CION Investment Corporation (CION) Q3 2025 Earnings Report, Transcript and Summary

Greetings. Welcome to CION Investment Corporation Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Charles Arestia, Managing Director and Head of Investor Relations. Thank you. You may begin.

Good morning, and welcome to CION Investment Corporation's Third 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, Charles, and good morning, everyone. Overall, we reported a strong third quarter with continued NAV appreciation and significant quarterly earnings. We reported $0.74 a share in net investment income for the third quarter, driven by robust transaction activity involving 20 of our portfolio companies with several fee events, new investments and repayments. As in past quarters, increased transaction activity tends to translate into higher earning quarters through increased transaction-related fees and other yield enhancement measures such as MOICs, exit fees and call protection. During the third quarter, we realized significant transaction-related accretion related to a portfolio company and is part of our opportunistic strategy. As we discussed on our prior call, we expected this transaction to close in the third quarter which contributed meaningfully to our net investment income. Excluding the income from this transaction, we still would have covered our base dividend for the quarter, which we believe reflects the ongoing earnings power of our portfolio. Gregg will discuss this transaction in greater detail later on during the call, but I want to reiterate how we view our opportunistic strategy as a differentiated component of our overall earnings potential. While these contributions can appear episodically, we consider these potential earnings to be a strategic component of our portfolio as we manage the business and the dividend over the longer term. We appreciate that the timing of these contributions can be difficult to predict, which is why we provided the additional context on our prior earnings call. Going forward, we plan to provide comparable guidance on any similar anticipated transactional income to help manage investor expectations in the short term, should conditions allow. As we have mentioned previously, we believe the volatility that these potential returns create tends to skew meaningfully to the upside versus consensus expectations and thus should be evaluated on a longer-term perspective. Our net asset value increased 2.5% quarter-over-quarter to $14.86 up from $14.50 in the prior quarter, driven largely by fair value increases in our equity portfolio with significant increases in Longview Power and Palmetto Solar. Following the upside of our share repurchase program announced in the prior quarter, we were able to take advantage of a meaningful sector-wide sell-off in the BDC space in September to repurchase our shares in the open market, which remains accretive to NAV. Overall, we repurchased approximately 330,000 shares at an average price of $9.86 per share during the quarter and have continued repurchasing shares in the fourth quarter. So far in the fourth quarter through last week, we have repurchased approximately 325,000 shares at an average price of $9.33 per share. The largest contributor to our quarterly NAV growth was Longview Power, which continues to see tailwinds from stronger fundamental performance and broader sector growth from AI-driven digital infrastructure demand. Longview is now our largest equity position, and we are pleased with the underlying asset performance so far. Looking ahead, we believe successful monetization of our equity positions will be a significant driver of the growth potential for our stock, and we are encouraged by recent trends on that front. Despite broader headlines about problematic loans in the credit space, we believe our portfolio continues to perform well. Underlying LTM adjusted EBITDA growth trends in our portfolio companies in our debt portfolio remain in the mid- to high single digits and our portfolio nonaccruals remained relatively low at 1.75% of the portfolio at fair value. We added 2 names to nonaccrual status this quarter, including a relatively small position in one of our very few second lien holdings. Following our quarterly review process, we downgraded 3 loans, including the 2 new nonaccruals I just mentioned, partially offset by upgrading 1 loan that was subsequently repaid at par at quarter end. Overall, investments risk rated 4 or 5 comprise approximately 2.4% of the portfolio at fair value. I'm also excited to announce today a shift in our timing of paying base distributions to our shareholders beginning in January 2026. We will be converting to paying base distributions from quarterly to monthly. We are pleased with the continued performance of our portfolio and believe that shareholders will appreciate the increased frequency of our base distributions going forward. We have also declared a base distribution of $0.36 per share for the fourth quarter of 2025, the same amount as the third quarter, and Keith will discuss this in more detail. In summary, we believe that this was a strong quarter for CION and a reinforcement of our differentiated strategy, which pairs traditional first lien focused direct lending with an opportunistic capability to enhance overall returns over the longer term. We have seen a noticeable pickup in repayment activity in recent quarters, which allows us to redeploy into our active pipeline and allows us to recapture incremental fee income as the portfolio turns over. I'm especially proud of CION's performance amidst a highly competitive operating environment. There is certainly no shortage of press out there today on the headwinds of spread compression, looser lender protections and credit concerns driven by recent high-profile bankruptcies. We have no direct exposure to these names or sectors. We believe that our results today validate the diligent work of our team and continuing to source and execute on differentiated opportunities in a challenging environment. With that, I will 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've remained highly selective with new portfolio company investments in Q3 as we were highly active and focused on transaction opportunities within our portfolio of companies. We were also effectively at full investment during most of the quarter and worked to maintain our targeted net leverage range of 1.25x to 1.3x while simultaneously balancing the timing of expected investment pipeline investments versus repayment amounts. Most of our exiting repayments occurred towards the end of the quarter. 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 in the market. As Michael discussed in his remarks, market conditions continued to rebound in Q3 as stronger economic indicators and reduced concerns regarding tariffs have boosted overall economic sentiment in equity markets. We focused our Q3 activities on incremental opportunities with our own portfolio of companies as we had significant transaction and fee events with over 20 of our portfolio companies this quarter. 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 funded first lien investments for the quarter based on our investment cost with the equivalent of SOFR plus 7% for our direct strategy and SOFR plus 14% for our opportunistic strategy investments. 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. Together, these categories represented approximately 71% of our total PIK investments in Q3, approximately 67% of our PIK investments are in portfolio companies risk-rated either 1 or 2 and 98% 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 Q3 investment and portfolio activity. Our Q3 investment activity consisted of a co-lead investment in 1 new portfolio company metric and incremental add-on investments and secondary purchases in existing portfolio companies, including Avison Young, Senex, Community Tree Services, David's Bridal, [ Invincible Boats, I&W ], Ivyhill, LAV Gear, Juice Plus, Precision Medical, STATinMED and Tactical Air Support. During Q3, we made a total of approximately $73 million in investment commitments across 1 new and 12 existing portfolio companies, of which $65 million was funded. We also funded a total of $8 million of previously unfunded commitments. We had sales and repayments totaling $151 million for the quarter, which consisted of the full repayment of the first lien loans for American Family Care, Health e-commerce, HW [ Wachkner ] [ KeyImpact ], Lamons, Nova Compression and Rogers Mechanical. As a result of all these activities, our net funded investments decreased by approximately $69 million during the quarter. As Michael referenced, our NAV increase during the quarter was driven primarily by net increase 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, Palmetto Solar, Juice Plus and Anthem Sports. The value of our equity investments in Longview Power and Palmetto Solar increased due to the strong fundamental performance and projected financial outlook for these companies. As Michael mentioned, CION co-led the consensual restructuring and refinancing of Juice Plus during the quarter, which resulted in significant realized earnings for CION and repositioned Juice Plus the fuel product growth and strategic investments. Our investment in Juice Plus represents an illustrative example of our opportunistic first lien investment strategy where we acquire lightly syndicated first lien loan tranches in quality companies 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 have been able to realize healthy earnings on our first lien restructured and recapitalized transactions as our realized weighted average total recoveries have been in excess of the amortized cost of these investments at the time of the restructuring. Additional examples include our investments in Longview Power, Yak Mat, Heritage Power and Dayton Superior. We experienced a mark-to-market decline in our first lien debt investments in Anthem Sports which were driven primarily by the less-than-expected ramping of the revenue for the quarter. The company continues to transition from a subscription base to an advertising-driven revenue model and is in the process of integrating a recent strategic acquisition completed in the second quarter. From a portfolio credit perspective, our nonaccruals increased from 1.3% of fair value in Q2 to 1.75% in the third quarter. This increase was driven by the addition of 2 new names to nonaccrual, our first lien investment in Trademark Global and second lien investment in Aspira. Trademark Global's operations have been materially impacted by tariffs in 2025 as the company continues to diversify its sourcing away from China. While the company is executing a comprehensive plan to rebuild its earnings we have placed on nonaccrual and will reassess based on the company's execution of that plan. Aspira is rolling out a new generation of subscription products to its customers, which has impacted short-term performance. During the quarter, we sold our second lien investment in Seqirus, which removed the name from nonaccrual. On an absolute basis, nonaccruals continue to be 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 80% in first 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 or have seen increased risk since the initial asset purchase decrease from approximately 11.6% in Q2 to 10.4% in Q3. I'll now turn the call over to Keith.

