CION Investment Q1 2026 Earnings Call Transcript

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Provided by Quartr
May 7, 2026

Key Takeaways

  • Negative Sentiment: The company under‑earned its distributions, reporting net investment income of $0.25 per share versus $0.30 in base distributions, driven by lower transaction fees and dividend income plus higher interest expense from recent refinancing and temporary excess cash.
  • Neutral Sentiment: NAV declined 4.7% to $13.11, but management says ~80% of the decrease was unrealized mark‑to‑market movement tied to public comparables and spread widening rather than broad fundamental credit deterioration.
  • Positive Sentiment: Credit metrics remained resilient with ~81% first‑lien exposure, weighted average interest coverage of 2.08x, largely stable risk ratings, and non‑accruals improving to 1.53% (Lux Credit expected to exit non‑accrual after its post‑quarter sale).
  • Positive Sentiment: Management repurchased ~1.1 million shares at an average $8.71 and completed a $135M senior unsecured baby bond issuance (7.5%); they plan to use proceeds, repayments and sales to lower net leverage toward a ~1.30–1.35 target over coming quarters.
  • Neutral Sentiment: Investment activity was selective—~$69M in commitments ($54M funded) with new direct first‑lien yields around SOFR+6.1% and PIK exposure largely in structured first‑lien positions, reflecting disciplined deployment but contributing to lower transactional fee income this quarter.
AI Generated. May Contain Errors.
Earnings Conference Call
CION Investment Q1 2026
00:00 / 00:00

There are 5 speakers on the call.

Speaker 4

Good morning, and welcome to CION Investment Corporation's first quarter 2026 earnings conference call. An earnings press release was distributed earlier this morning before market open. A copy of the release, along with a supplemental earnings presentation, is available on the company's website at www.cionbdc.com 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 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.

Speaker 4

Joining me on today's call will be Mark Gatto, 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 now like to turn the call over to Mark Gatto. Please go ahead, Mark.

Speaker 3

Thank you, and good morning, everyone. I want to start this morning the way we have on prior calls by putting our quarterly results in the proper context before walking through the details. While this was not our strongest quarter from a headline numbers perspective, I want to make clear that the story underneath those numbers is more nuanced than the headline suggests, and we believe there is quite a bit to feel good about as we look at the underlying health of our portfolio. I think it is important that investors and analysts understand what actually drove our results this quarter and evaluate us not quarter to quarter, but on a more long-term basis. Let me start with investment income. We reported $0.25 per share for the first quarter, which is below our monthly base distributions totaling $0.30 per share for the first quarter.

Speaker 3

This shortfall was driven primarily by lower transaction fees recorded during the quarter due to lower repayment and investment activity and lower dividend income earned on our investments. This shortfall was also driven by higher interest expense during the first quarter due to the refinancing of our lower yielding fixed-rate notes and senior secured debt into higher yielding fixed-rate unsecured notes and the timing of paying down our debt with the net offering proceeds received from the recent issuances of our new unsecured notes due to potential prepayment penalties as all of our debt is currently at their contractual minimums. As a result, we carried more excess cash on our balance sheet than we would have under normal operating conditions, essentially sitting on proceeds we could not deploy.

Speaker 3

This was attributable to a specific capital structure decision we made that we believe was in the long-term interest of our shareholders, which we do not view as a reflection of the underlying earnings power of our portfolio. Gregg and Keith will provide further context, but I want to be clear that we believe that the underlying earnings capacity of our portfolio remains intact, and we remain optimistic about the trajectory from here. Turning to NAV. Our net asset value declined 4.7% quarter-over-quarter to $13.11 per share from $13.76 at year-end. As we have discussed on prior calls, mark-to-market movements in our portfolio can introduce quarterly volatility, and this quarter was no exception. Importantly, over 80% of the downward movement in our marks this quarter were unrealized in nature and driven by market-level influences.

Speaker 3

Movements in comparable public company valuations and broader credit spread widening and not by a fundamental credit deterioration at our portfolio companies. This is an important distinction and one that gives us confidence in the underlying resilience of the book. I also want to address something directly that I know has been a topic of conversation in the BDC space broadly, the scrutiny around private credit marks and valuation rigor. We welcome that conversation because we believe that we have an extremely disciplined and transparent valuation process. We utilize four independent third-party valuation providers, and the vast majority of our portfolio is subject to full independent review and scrutiny every quarter. We believe that process is comprehensive and rigorous, and we are committed to maintaining that standard.

