Q4 2023 Cion Investment Corp Earnings Call

Participants

Michael Reisner; Co-Founder & Co-CEO; CION Investment Corporation

Gregg Bresner; President & Chief Investment Officer; CION Investment Corporation

Keith Franz; MD & CFO; CION Investment Corporation

Erik Zwick; Analyst; Hovde Group, LLC

Steven Martin; Analyst; Slater Capital Management, L.L.C.

Presentation

Operator

Good morning, and welcome to Cyan Investment Corporation's Fourth Quarter and Year End 2023 earnings conference call and earnings press release 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 w. w. w. dot Xi'an BDC. dot com in the Investor Relations 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 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.
Speaking on today's call will be Michael Reznor guy on investment corporation's Co-Chief Executive Officer, Greg President, President and Chief Investment Officer, and Keith Pratt, Chief Financial Officer. With that, I would now like to turn the call over to Michael Rasmussen. Please go ahead, Michael.

Michael Reisner

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. I will start our call today with an overview of our fourth quarter and year-end results. Greg will review our investment activity during the quarter, and Keith will provide additional detail on our financial results. After his prepared remarks, we will open the call to questions.
As we reported this morning, we had a very strong fourth quarter and 2023 overall, which saw us continue to demonstrate solid credit performance with an increase of almost 3% to our net asset value quarter over quarter and almost 2% year over year and net income of $0.94 per share, an increase of 8% quarter over quarter.
Our ROE was 23.4% for the quarter and 11% for the year. Our net investment income ROE was 10% for the quarter and 12.1% for the year. Our net investment income of $0.40 per share, once again outearned our base dividend because of our continued ability to outgrow our base dividends, coupled with our ability to drive returns by our yield, enhancing features and opportunistic buying of lightly syndicated deals at discounts, which Greg will speak more about.
We are announcing today, our intention to declare a midyear supplemental dividend payable July 12th to shareholders of record as of June 28th. Exact amount of the supplemental dividends will be announced next quarter, our portfolio continued to deliver resilient credit performance as the percentage of our portfolio on nonaccrual is now below 1% of fair value, perhaps an even better indication of our credit performance. The percentage of names that we have risk rated 4 or 5, which represents our higher credit risk names, is also below 1% of the portfolio at fair value which compares favorably to many other BDCs. 99% of our book is risk rated 3 or higher. Again, a favorable benchmark when looking at our peers.
At quarter end, we were still levered conservatively on a net basis at 1.1 times, our net asset value increased to $0.43 per share to $16.23. I would impart to mark-to-market adjustments to the portfolio as well as the accretive nature of our share repurchase program. Our NAV continues its recent improvement. It is now back to where it was two years ago. Despite the higher interest rate environment, we have and operate them and compares favorably with the net asset values of our peers, which have mostly experienced decreasing to flat net asset values over the same period.
During Q4, we repurchased approximately 280,000 shares at an average price of $10.35 per share for a total repurchase amount of $2.9 million. We have repurchased a total of approximately 2.8 million shares for a total repurchase amount of $27 million since the beginning of the repurchase program we put in place in August 2022 through the end of 2023. And we intend to continue to be active, repurchasing our shares in the coming quarters. While many consider this the golden age of private credit or more of our BDC peers continue to depart from their traditional niche of lending to true middle market companies as banks retrenched in 2023.
However, as banks start to resume lending activity, we believe that having a defensible niche in the middle market is paramount. As I mentioned last quarter, many BDCs are going after larger companies where leverage is higher, spreads are lower and covenants even presence are looser to that end. Just recently, a Bloomberg article was titled, quote, private credit cuts, pricing to fend off Wall Street deal grab and quotes as many large BDCs participated in a loan with a spread of only 475 basis points over the base rate with 1.5% OID, one of the cheapest private credit deals in recent memory.
The company in question has an EBITDA of approximately $500 million. By comparison, the weighted average EBITDA of our portfolio is $34 million. We almost always receive meaningful lender protection than covenants. Our weighted average spread is 750 basis points over the base rate and our average OID is between to 2% and 3%.
Well, there's nothing wrong in and of itself with the deal I referenced, we believe from a risk-adjusted perspective, our style of lending is superior. At almost $2 billion in total assets, we are large enough to be an impactful player to borrowers in the middle market without being so large that we are forced to by the market or sacrifice economics or borrower protections in an effort to put money to work.
Finally, before I turn the call to Greg, I wanted to announce that we are welcoming a new member to our senior management team this week as Charlie a rest here has joined us as a Managing Director and Head of Investor Relations. Charlie was previously part of IR team at Focus Financial Partners, and before that was an analyst at JP Morgan.
And with that, I'll now turn the call over to Greg.

