CION Investment Corp. operates as a debt-focused business development company (BDC). The company primarily engages in floating rate senior secured debt investments, spread across 109 portfolio companies, and manages $2 billion in total assets.
Despite its primary focus on debt, CION maintains a portion of its investments in equity. The company is externally managed, which can often be seen as a disadvantage due to potential conflicts of interest.
CION is trading at a significant discount relative to its peers and on an absolute basis. This discount appears to be due to the company’s challenging period in 2023. Despite this, CION offers a good dividend yield of nearly 12% based on the regular quarterly dividend, with supplemental payouts occasionally enhancing the yield further.
The dividend coverage for CION is notably high, providing a cushion against potential downturns.
Company Overview and Financial Performance
CION’s history dates back to December 2012, despite only becoming publicly traded near the end of 2021. Throughout its history, CION has distributed a total of $16.01 in dividends, although this has been partially offset by a decline in net asset value (NAV) per share.
Unlike many of its peers, CION’s leverage is primarily based on floating rates rather than fixed rates. This structure differs from other BDCs that locked in low rates during a zero-rate environment, which benefited them during periods of rising interest rates.
As of Q1 2024, approximately 14.5% of CION’s $1.07 billion in total debt was at fixed rates. Despite this, CION managed to grow its net investment income (NII) year-over-year. In 2022, the NII per share was $1.56, increasing to $1.92 in 2023. Impressively, Q1 2024 saw an NII per share of $0.60.
Portfolio and Credit Quality
CION’s portfolio is predominantly composed of senior secured debt, primarily first lien, with a small equity exposure. The BDC faced issues with non-accruals and lower credit quality investments, but these issues are being resolved.
As of Q1 2024, CION’s NAV per share had risen significantly over the past year, though it declined from Q4 2023’s $16.23 due to realized and unrealized losses. CION’s net asset value per share has increased to $16.05, though it remains below the $16.26 level seen in Q3 2022 before encountering its challenges.
Dividend Coverage and Valuation
CION offers a compelling dividend yield of nearly 12%, with strong coverage. The dividend coverage dipped briefly below 100% in Q4 2023, but other quarters showed robust coverage. The BDC’s quarterly dividend was recently increased to $0.36, translating to an annualized rate of $1.44.
The rolling four-quarter NII provides a coverage ratio of 1.375x for the dividend.
CION trades at a significant discount to its peers, with a discount of nearly 25% based on the latest reported NAV. Although the discount has narrowed from its peak, it still represents a substantial value compared to peers.
Risks and Considerations
CION’s PIK (paid-in-kind) interest income, which constituted nearly 13% of total investment income in the latest quarter, is a factor that investors should monitor closely. High PIK income can indicate financial stress among portfolio companies.
Fitch Ratings noted that the average PIK income for the sector was 8.3% of interest and dividend income in 2023, suggesting that CION’s PIK income is relatively high.
Given the Fed’s anticipated rate cuts, most BDCs, including CION, could see a decline in the spreads they earn above their cost of leverage. However, with most of CION’s borrowings already based on floating rates, the impact may be less pronounced than for peers with fixed-rate debt.
Conclusion
CION Investment Corp. presents a compelling opportunity due to its significant discount and strong dividend coverage. The company’s recent challenges, including higher non-accruals and elevated PIK income, are being addressed, providing a positive outlook.
Despite potential risks associated with the broader economic environment and interest rate fluctuations, CION’s attractive yield and substantial discount make it an enticing option for income-focused investors.
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Kevin is an experienced business development strategist and content writer specializing in finance and stock market topics. He has a proven track record of driving sales and enhancing communications for small businesses by blending academic knowledge with practical experience to create engaging and accurate content.