Speaker 3

At the same time, the incorporation of third-party macro assumptions and market-level inputs can at times introduce marks on certain assets that may not fully reflect the underlying credit fundamentals of those positions, particularly given the secured and senior nature of our first lien holdings, which represents approximately 81% of the portfolio at the end of Q1. We believe that the heightened need to focus on SOFR credit quality across the private credit industry may have contributed to a broader tightening of third-party valuation assumptions that, given the sector-wide nature of that scrutiny, could have affected our portfolio in a manner disproportionate to our actual exposure.

Speaker 3

With software representing just 1.8% of our portfolio, well below the 20%-25% average reported across many private credit portfolios, we do not believe the degree of mark-to-market pressure we experienced this quarter is fully consistent with our underlying fundamentals. On credit quality more broadly, I am pleased to report that our portfolio continues to hold up very well. Our first lien book remains the core of our strategy and continues to perform well. Weighted average interest coverage across the debt portfolio was a healthy 2.08 times for the quarter, a level we view as consistent with the defensive construction of our portfolio. Weighted average net leverage on our debt portfolio was 4.62 times, essentially flat, with 4.7 times in the prior quarter.

Speaker 3

From an internal risk rating perspective, our weighted average risk rating was essentially unchanged at 2.08 versus 2.09 in the prior quarter, and our risk rated 4 names improved quarter-over-quarter to 1.55% of the portfolio at fair value, down from 1.9% in Q4. Our risk rated 5 names remained a very small portion of the portfolio at 0.54%. We had 7 upgrades and 8 downgrades in the quarter, a largely balanced picture that we believe reflects no meaningful deterioration in the overall composition of the book. On non-accruals, I am pleased to share some positive news. Our non-accrual percentage on a fair value basis improved to 1.53% as of March 31st, down from 1.78% in the 4th quarter.

Speaker 3

The principal new addition to non-accrual status this quarter was Lux Credit Consultants, which was in the midst of a sale process through quarter end. I'm glad to report that subsequent to quarter close, that sale was successfully completed. As a result, we expect that Lux will be removed from non-accrual status in Q2. Generally, our non-accruals for the quarter were stable and consistent with our historical levels. More broadly, despite the volume of commentary out there about stress in private credit, we are simply not seeing broad-based deterioration across our middle market borrowers. We believe that the domestic economy, while not without risks, continues to demonstrate underlying resilience. Our portfolio companies, the majority of which serve B2B end markets, continue to operate in line with or close to our expectations.

Speaker 3

We remain mindful of the ongoing geopolitical developments and the uncertain macro backdrop. Our ground-level view across 89 portfolio companies in 23 industries reflects a book that we believe is performing well and does not support the broad distress narrative that circulates private credit portfolios in the press. Finally, we repurchased approximately 1.1 million shares during the quarter at an average price of $8.71. We believe current prices represent a compelling opportunity to acquire our shares at a meaningful discount to fair value. We intend to continue such repurchases while seeking to simultaneously reduce our overall leverage through debt repayments. A combination we believe will position CION well for the remainder of 2026. Keith will provide additional details on our capital structure and distribution activity.

Speaker 3

With that, I will now turn the call over to Gregg to discuss our portfolio and investment activity during the quarter.

Speaker 1

Thank you, Mark, and good morning, everyone. Prior to covering our investment and portfolio activity for Q1, I would like to expand on Mark's comments regarding our nominal level of software exposure within the portfolio. We have three software portfolio companies totaling approximately 1.8% of portfolio fair value or 2% on an amortized cost basis. We have no ARR loans in the portfolio. As a firm, we've historically not invested in software as we were unwilling to lend against an ARR growth methodology with negative EBITDA profile at closing. In terms of our Q1 investment activity, we remained highly selective with new portfolio investments and focused on transactions within our portfolio companies and the repurchase of our shares. We also worked to balance the timing of investments versus repayment amounts while working to reduce leverage towards our targeted net leverage range.

Speaker 1

Overall, we had fewer exiting repayments for the quarter versus our Q4 level as certain repayments slipped into Q2. During the quarter, we continued to pass on new investment opportunities based on credit and pricing considerations. While secondary credit market conditions remained choppy based on macro concerns and potential cracks in private credit, there remained a significant bifurcation from the new issue market. New issue cohort pricing continued to be driven by the hangover of record 2024 and 2025 private debt fundraising, which translated into lower coupon spreads, higher leverage levels, and looser credit documents in the new issue market. We focused our Q1 investment activities on incremental opportunities with our portfolio companies. We believe our continued investment selectivity and proportional deployment levels help us to invest in first lien loans at higher spreads when compared to the overall private and public loan markets.

