In my previous article on CION Investment Corporation (NYSE: TION), I wrote about the bad timing for this BDC going public in October 2021 after almost a decade as a private company. Now in September, as the Federal Reserve prepares to raise rates again and the market is in the throes of another downturn that appears to be getting even more severe, CION continues to offer long-term investors a unique opportunity. CION offers a healthy distribution with a 13% annual yield from a dividend that increased by 10%, from $0.28 to $0.31 quarterly, after the company Second Quarter Earnings Report. Additionally, there is potential for capital appreciation as the stock is trading below $10 per share, closing at $9.92 on September 16, while the NAV as of June 30, 2022 was $15.89, a slightly less than on March 31, when it was estimated at $16.20.
When I first wrote about CION in June, during the 2022 market low thus far, the NAV discount was around 40% and the yield 14%. That was an excellent time to establish a long position in CION and the stock has performed well ever since. However, as credit markets begin to deteriorate again, there may be another opportunity soon to establish a position, or add to an existing one, in this recently public BDC before it resumes its uptrend.
In a recent comment At CION, the company discussed the current state of the credit markets and what they see as a potential short-term outcome based on the Federal Reserve’s actions. CION invests primarily in the debt of middle-market private companies through the issuance of 94% secured senior loans, which are 85% variable rate, so this BDC will benefit from increased rates. However, the broader economy is expected to continue to deteriorate and therefore credit markets may suffer further in the coming months, dampening expectations of continued outperformance in the CDB sector.
The July and early August question of whether the markets were recovering or if it was a bear market rally was answered, and the bears remained firmly in charge. The catalyst was Chairman Powell’s recent remarks, in which he made it clear that the Fed is committed to controlling inflation.
Treasury yields rose, almost hitting their June high year to date. After a mostly positive July, most major credit sectors fell in August. Bloomberg Barclays’ US aggregate marked its sixth month of negative performance, pulling back all gains from July, which was its best month to date.
Additionally, the commentary notes that future expectations are expected to remain negative with further weakening in demand over the next six to twelve months. Price pressures are expected to persist at least through the end of the year. The silver lining to all of this is that there are opportunities to invest more in private credit, which is expected to be in continued demand, as illustrated in this graph from the article.
Investment management experience
A differentiator of CION as an investment includes the experience of the external manager. CION, the BDC is externally managed by CION Investment Management, LLC or CIM. CIM is a different breed with unique capabilities for scale and accuracy based on established relationships and core partnerships in the credit and asset management space. CIM is a subsidiary of parent company CION Investments. In addition to CIM, the company also owns the subsidiary companies CION Securities and CREM Capital. The CIM subsidiary also offers a product that is managed by CION Ares Management, a joint venture with Ares Management (ARES), called CION Ares Diversified Credit Fund.
Depending on the background website, CION invests in companies with an EBITDA target range of $25 million to $75 million. The average transaction is around $25 million. The main investment types are senior secured loans which are about 93% first lien, some second lien and single tranche, and about 4% co-equity. Approximately 85% are variable rate loans, 10% fixed and about 4% in investments that do not generate income.
As of June 30, 2022, there were 121 portfolio companies in diversified industries representing a portfolio value of $1.9 billion in total assets.
Second Quarter Earnings Summary
After a difficult first half of the year for the equity and credit markets, CION reported a reasonably good quarter in its Q2 report published on August 11. Although the headline reported by SA was a $-0.02 EPS GAAP loss, net income for the 3 months ending June was $43.6 million or $0.34 per share.
As of June 30, 2022, the Company had $947.5 million of total debt principal outstanding, of which 78% was comprised of senior secured bank debt and 22% was comprised of unsecured debt. The Company’s debt to equity ratio was 1.05x as of June 30, 2022, compared to 0.95x as of March 31, 2022.
Investments in non-accumulation status represented 1.5% and 3.6% of the fair value and amortized cost of the total portfolio, respectively.
- On April 27, 2022, the Company entered into a 5-year floating rate unsecured term loan agreement with More Provident Funds and Pension Ltd. under which the Company obtained a $50 million loan; Y
- On June 24, 2022, the Company’s board of directors, including the independent directors, increased the number of common shares of the Company that may be repurchased under the Company’s share repurchase policy by $10 million to a total of $60 millions.
The NAV per share decreased to $15.89 from $16.20 on March 31. The decline was primarily due to market adjustments caused by wider credit spreads and price declines. As you can see from this chart from the St. Louis Fed, credit spreads really started to widen in June peaking at 5.99% on July 5th. Since then, the spread started to normalize back to around 4.5% before rising again. now in september.
Summing up the second quarter results, Co-CEO Michael Reisner discussed the portfolio’s investment philosophy and growth despite challenging market conditions:
“The better financial and portfolio performance in the second quarter is the result of our prudent long-term investment strategy that we continue to implement even during these volatile market conditions. We remain focused on expanding and diversifying our portfolio with strong companies across many industries as we seek to capitalize on new opportunities. As a result, during the quarter we increased our portfolio by $63 million in net investments financed. We believe that we are well positioned to provide strong returns to our shareholders. Our shares are trading at a significant discount to our net asset value per share of $15.89 at the end of the quarter, which is one of the reasons our Board recently approved increasing the total amount to be repurchased under our share repurchase policy. existing shares by $10 million for a total of $60 million. Share buybacks under this policy will add to our net investment income per share, thereby providing higher returns to our existing shareholders,” said Michael A. Reisner, co-chief executive officer of CION.
History and distribution policy
CION also announced that, on August 9, 2022, its co-executive directors declared a regular third quarter 2022 distribution of $0.31 per share payable on September 8, 2022 to shareholders of record as of September 1, 2022, which represents an increase of $0.03 per share, or 10.7%, from the regular distribution of $0.28 per share paid for the second quarter of 2022.
Due to the recent public nature of the shares, there is a very short but illuminating distribution history for CION. In December 2021, the fund paid its first quarterly public dividend of $0.2648 and a special dividend of $0.20. Then in March 2022 and in June the company made quarterly distributions of $0.28. The next quarterly dividend to be paid in September will be $0.31. Thus, in less than a year the dividend has already been increased twice and a supplementary distribution has been paid. The total amount of distributions paid in the subsequent twelve-month period will be $1.33 for an annual return of 13.4%.
Summary and recommendations
Based on recent market conditions, the reversal of the uptrend that started in July but turned negative again last week would suggest current shareholders continue to hold and reinvest dividends if possible. There may be an opportunity later to add to a long position as credit markets struggle to gain traction. I’d be a cautious buyer below $10 if you’re new to stocks but don’t want to try and time the market. For others who are interested in this ticker, it may be wise to wait and see what happens in the next few months.
The upcoming midterms may have some impact on future market sentiment, which could be a time to “buy the dip” if the market changes course again. In the meantime, CION’s portfolio managers will likely deploy funds to take advantage of opportunities that may prevail in private credit markets to further increase the net asset value of the portfolio and thus allow for continued growth in future distributions. CION has a good track record (since 2011) before going public with CION shares in 2021 and this is not their first rodeo. Although if the credit markets in general continue to sink in the next 6 to 12 months, there may not be a safe harbor for investors.