Gregg Bresner

Thank you, Michael, and good morning, everyone. Our Q4 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 and other prepayment premiums and other yield-enhancing provisions embedded within our primarily first lien portfolio.
As Michael referenced, there remains a clear distinction between the increased levels of competition in the large cap markets between the larger asset management platforms and money center banks and the direct middle-market private credit sector where we strategically focus middle market. Direct lending sector remains robust and continues to take market share from the lower rated single-B syndicated markets, which is consistent with what we are experiencing with our platform as our private direct transaction sourcing remains vibrant, we continue to see attractive direct investment opportunities for which we remain highly selective.
While M&A activity remained subdued in Q4, we saw an increase in refinancing opportunities, particularly in conjunction with add-on acquisitions where additional debt capital was required. That was beyond the capacity of the incumbent lender groups or the private equity sponsor chose to refinance to provide an additional two years to pursue M&A or sale strategies. We do expect M&A activity to increase in 2024 as we believe buyers and sellers are now accepting the higher for longer reality regarding interest rates.
In addition, we continued to benefit from technically driven disruptions in the syndicated loan market where we acquire on lightly syndicated first lien loan tranches at significant discounts to par due to issues such as ratings changes, maturity extensions, exchanges or restructurings that are not suitable for the existing syndicate holders and where we can expect to have active roles in the processes that drive the refinancing or restructuring of the investments.
We remain highly selective with new investments as we are still cautious with respect to the US consumer, particularly in light of recent global developments and the persistence of higher interest rates and inflation levels. We continue to strategic strategically focus on first lien investing and prefer to utilize yield enhancement provisions such as pick features, call protection, make-whole provisions and metrics to incrementally enhance yields at the top of the capital structure rather than reaching deeper into capital structures for mezzanine and equity co-investments to achieve incremental yield.
Approximately 60% of our annual [PIC] income is 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 PIC is incremental to our cash interest. Approximately 85% of our PIC investments are in portfolio companies, risk rated either 1% or 2% and 97%, risk-rated 3% or better.
Turning now to our Q4 investment and portfolio activity. During Q4, we completed an attractive mix of first-lien investments. We completed private direct first lien financing tranches from new platforms, including Nova compression, North Star travel and tactical air support where we act as co-lead arranger. We also completed a number of first lien add-on investments for portfolio companies, including work, Genius, HW, Lochner, David's Bridal, you SulphCo and Moss. The weighted average coupon for our direct investments was approximately SOFR plus 8% for the quarter.
We additionally continued our purchases of the lightly syndicated first lien tranches of companies such as pure Star Yak, Matt, Amazon, young and Avalon. At discounts. These purchases proved to be attractive as pure Star Yak MAT and Avalon have been recently refinanced and we have received significant investment income from OID. acceleration in Q1 of this year. Allison young announced a comprehensive recapitalization and deleveraging transaction that is expected to close in Q1 of 2024 and positions the company for future growth and investment. Upon closing, we expect to realize significant accretion to the blended cost of our first lien investment in Addison Young.
During Q4, we made $152 million in new investment commitments across 5 new and 15 existing portfolio companies, of which $147 million was funded. These investments were diversified across direct and secondary opportunities with approximately 72% in direct private investments. We also funded a total of $7 million of previously unfunded commitments. We had sales and repayments totaling $83 million for the quarter, which primarily consisted of the full repayment of our investments in cadence, Archer systems and WN and associated asphalt.
As a result, net funded investment activity increased by approximately $71 million during the quarter. The repayment trend has continued into 2024 as M&A activity has fueled recent Q1 repayments that have resulted in significant OID acceleration and incremental investment income from yield enhancement provisions such as prepayment premiums, may cause and metrics attached to our first lien portfolio.
Our nonaccruals declined slightly from 1% of fair value at 9-30-23 to 0.9% of fair value at 12-31-23. We added one new name, our second lien investment in Trimax Ambrosia with approximately $1.5 million of fair market value to nonaccrual this quarter, Trimark was in the process of a voluntary restructuring process in Q4 that did not close until January of 2024.
As a result of the restructuring, we participated in the backstop group and received a package of backstop fee take-back debt and equity for first lien and second lien positions in the Company. Given the closing of the transaction, we expect to remove Trustmark from nonaccrual status in Q1 of 2024. Overall, our portfolio remains defensive in nature with 85% in first lien investments and 87% in senior secured investments.
I'll now turn the call over to Keith.