Speaker 1

The weighted average yield for our new direct first lien investments for the quarter based on our investment cost was the equivalent of SOFR plus 6.1%. As we discussed in previous quarters, the majority of our annual PIK income is strategically derived from either highly structured first lien investments or where PIK income is incremental to our cash coupon. Together, these categories represented approximately 82% of our total PIK investments in Q1, up from 75% in Q4 of 2025. Over 99% of our PIK investments are in first lien assets. As a result, we believe this PIK income does not compare to restructured PIK income resulting from a deterioration in credit. Turning now to our Q1 investment and portfolio activity.

Speaker 1

Our Q1 investment activity consisted of investments in 2 new portfolio companies, Anchor QEA and Dependable Acquisition, both specialty business service providers and incremental add-on investments and secondary purchases in existing portfolio companies, including American Clinical, Carestream Health, Coinmach, David's Bridal, HealthWay, Juice Plus+, STAT-MED, Stengel Hill, and WorkGenius. During Q1, we made a total of approximately $69 million in investment commitments across 2 new and 9 existing portfolio companies, of which $54 million was funded. We also funded a total of $12 million of previously unfunded commitments. We had sales and repayments totaling $38 million for the quarter, which consisted of the full repayment of our first lien holdings in IMW and The Men's Wearhouse. As a result of all these activities, our net funded investments increased by approximately $28 million during the quarter.

Speaker 1

As Mark referenced, our NAV decrease during the quarter was driven primarily by declines in the unrealized mark-to-market value of our portfolio. This was in large part driven by reductions in market multiples and resulting valuations due to macro headwinds ranging from the Iranian war and widespread market concerns regarding potential crack in private credit, most specifically, the software concentrations within the private capital sector and potential AI impact to those investments. For the quarter, the ratio of mark-to-market declines versus mark-to-market increases for our investments was approximately 2 to 1. Our largest unrealized declines for the quarter were from our investments in Lux Credit, FuseFX, Labgear, which is also known as 4Wall Entertainment, SIMR Statin Med, and the common equity of David's Bridal.

Speaker 1

Lux Credit represented our largest decline as the sale process for the company resulted in final bids well below the initial indications of interest based on the company's significant asset base and EBITDA profile. Rather than the lenders restructuring and recapitalizing the company with additional investment, the majority of lenders decided to pursue a cash sale transaction and move on rather than restructure and invest. The sale closed early in the second quarter. The mark value of our investments in FuseFX and Lab Gear were negatively impacted by reduced trailing EBITDA performance and lower multiples as the sector rebuilds event and production pipelines from the writer strike that delayed the release queue of new scripts and production content throughout the industry. Through January and February of 2026, Lab Gear's performance demonstrated stronger than projected recovery that we expect to continue into Q2.

Speaker 1

The unrealized decline in the mark of our SIMR Statin Med term loan was driven by both the relative increase in value to priority senior tranches, where CION has a larger pro-rata interest and lower revenue multiples derived from quasi comparable large cap biopharma service companies impacted by AI and software concerns. As we have mentioned on previous quarterly calls, we expect to see significant quarter-to-quarter volatility in the marks of David's Bridal equity due to the larger overall relative size of our investment, as well as the highly seasonal nature of the company's operations and working capital profile. In the face of difficult macro market sentiment, we also had a number of portfolio companies where the marks increased for the quarter due to stronger financial performance and projected outlook, including Longview Power, Hollander, TriMark, Avison Young, and Nova Compression.

Speaker 1

From a portfolio credit perspective, our non-accruals decreased from 1.78% of fair value in Q4 to 1.53% at the end of Q1. On an amortized cost basis, the number increased from 4.32% of cost to 5.35%. We added one new name to non-accrual, our term loan investment in Lux Credit Consultants. Given the sale of the company in early Q2, Lux Credit will be removed from non-accrual next quarter. On an absolute basis, non-accruals continue to be in line with historical experience, and we are pleased with the continued credit performance of our portfolio, particularly in the current macro environment. Overall, our portfolio remains defensive in nature with approximately 81% in first lien investments. Approximately 98% of our portfolio remains risk-graded 3 or better.