Thank you, Gregg, and good morning, everyone. During the third quarter, net investment income was $38.6 million or $0.74 per share compared to $16.9 million or $0.32 per share reported in the second quarter. Total investment income was $78.7 million during the third quarter as compared to $52.2 million reported during the second quarter. This is an increase of $26.5 million or an increase of about 51% quarter-over-quarter. The increase in total investment income was driven primarily by higher interest income earned as a result of certain investments being restructured and other yield-enhancing prepayment fees recorded during the quarter, as well as higher transaction fees earned from originations and amendment activity when compared to the prior quarter. On the expense side, total operating expenses were $40.1 million, compared to $35.3 million reported in the second quarter. The increase in operating expenses was primarily driven by higher advisory fees due to higher investment income earned during the quarter. At September 30, we had total assets of approximately $1.9 billion and total equity or net assets of $773 million, with total debt outstanding of about $1.1 billion and 52 million shares outstanding. Our portfolio at fair value ended the quarter at $1.7 billion, and the weighted average yield on our debt and other income-producing investments and amortized cost was 10.9% at September 30. Our PIK income for the third quarter was largely impacted by one of our portfolio companies in connection with its amended loan facility. The amount capitalized was about $5 million for the quarter. And excluding this transaction, our PIK as a percentage of total income for the third quarter would have been lower and in the mid-teens level. At September 30, our NAV was $14.86 per share as compared to $14.50 per share at the end of June. The increase of $0.36 per share or 2.5% was due to mark-to-market price increases in our portfolio, mostly due to price increases from our equity book and the accretive nature of a share repurchase program during the quarter. We ended the third quarter with a strong and flexible balance sheet with over $1 billion in unencumbered assets, a strong debt servicing capacity and interest coverage ratio of about 2x and solid liquidity. We had over $105 million in cash and short-term investments and another $100 million available under our credit facilities to further finance our investment pipeline and continue to support our existing portfolio companies. At September 30, we continue to have a healthy debt mix with about 63% in unsecured debt and 37% in senior secured bank debt. About 75% of our debt capital is in floating rate, which aligns well and creates a natural hedge with our mostly floating rate investment portfolio. Our well-diversified debt structure is focused on unsecured debt in order to maximize our balance sheet flexibility and at the same time, creates a strong buffer for our financial covenants. At the end of the quarter, our net debt-to-equity ratio decreased to 1.28x from 1.39x at the end of June. And the weighted average cost of our debt capital was about 7.5%, which is unchanged from the second quarter. We currently manage our portfolio and leverage levels on a net of cash basis as all of our outstanding debt is currently noncallable and at their minimums. Now turning to distributions. During the third quarter, we paid a base distribution to our shareholders of $0.36 per share, which is the same as the second quarter distribution. The trailing 12-month distribution yield through the third quarter based on the average NAV was about 10%. And the trailing 12-month distribution yield based on the quarter end market price was about 15.7%. As announced this morning, we declared our fourth quarter base distribution of $0.36 per share, which is the same as the third quarter. The fourth quarter base distribution will be paid on December 15 to shareholders of record as of December 1. And finally, we also announced this morning that we will be changing the timing of paying base distributions to our shareholders from quarterly to monthly beginning in January 2026 to better align with our shareholder base. Monthly base distributions will continue to be declared quarterly in advance. With that, I will now turn the call back to the operator, who will open the line for questions.