Keith Franz

Thank you, Greg, and good morning, everyone. As Michael mentioned, we reported another quarter of solid financial results, driven by the benefits of higher base rates on our mostly floating rate portfolio and fees generated from a quarterly investment activity during the fourth quarter, net investment income was $21.8 million, or $0.40 per share as compared to $30 million or $0.55 per share reported in the third quarter. For the full year, net investment income was $105 million or $1.92 per share as compared to $88.2 million or $1.56 per share for the prior year. This is an increase of $0.36 per share with 23% year over year.
On the expense side, total operating expenses were $38.2 million as compared to $37.6 million reported in the third quarter. The increase was driven by higher interest expense under our financing arrangements due to an increase in our average debt outstanding when compared to the prior quarter at December 31st, we had total assets of approximately $2 billion and total equity or net assets of $880 million with total debt outstanding of $1.1 billion and 54.2 million shares outstanding.
At the end of the quarter, our net debt to equity ratio was 1.10 times, which is slightly higher than 1.03 times at the end of Q3. During the year, our total debt outstanding increased by $134 million or 14% from the prior year, reflecting the measured growth of our portfolio using additional debt capital.
Our portfolio at fair value ended the quarter at $1.8 billion, up $113 million from the third quarter, reflecting the combination of net fundings and net unrealized gains from the portfolio. The weighted average yield on our debt and other income-producing investments at amortized cost was 13.4% at December 31, which increased 36 basis points from 13.04% at the end of Q3 and increased over 100 basis points from the prior year end.
At December 31st, our NAV was $16.23 per share as compared to $15.80 per share at September 30, an increase of $0.43 per share or 2.7%. The increase was driven by mark-to-market price increases in our portfolio and the accretive nature of a share repurchase program during the quarter, which was offset by our year end special and fourth quarter supplemental distributions totaling $0.20 per share.
For the quarter, we experienced a significant mark-to-market price increase to the value of our common equity investment in David's Bridal, given the overall larger size of this position relative to our other equity investments and the seasonal nature of its end markets, we do expect to have a higher than average mark to market price volatility in the fair market value of this investment on a quarter-to-quarter basis.
Year over year, our NAV was up $0.25 per share or 1.6%, increasing from $15.98 per share at the end of 2022 to $16.23 per share at the end of 2023, reflecting the strong credit quality of our portfolio. We ended the quarter with a strong and flexible balance sheet with over $600 million in unencumbered assets, lower net leverage relative to our peers, a strong debt servicing capacity and solid liquidity.
We have over $120 million in cash and short-term investments and access to an additional $150 million 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 8.5%.
In terms of our debt structure, as we previously discussed in October, we closed on a $33 million follow-on to our Series A unsecured floating rate notes to certain institutional investors in Israel with the same terms as the existing notes issued earlier in the year.
And in November, we completed a $100 million private offering of floating rate unsecured notes to certain US institutional investors. The addition of these unsecured notes to our debt capital brings additional strength and flexibility to our balance sheet and aligns well with our mostly floating rate investments. After completing these two financing transactions, our debt mix is now about 60% in senior secured and 40% in unsecured, with about 85% in floating rates.
Now turning to our distributions. During the fourth quarter, we paid total distributions to our shareholders of $0.54 per share, which includes a base distribution of $0.34 per share, a year-end special distribution of $0.15 per share and a previously declared fourth quarter supplemental distribution of $0.05 per share. For the full year 2023, we declared total distributions of $1.61 per share as compared to total distributions of $1.45 per share during 2022, an increase of $0.16 per share or 11% year over year. As a result, our distribution yield based on the year-end average NAV that was 9.9% and our distribution yield based on a year-end market price was 14.2%.
As announced this morning, we declared our first quarter base distribution of $0.34 per share, which is the same amount as the base distributions declared during the fourth quarter of 2023. The first quarter distribution will be paid on March 28th to shareholders of record on March 22nd.
Okay. With that, I will now turn the call back over to Michael for some closing remarks.

Michael Reisner

Thanks, Keith. As a final thought before we open the line for questions, I would like to reiterate our message that we believe Cyan is undervalued, continues to perform well and is well positioned to continue to provide solid returns to its shareholders.
And with that, operator, we're ready to take any questions.

Question and Answer Session

Operator

(Operator Instructions) Erik Zwick, Hovde Group.

Erik Zwick

Good morning, everyone. Wanted to start with a, um, a question of following the Q4 actions to raise more unsecured debt. You noted that the the mix now kind of 60/40 secured versus unsecured. And curious, have you kind of reached your target mix there? Or do you anticipate potentially making some additional changes into 2024?

