CION Investment Corp: Deep Discounts, High Yields (NYSE:CION)

Written by Nick Ackerman.

CION Funding Corp. () is a enterprise growth firm (“BDC”). They primarily deal with investing in secured loans with a floating price. They’re invested in 109 portfolio corporations and handle $2 billion in complete property. Whereas they’re

CION trades at an enormous low cost to friends and on an absolute foundation. This appears to be on account of a moderately “troublesome interval” in 2023. It additionally gives a excessive dividend yield of practically 12% based mostly on common quarterly dividends. With the ability to pay some additional helps juice the precise crop a bit extra.

Maybe extra importantly than the profitability itself, the dividend protection right here leaves loads of room for issues to go fallacious. In different phrases, the dividend protection for this BDC is extremely excessive.

Glancing at CION

Though CION might solely start public buying and selling on the finish of 2021, the story right here goes again a lot additional. They began their actions in December 2012.

Through the years, this BDC has helped generate substantial dividends to build up a complete of $16.01 in payouts. Admittedly, the acquire right here was partially offset by a decline in internet asset worth per share over the interval.

CION is a little more uncommon in that almost all of its leverage is predicated on floating charges moderately than the mounted charges that almost all different BDCs have been in a position to lock in in a zero-rate atmosphere. This meant that many BDCs have been in a position to profit considerably within the increased price atmosphere as a lot of their borrowing was locked in at decrease charges and underlying yields started to rise. Within the case of CION, it seems that of their complete debt of $1.07 billion on the finish of the primary quarter of 2024, solely about 14.5% of that was at mounted charges.

Regardless of this being the case, BDC was nonetheless in a position to present some progress in internet funding revenue in comparison with final yr. In 2022, NII per share was $1.56, and in 2023 – $1.92. Maybe much more spectacular, Q1 2024’s NII per share was even increased at $0.60.

Above, we will additionally see that the web asset worth per share has grown considerably over the previous yr, which has helped push the title to commerce at a gorgeous low cost. The share value has not saved tempo with the year-over-year restoration of NAV per share. Then again, it’s down from $16.23 in This fall 2023 based mostly on some realized/unrealized losses.

The potential to see a better NII is because of the deal with senior secured debt that comes with a floating price, primarily first lien, however in addition they carry a small quantity of fairness threat.

They’d some issues with defaults and investments with poor credit score high quality, however that appears to have cleared up.

They supply a peer-to-peer comparability, and no less than they truthfully admit that the cost-based non-accrual is increased than their BDC friends.

The actual query is whether or not we’re headed for a tighter economic system. Presently, these names on the watch checklist and unaccounted for could also be elevated once more. The reason being that BDCs don’t lend cash to corporations with sterling steadiness sheets; they put money into corporations which can be much less financially safe.

That is why they pay such excessive rates of interest on these loans within the first place. That is to steadiness threat with reward. They’re the primary kinds of corporations to start out exhibiting cracks in a weakened economic system, and so we have seen some explosions when it comes to non-accruals popping up from varied BDCs through the years.

CION is a kind of. If we glance again to the primary quarter of 2023, that they had 6.8% accruals at price and three.47% at truthful worth. Whereas they’re getting over these earlier errors early, some imagine we could also be due for some financial weak spot after such a robust and resilient US economic system. NAV per share for CION elevated once more to $16.05, however was nonetheless down from $16.26 in Q3 2022, which reached a flat interval.

After all, it was near a full restoration in This fall 2023 when it reached $16.23. They famous that this decline was based mostly on “unrealized mark-to-market changes within the fairness portion of our portfolio.”

This predicament was brought on by a number of totally different investments that they invested in, as they mentioned within the second quarter of 2023. They have been restructured and due to this fact the variety of defaults decreased.

Our accruals decreased from 3.5% of truthful worth at 03/31/23 to 1.7% at 06/30/23. We eliminated Sequoia Healthcare, Unbiased Pet Companions and United Highway from non-accrual standing this quarter as we efficiently used our secured debt positions to restructure our investments in these corporations.

