origination and amendment activity compared to the prior quarter. On the expense side, total operating expenses were $35.3 million compared to $36.8 million reported in the first quarter. The decrease in operating expenses was primarily driven by lower advisory fees, a decrease in interest expense on our debt due to the benefits of repositioning our debt capital during prior quarters, and slightly lower G&A costs during the second quarter. At June 30, we had total assets of approximately $1.9 billion and total equity or net assets of $759 million, with total debt outstanding of $1.1 billion and 52.3 million shares outstanding. Our portfolio at fair value ended the quarter at $1.8 billion, and the weighted average yield on our debt and other income-producing investments at amortized cost was 12.4% at June 30, which is up 22 basis points from the first quarter. At June 30, our NAV was $14.50 per share as compared to $14.28 per share at the end of March. The increase of $0.22 per share, or 1.5%, was primarily due to mark-to-market price increases in our portfolio, mostly due to price volatility from our equity book and the accretive nature of our share repurchase program during the quarter. We ended the second quarter with a strong and flexible balance sheet with over $1 billion in unencumbered assets, a strong debt servicing capacity, an interest coverage ratio of about 2x and solid liquidity. We had over $65 million in cash and short-term investments and over $100 million available under our credit facilities to further finance our investment pipeline and continue to support our existing portfolio companies. At June 30, we continue to have a healthy debt mix, with about 62% in unsecured debt and 38% in senior secured, with about 75% in floating rate. At the end of the quarter, our net debt-to-equity ratio was unchanged at 1.39x, and the weighted average cost of our debt capital was about 7.5%, which is also unchanged from the first quarter as SOFR rates remained relatively flat. The benefits of repositioning our debt capital during the prior quarters and the increase in the unsecured debt mix to over 60% of our total debt capital, with about 75% in floating rate, continue to bring additional strength and flexibility to our balance sheet while creating a natural hedge to our overall market interest rate risk. Now turning to distributions. During the second quarter, we paid a base distribution to our shareholders of $0.36 per share, which is the same as the first-quarter base distribution. The trailing 12-month distribution yield through the second quarter based on the average NAV was about 10%, and the trailing 12-month distribution yield based on the quarter-end market price was 15.6%. As announced this morning, we declared our third-quarter base distribution of $0.36 per share, which is the same as the second quarter. The third-quarter base distribution will be paid on September 16 to shareholders of record as of September 2. Okay. With that, I will now turn the call back over to the operator who will open the line for questions.

The first question comes from Erik Zwick with Lucid Capital Markets.

Wanted to start with a question, I guess, on the pipeline and your expectations for originations in Q3 and kind of really matching that up against just your commentary that repayments in Q3 could be equal or greater to Q2. So just trying to get a sense of whether we might see the portfolio move a little bit lower in Q3 or if you have some insight that potential for originations could offset those repayments?

Erik, it's Gregg. I would say it's too early to tell, but we have a number of investment opportunities in the pipeline. I think it's a question of whether some of that slips over into Q4. It's always hard to judge when we're going to close things. But we are seeing some significant opportunity pipeline. So it will depend on the timing of both sides of the repayments plus the new investments. So it's hard to give you an exact estimate right now.

No, I appreciate that, and I know it's hard to have 100% clarity. So maybe kind of given that and just looking at the earnings run rate here in Q2, and I know you mentioned you expect some positive benefits in Q3 from the restructuring, but there are some, I guess, headwinds from the smaller investment portfolio. And if we look at the SOFR curve, it would suggest 100 basis points of compression from the rate environment over the next 12 months or so, and I believe about 90%, 91% of your portfolio is subject to floating rate. So maybe just kind of help me understand the path back to NII per share covering the declared dividend rate.

Sure. So it's a combination of things. When you see SOFR declining, I think in an environment where SOFR is going down, we typically see spreads widen. They usually run inverse to each other. Also, when there is more activity, so if there are more refinancings or more M&A activity picks up, we tend to generate significantly more investment income upfront in the form of fees and transaction fees and origination fees. So in the past, those two historically have offset each other, at least in the directions they run. Therefore, we believe any cut in SOFR will see activity uptick in fees along with an uptick in spreads.

Got it. So it sounds like it may be kind of a multi-quarter path to get back to NII covering the dividend? Or do you think you can get back there in Q3?

Yes. I think, based on my prepared comments, the activity we're doing in Q3, we're hopeful we can get there this quarter. There comes a time when we don't think we're going to get back there, and that's why we consider cutting the dividend.

And one last one, and I'll step aside and jump back in the queue. Just in terms of the share repurchase, the activity was quite a bit stronger in Q2 than we had seen previously, and I know you've got the increased authorization. So just how should I think about your appetite or the pace of buyback over the next quarter or two?

Yes, I believe this quarter was significant due to the impact of the announced tariffs. The programmatic buyback we have in place is designed to support the stock, and we tend to purchase more shares the more beneficial it becomes as the price decreases. We are optimistic that as we communicate our story, the stock will gain traction, and ideally, you will notice reduced buyback activity this quarter, although that is contingent on market conditions.

There are no further questions at this time. I now would like to turn the floor back over to Michael Reisner for any closing remarks.

Great. We want to thank everyone for joining us today. I hope everyone enjoys the rest of the summer. We look forward to coming back to you next quarter. Thank you, everyone.

This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.