Keith Franz

Good morning, Eric. This is Keith. So in terms of our debt capital. We continue to work with our commercial banking partners on extending our current arrangements. Those conversations continue to be had today. So we'll probably have a better update for you over the next couple of weeks or months. And at the same time, we continue to explore, you know, opportunities in the debt capital markets, which would further diversify our mix between secured and unsecured and also expand our lending partners that we do business with. So yes, we are I don't think that we're done. I think we'll continue to explore opportunities as they present themselves.

Erik Zwick

Thanks. Keep switching gears, just curious if you could provide any commentary on what the current pipeline may be in terms of the mix of new versus add-on opportunities as well as any if you're seeing any particular industries that are stronger and presenting maybe more attractive opportunities today?

Gregg Bresner

Hi, Eric. It's Greg. It really is diversified. There's no one specific industry focus on what we're seeing a B to B remains strong. So you will see that in our business services focus. We're still seeing opportunities, niche opportunities in healthcare and industrial services. So it's pretty broad based. I wouldn't say there's one particular Intuit.

Erik Zwick

Thanks. And make our kind of the mix between new and add-on opportunities today.

Gregg Bresner

Yes, we're seeing both it's healthy on both sides. We do see platform M&A starting to pick up sales of companies, but we're also seeing a lot of incremental add-on activity where we step in so it really is a combination of both banks.

Erik Zwick

And previously, you mentioned that your portfolio companies kind of have been growing at a single digit EBITDA are hearing just from anecdotal evidence and talking to some other BDCs that some are starting to see some slowdowns in certain pockets of the economy. So just curious if you could provide any kind of insight into what you're seeing with your portfolio companies and whether they continue to grow and improve at this point?

Gregg Bresner

Yes, we're still seeing the single digit growth. It's we haven't seen any pronounced slowdown. It varies industry by industry, but I think that single digit measure still holds.

Erik Zwick

And then last one for me on. Can you provide any comments on what drove the unrealized gains this quarter?

Keith Franz

Yes. So mark to market. Obviously, there was some spread compression, which typically run at our model. So we did see spreads tightening a bit and also the David's Bridal was it proposed a strong in this quarter and that had to do with really the purchase accounting adjustments associated with closing the transaction. The auditors had the time to perform the revalued inventory merchandise and things like that. So you saw on a mark to market increase based on that analysis.

Operator

Steven Martin, Slater Capital Management.

Steven Martin

Hi, guys. Following up on your last response on David's Bridal on T. talk is there any incremental information on its performance, its turnaround? I see you extended additional credit and I assume it's current pay, et cetera.

Gregg Bresner

So I think there's really no not much material information we can share on part of it too, as you're going through the selling season now. So we'll have a much better view in the next couple of quarters on the incremental debt this quarter was a synthetic letter of credit facility. So it wasn't a general loan. It was more to back LCs to free up capacity under a traditional ABL so it really wasn't done at corporate for use loan. It was really to help the Company more efficiently and cost of capital basis backstop a standby LCs.

Steven Martin

Got it. Are they now complete with all the closings and restructurings that were discussed previously?

Gregg Bresner

Yeah.

Steven Martin

Okay. On the I just and this is probably something you talked about on the third quarter on interest income from Q2 to Q3 to Q4 went from [$0.57 to $0.64] and then back down to 64 -- [$0.56]. What was the anomaly in Q3 accounted for that?

Keith Franz

Yes, good morning. It's Keith. So in Q3, we had some make whole fees that we recognize as a result of some exits and some additional income recognized as a result of some restructuring transactions that brought back and recapture some income that.

Steven Martin

Yes, I figured you had mentioned it, but I just couldn't find a note on it. On where do you stand on PIC sequentially and going forward?

Gregg Bresner

So we discuss some in our in our conference today, our PIC income, it's diversified and it's usually driven by structured situations where we're picking up enhanced yield for the flexibility. We do expect over time, that number to come down as our current portfolio, our refinances or gets repaid, and there's structured situations. So overtime, we do expect it to come down. But again, it's more opportunistic, but we've chosen strategically is we would rather, for special situations, be pick security at the top of the capital structure than do equity coinvestment managers, which are junior securities, where you have a lot more capital structure risks. So for us, we find it's a good risk return trade-off.

Steven Martin

Okay. And last on on you did a good job on the nonperformings and non-accruals. Are there any prospective restructurings that would reduce that further after the quarter this quarter or next quarter.

Michael Reisner

Now other Michael other than trademark, as Greg mentioned, which we expect to take off nonaccrual this quarter (inaudible) also know by now.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to management for closing comments.

Michael Reisner

Well, we thank everyone for tuning in today, and we look forward to talking to a couple of months after the close of the first quarter. Take everyone. Thank you.

Operator

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