Speaker 1

Our risk-graded 3 investments, which are investments where we expect full repayment, but are either spending more engagement time and/or have seen increased risks, the initial asset purchase increased from approximately 11.5% in Q4 to 12.9% in Q1. I'll now turn the call over to Keith.

Speaker 2

Okay. Thank you, Gregg, and good morning, everyone. During the first quarter, net investment income was $12.9 million or $0.25 per share, compared to $18.3 million or $0.35 per share reported in the fourth quarter. Total investment income was $49.5 million during the first quarter, compared to $53.8 million reported during the fourth quarter. The decrease in total investment income was driven primarily by lower transaction fees recorded during the first quarter due to lower prepayment and investment activity and lower dividend income earned on our investments when compared to the prior quarter.

Speaker 2

On the expense side, total operating expenses were $36.7 million, compared to $35.5 million reported in the fourth quarter. The increase in operating expenses was primarily driven by higher interest expense due to an increase in the average debt balance outstanding and a higher weighted average cost of our debt capital during the quarter. These increases were driven as a direct result of refinancing our lower yielding fixed rate notes and the repayment of a portion of our lower yielding senior secured debt using the proceeds from our newly issued higher yielding fixed rate baby bonds. The increase in our operating expenses was partially offset by lower advisory fees earned due to lower investment income recorded during the quarter.

Speaker 2

At March 31st, we had total assets of approximately $1.8 billion and total equity or net assets of $660 million, with total debt outstanding of $1.2 billion and 50.3 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 at amortized cost was 10.4%, which is slightly down from 10.7% in the fourth quarter. At March 31st, our NAV was $13.11 per share as compared to $13.76 per share at the end of December. The decrease of $0.65 per share, or 4.7%, was primarily due to unrealized mark-to-market price decreases in our portfolio and under-earning our distributions during the first quarter.

Speaker 2

The decrease in NAV was partially offset by the accretive nature of our share repurchase program during the quarter. We ended the first quarter with a strong and flexible balance sheet with about $1.3 billion in unencumbered assets, a strong debt servicing capacity with an interest coverage ratio of about 2 times and solid liquidity. We had over $100 million in cash and short-term investments and another $100 million available under our credit facilities. In terms of our debt capital, at March 31st, we continue to have a healthy debt mix with about 75% in unsecured and 25% in senior secured bank debt. About 60% of our debt capital is in floating rate, which aligns well and creates a natural hedge with our mostly floating rate investment portfolio.

Speaker 2

A 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 increased to 1.62 times from 1.44 times at the end of December, and the weighted average cost of our debt capital was about 7.52%, which is slightly up from the fourth quarter. The increase in our weighted average cost of debt capital was directly due to refinancing our lower yielding unsecured fixed rate debt and increasing our higher yielding unsecured debt mix during the quarter. The increase in our net leverage ratio was primarily impacted by the quarterly decrease in our NAV and an increase in the average debt outstanding during the quarter.

Speaker 2

During the quarter, total debt increased by $35 million due to the timing of paying down a portion of our senior secured debt with a portion of the net proceeds raised from the new unsecured baby bond offering completed in February. During the quarter, on February 9th, we completed a public baby bond offering issuing $135 million of new senior unsecured notes with a fixed interest rate of 7.5% due 2031, which listed and commenced trading on the New York Stock Exchange under the ticker symbol CICC on February 12th. A portion of the net proceeds from this offering was used to repay $100 million under our JPMorgan credit facility at the end of March.

Speaker 2

We expect to use the remaining proceeds from this offering, along with proceeds from recent and expected repayment and sales activities, to further reduce our leverage level over the next few quarters. In addition, we will also consider rightsizing our leverage levels when we refinance our near-term maturity wall. In terms of our 2026 debt maturities, we continue to work with our banking partners and debt investors on refinancing our 2026 maturities over the next few months. Turning to distributions. As previously announced, we changed the timing of paying base distributions to our shareholders from quarterly to monthly beginning in January 2026 to better align with our shareholder expectations. During the first quarter, we paid monthly base distributions to our shareholders totaling $0.30 per share. We also declared our second quarter monthly base distributions totaling $0.30 per share.

