CION Investment (US:CION)2022-03-09 16:00PART I Item 1. Business CĪON Investment Corporation is an externally managed BDC investing in senior secured debt of U.S. middle-market companies - CĪON Investment Corporation is an externally managed BDC focused on generating current income and capital appreciation by investing in senior secured debt of U.S. middle-market companies2022 - The company is managed by CION Investment Management, LLC (CIM), which is a joint venture with an affiliate of Apollo Global Management, Inc (Apollo)219193 Portfolio Composition as of December 31, 2021 | Investment Type | Fair Value ($ thousands) | Percentage of Portfolio | | :--- | :--- | :--- | | Senior secured first lien debt | 1,526,989 | 91.6% | | Senior secured second lien debt | 38,583 | 2.3% | | Collateralized securities and structured products - equity | 2,998 | 0.2% | | Unsecured debt | 26,616 | 1.6% | | Equity | 70,936 | 4.3% | | Total | 1,666,122 | 100.0% | | Short term investments | 87,917 | - | | Total Investments | 1,754,039 | - | - On October 5, 2021, the company's common stock commenced trading on the New York Stock Exchange (NYSE) under the ticker symbol "CION"29 - Shareholders approved a proposal to reduce the company's minimum asset coverage ratio from 200% to 150%, effective December 31, 2021, allowing for increased leverage25121 Item 1A. Risk Factors The company faces diverse risks including its business structure, adviser reliance, BDC regulations, and market conditions - Business & Structure Risks: The company's ability to achieve its investment objective is highly dependent on CIM's management, faces increasing competition, and has valuation uncertainty in its portfolio185192193 - CIM & Affiliate Risks: Conflicts of interest exist due to compensation arrangements, which could incentivize CIM to make more speculative investments or use additional leverage209212216 - BDC Risks: The company must invest at least 70% of its assets in "qualifying assets," and failure to maintain BDC status would reduce operating flexibility and affect its ability to use leverage223225226 - Investment Risks: Investments in middle-market companies are inherently risky, and the company is exposed to interest rate changes and risks associated with the transition from LIBOR239257259 - Debt Financing Risks: The company has shareholder approval to increase leverage by reducing its asset coverage ratio to 150%, which magnifies the potential for loss on invested capital288290 - Tax Risks: The company will be subject to corporate-level income tax if it fails to qualify as a Regulated Investment Company (RIC), which requires distributing at least 90% of its taxable income annually303304 - Common Stock Risks: The market price of the company's common stock may fluctuate significantly and trade at a discount to its Net Asset Value (NAV), while issuing shares below NAV could dilute shareholders310312319 - General Risks: Global economic, political, and market conditions, including the COVID-19 pandemic and cybersecurity threats, may adversely affect the business and financial condition331337350 Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - Not applicable352 Item 2. Properties The company does not own material physical properties and leases its principal executive offices in New York - The company does not own any material physical properties and its executive offices are located in New York, NY353 Item 3. Legal Proceedings The company is not currently subject to any material legal proceedings - The company is not currently a party to any material legal proceedings354 Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable355 PART II Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, distributions are sourced from income, and a new share repurchase plan is authorized - The company's common stock listed on the NYSE on October 5, 2021 and traded at a significant discount of approximately 25.3% to its NAV as of March 3, 2022358 Distributions Declared (2019-2021) | Year Ended | Per Share ($) | Total Amount ($ thousands) | | :--- | :--- | :--- | | Dec 31, 2021 | 1.2592 | 71,530 | | Dec 31, 2020 | 1.1106 | 63,283 | | Dec 31, 2019 | 1.4910 | 84,772 | - For the years ended 2021, 2020, and 2019, 100% of distributions were sourced from net investment income on a GAAP basis374 - Upon listing on the NYSE, the company terminated its old distribution reinvestment plan and adopted a new "opt-out" plan (New DRP)369371 - A new post-listing policy authorizes up to $50 million in repurchases, but no shares were repurchased under this policy through March 3, 2022380382384 Item 6. [RESERVED] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The company's net assets increased in FY2021, driven by unrealized appreciation on investments and key strategic developments Results of Operations (2020 vs. 2021) | Metric ($ thousands) | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Investment income | 157,348 | 163,842 | | Net operating expenses | 83,041 | 85,114 | | Net investment income | 74,307 | 78,728 | | Net realized gain (loss) | 840 | (69,872) | | Net change in unrealized appreciation (depreciation) | 43,617 | (19,878) | | Net increase (decrease) in net assets | 118,764 | (11,022) | - The significant improvement in net assets from operations in 2021 was primarily due to a positive swing in the net change in unrealized appreciation on investments439441 - Investment income decreased in 2021 compared to 2020, primarily due to lower average LIBOR rates during the period433 Portfolio Activity (2020 vs. 2021) | Activity ($ thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Purchases and drawdowns | 920,039 | 359,633 | | Sales and principal repayments | (827,958) | (543,167) | | Net portfolio activity | 92,081 | (183,534) | - On December 21, 2021, the company formed CION/EagleTree, an off-balance sheet joint venture with an affiliate of EagleTree Capital, LP411 - The company's asset coverage ratio was 212% as of December 31, 2021, with the minimum required ratio reduced to 150% effective the same day414451 Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk due to its portfolio of variable-rate debt and floating-rate credit facilities - The company's primary market risk is from changes in interest rates, as 84.2% of its investments paid variable interest rates as of December 31, 2021487 Interest Rate Sensitivity Analysis (as of Dec 31, 2021) | Basis Point Change in Interest Rates | (Decrease) Increase in Net Interest Income ($ thousands) | Percentage Change in Net Interest Income | | :--- | :--- | :--- | | Up 50 basis points | (2,622) | (2.4)% | | Up 100 basis points | (3,291) | (3.0)% | | Up 200 basis points | 3,108 | 2.8% | | Up 300 basis points | 10,504 | 9.5% | - The company's borrowings under its major credit facilities are also at floating rates, meaning rising interest rates will increase its cost of funds488 Item 8. Consolidated Financial Statements and Supplementary Data The financial statements present the company's financial position, with an unqualified opinion from the independent auditor - The independent registered public accounting firm, RSM US LLP, issued an unqualified opinion, identifying the valuation of Level 3 investments as a critical audit matter496501502 Consolidated Balance Sheet Highlights (as of Dec 31) | Metric ($ thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total investments, at fair value | 1,754,039 | 1,569,371 | | Total assets | 1,782,682 | 1,614,795 | | Total liabilities | 852,170 | 736,539 | | Total shareholders' equity | 930,512 | 878,256 | | Net asset value per share | $16.34 | $15.50 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | Metric ($ thousands) | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total investment income | 157,348 | 163,842 | 201,103 | | Total operating expenses | 82,699 | 84,846 | 113,779 | | Net investment income after taxes | 74,307 | 78,728 | 87,312 | | Net realized and unrealized gains (losses) | 44,457 | (89,750) | (35,468) | | Net increase (decrease) in net assets | 118,764 | (11,022) | 51,844 | - As of December 31, 2021, approximately 94.7% of the company's total investments were classified as Level 3 in the fair value hierarchy501 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None836 Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021837 - Based on an assessment using the 2013 COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2021842 - There were no material changes in internal control over financial reporting during the fourth quarter of 2021845 Item 9B. Other Information This item is not applicable to the company - Not applicable846 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable847 PART III Item 10. Directors, Executive Officers and Corporate Governance The company is governed by an eight-member Board with six independent directors and three standing committees - The Board of Directors is composed of eight members, six of whom are independent, serving staggered three-year terms877869 - Mark Gatto and Michael A. Reisner are interested directors, serving as Co-Chairmen and Co-Chief Executive Officers851880 - The Board has established an Audit Committee, a Nominating and Corporate Governance Committee, and a Compensation Committee, each composed entirely of independent directors883 - For 2021, total director compensation was $512,433891893 Item 11. Executive Compensation Executive officers receive no direct compensation from the company, as their services are provided through the investment adviser - The company does not directly compensate its executive officers and has no employees898 - Executive officer services are provided by individuals who are officers of the investment adviser, CIM, and the company reimburses CIM for its allocable portion of these expenses898 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Executive officers and directors collectively own less than 1% of the company's outstanding common stock - As of March 3, 2022, all executive officers and directors as a group beneficially owned 97,836.28 shares, which is less than 1% of the outstanding common stock901905 - No individual executive officer or director beneficially owned 1% or more of the company's shares905 - The company reports no beneficial owners of 5% or more of its common stock901 Item 13. Certain Relationships and Related Transactions, and Director Independence The company has significant related-party transactions with its investment adviser, CIM, governed by specific agreements - The company has key related-party agreements with its investment adviser, CIM, for investment management and administrative services909 - Potential conflicts of interest exist as CIM and its affiliates manage other investment vehicles, which are addressed by an investment allocation policy912913 - As a BDC, the company is restricted from co-investing with CIM affiliates without an SEC exemptive order, for which an application has been filed920 Item 14. Principal Accountant Fees and Services RSM US LLP serves as the independent auditor, with all fees pre-approved by the Audit Committee - RSM US LLP is the company's independent registered public accounting firm922 Accountant Fees Billed by RSM US LLP | Fee Type | FY 2021 ($) | FY 2020 ($) | | :--- | :--- | :--- | | Audit Fees | 715,981 | 749,336 | | Audit-Related Fees | — | — | | Tax Fees | — | 20,374 | | All Other Fees | — | — | - All audit and non-audit services provided by RSM were pre-approved by the Audit Committee in accordance with its policy925927 PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K - This section provides an index of all financial statements, schedules, and exhibits included in or incorporated by reference into the Form 10-K filing938 Item 16. Form 10-K Summary This item is not applicable to the company - None944