[Operator Instructions] Our first question is from Erik Zwick with Lucid Capital Markets.

First question maybe for Keith, and I appreciate all of the commentary kind of walking through the puts and takes there and interest income for the quarter. Curious if you could kind of break it down either in terms of dollar terms or percentage terms, and what of that $51 million, what came from kind of regular ongoing interest payments? And what was more from the periodic in nonrecurring events?

Yes. I would think that on a baseline basis, we had interest income similar to what we recorded in Q2, maybe slightly up and then the rest of it came from the restructured investments that we experienced during the quarter.

And maybe a similar line of questioning on the PIK income in the quarter. You noted the $5 million of capitalized costs. So that was more onetime in nature? Is that the correct interpretation that $5 million...

I don't know if I would necessarily use that vernacular, but yes, that was a pick event that occurred uniquely in this quarter.

And then so the remaining, call it, $12 million or so, could you provide a breakout of that part, what is structured versus kind of credit related because I know you've got a fair amount that's structured by design?

Yes. No different than the pool that Gregg had mentioned on his comments that the majority of that is structured.

And then just curious, as you seem fairly optimistic about the originations outlook. And just curious if you could provide any commentary on the pipeline in terms of the size relative to maybe 3 months ago? And also just the quality of what you're seeing in terms of structure and in yield as you look forward to future activity?

Erik, it's Gregg. Definitely more robust than we've seen this year. More activity, it's broader based. There's definitely been a pickup in M&A, which is different from the first 2 quarters. And I would say, in terms of spreads and things like that, pretty consistent with what we've done in the past. I would say we definitely -- what I would call traditional middle-market type spreads.

This will now conclude our question-and-answer section. I would like to turn the call back over to Michael Reisner for closing remarks.

We appreciate everyone taking time out of their day to join us, and we look forward to communicating with you early next year. Thank you, everyone. Take care.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.