Speaker 2

Which were paid or will be paid at $0.10 per share per month for each of April, May, and June. As a result, the trailing twelve-month distribution yield through the first quarter based on the average NAV was about 9.8%, and the trailing twelve-month distribution yield based on the quarter end market price was 20.2%. As announced this morning, we declared our third quarter base distributions totaling $0.30 per share, which is the same as the second quarter. The third quarter base distributions will be paid monthly in July, August, and September at $0.10 per share per month. Okay. With that, I will now turn the call back to the operator who will open the line for questions.

Speaker 4

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing these star keys. One moment please while we poll for questions. Our first question comes from the line of Erik Zwick with Lucid Capital Markets. Please proceed with your question.

Operator

Thank you. Good morning, all. Wanted to start with a question on your commentary about kind of gradually reducing leverage. Wondering if you could potentially provide just maybe a little kind of, you know, quantitative thoughts there in terms of, you know, where is your target, to get there and potentially, you know, what is the timeframe to achieve that target?

Speaker 2

Good morning, Erik. It's Keith. We're focused on getting those and driving those leverage levels down over the course of the remaining few quarters. You know, we got a few tranches that are in the queue to be repaid or matures this year. We're gonna take advantage of either a combination of both, right-sizing leverage through refinancing and/or using sales and repayments to reduce and drive down the leverage levels.

Operator

Okay. No specific kind of.

Speaker 2

Timeline?

Operator

-quantitative target at this point? Or just in terms of, you know, where you'd like the debt-to-equity ratio to?

Speaker 2

Yeah.

Operator

where you feel comfortable having that today.

Speaker 2

Yeah, for sure. You know, with the majority of our debt capital and unsecured, I think our leverage range is around 1.30-1.35. Obviously, we're way above that. It's gonna take some time and some wood to chop to get us back there. You know, just looking at how our portfolio churns each and every year, at least 25%, that generates enormous amount of capital. We intend to use that and other levers to, you know, drive the leverage levels down over the next couple of quarters.

Operator

Thanks. That's helpful, Keith. Then just curious with regard to Lux Credit Consultants and the sale there. Was the final sales price consistent with the 3/31 fair value mark?

Speaker 2

Yes.

Operator

Okay. Okay. No, nothing shouldn't be any additional kind of, I think, put in there. Okay, great. One kind of just curious about the, you know, strong quarter of originations in one Q. How is the pipeline looking, you know, at this point, and what are you seeing in terms of spreads and how that compares to the existing portfolio yield?

Speaker 1

Erik, we ended the quarter. The quarter was a S 6 10 profile of our new investments. I would say we're being very careful. There is definitely a disconnect between the new issue market and the secondary and public markets for direct. I think there's still a cohort of a lot of fundraising that happened over the last 18 months, where they're specifically targeted to the new issue cohort. I would say we're, you know, we're still trying to maintain our S 6 target. We're being incredibly choosy because we see better opportunities, candidly in the secondary markets in the portfolio and to buy back our stock, you know, compared to, you know, seeing spreads still relatively tight in new issues specifically.

Operator

Thanks, Gregg. How does the pipeline look in terms of opportunities? Is the kind of global and macroeconomic uncertainty impacting things at all, or are you still seeing quite a few, you know, attractive opportunities to invest in?

Speaker 1

We're still seeing attractive opportunities, proportionally for us, I think it's, you know, we don't have to do a massive amount of deals to proportionally deploy money. I will say that the environment has definitely affected M&A. We are seeing, you know, reduced M&A activity because of macro as well as where interest rates are. With our proportional deployments, you know, we're still seeing a pretty rich opportunity set. It's just a question of picking the best ones.

Operator

Got it. Last one for me. I appreciate the commentary about David's Bridal and the seasonality there. One, I guess, could you just remind me, I think kind of typically the second and third quarters are the strongest for them given the traditional wedding season. Also curious if you could provide an update on the, I believe it's the Pearl. Is that the online initiative that had been introduced over the past year or so, and how that's progressing?

Speaker 1

Sure. You're exactly right. Q two and Q three are the seasonally strongest quarters for David's Bridal. The Pearl Marketplace segment is ramping, is accelerating. We've been very pleased with the ramp in that particular part of the business. Strategically, that is the focus for Bridal today as we move more and more of our business to digital. That's been a good growth part of the business.

Operator

Appreciate the update. Thanks for taking my questions.

Speaker 4

Thank you. This concludes our Q&A session. I will now turn the call back to management for final comments.

Speaker 2

Wanted to thank everybody for joining us today. We appreciate your support and interest in our CION Investment Corp, and we look forward to speaking to you next quarter.

Speaker 4

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

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