Large reductions, large dividends

The place I imagine there may be some safety for CION now’s in two totally different areas. That’s dividend protection and the large low cost at which CION is at present buying and selling.

In comparison with its friends, CION is buying and selling at an enormous low cost of practically 25% based mostly on its most not too long ago reported NAV. As most traders accustomed to BDCs know, they solely report NAV as soon as 1 / 4, and that may go away some guessing as to the place the NAV has moved since then. Nevertheless, vital discounting has been a constant characteristic of this BDC, however it has narrowed in comparison with the buying and selling venue.

Once more, the “troublesome scenario” for CION throughout this era pushed the low cost to nearly 50%. A courageous investor, having invested capital in that title at the moment, would certainly have paid off. Nevertheless, a reduction of greater than 24% right now nonetheless represents an enormous low cost relative to friends and on an absolute foundation.

Now on to dividends. CION’s yield is nearly 12% and this protection is extremely sturdy. It dipped beneath 100% briefly in This fall 2023, however it additionally did in This fall 2022. This appears to be extra timing associated than a significant situation because the remaining three quarters present greater than sufficient to make up for the deficit.

The $0.60 by itself was a bit distinctive, however even when it returned to the NII space of ​​$0.45 to $0.55, it reveals greater than sufficient protection for the $0.36 quarterly dividend that simply elevated final quarter . Primarily based on the annual price of this newest dividend, that might be $1.44. In comparison with the graceful NII for 4 quarters, this works out to a dividend protection of 1.375x.

Regardless of a tumultuous interval for the title, they haven’t minimize their common dividend to traders. Additionally, they introduced a July surcharge of $0.05 as soon as once more. I imagine this helps reinforce administration’s confidence that their present dividend is greater than sustainable as effectively.

One other issue to think about is that NII’s dividend protection is powerful, however curiosity revenue paid in variety must be thought of. Of the whole funding revenue, PIC’s revenue within the final quarter was nearly 13%. Fortuitously, this determine is down from the 15% seen within the earlier quarter, primarily on account of vital progress in TII. The dangerous information is that it is up from about 10% within the first quarter of 2023.

Fitch Rankings famous that in 2023, PIK’s revenue averaged 8.3% of curiosity and dividend revenue. When measuring CION’s PIK revenue from curiosity and dividends alone, PIK is almost 13.7% in the latest quarter.

For additional context, taking what is likely to be thought of blue chip BDCs, Essential Road Capital ( MAIN ) was effectively beneath these ranges.

For the three months ended March 31, 2024 and 2023, 3.2% and a couple of.4% of our complete funding revenue was attributable to PIK curiosity revenue that’s not at present paid in money. For every of the three months ended March 31, 2024 and 2023, 0.3% of our complete funding revenue was attributable to combination dividend revenue not at present paid in money.

On condition that the Fed is anticipated to chop charges, such sturdy protection could possibly be an enviable place. Most BDCs ought to expertise a discount within the spreads they earn above the price of leverage. As we touched on above, it is because they principally borrow at a floating price however have a set price price of capital.

As for CION, we have already seen that almost all of their borrowing is predicated on floating charges; they could not see such a decline when it comes to NII. Nevertheless, since we noticed the NII enhance within the increased price atmosphere, it’s clear that there was some profit that might possible be reversed within the decrease price atmosphere. The excellent news is that charges will not return to zero.

So CION appears to be in a reasonably good place, not having to attend for a return to a zero-rate atmosphere and having an enormous reimbursement buffer earlier than protection comes beneath strain.

Conclusion

CION went via a reasonably powerful interval with increased delinquencies, however now they’re on the mend and delinquencies are falling. PIK is usually a concern for traders and ought to be watched extra intently. On the identical time, the dividend protection right here is kind of sturdy and can assist present some cushion for normal payouts. At the least the administration group was assured sufficient to pay one other surcharge.

CION gives traders the chance to buy at an enormous low cost. Nevertheless, like all BDCs, there are dangers to think about. A yield of ~12% on a traditional foundation additionally seems to be fairly enticing for income-oriented traders.