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Presentation

CION Investment Corporation misses on earnings expectations. Reported EPS is $0.36 EPS, expectations were $0.37.

Operator: Welcome to CION Investment Corporation First Quarter 2025 Earnings Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Charles Arestia, Managing Director and Head of Investor Relations. Please go ahead, sir.

Charles Arestia: Good morning and welcome to CION Investment Corporation’s First Quarter 2025 Earnings Conference Call. An earnings press release was distributed earlier this morning before the market opened. A copy of the release along with the supplemental earnings presentation is available on the company’s website at www.cionbdc.com in the Investor Resources section. It 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.

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 like to now turn the call over to Mark Gatto. Please go ahead, Mark.

Mark Gatto: Thank you, Charles, and good morning, everyone. Thank you all for joining our call today. CION reported $0.36 in quarterly net investment income for the first quarter, covering our base dividend and representing a slight increase from the prior quarter. Driven by lower interest expense as we absorb the impact of our balance sheet repositioning from late last year. Our net asset value declined quarter over quarter to $14.28, down from $15.43 in the fourth quarter. Driven primarily by fair value marks on a limited number of portfolio companies, somewhat offset by accretion from share repurchases during the quarter. While we will provide additional detail on what drove the quarterly decline in NAV later in the call, two names specifically contributed to most of the decline.

First, during the quarter, we announced a new growth capital raise for David’s Bridal, expanding the pool of investment partners supporting the company’s strategic focus on its asset-light higher growth Pearl Marketplace business. In conjunction with that new term financing facility, equity was issued to our new lending partners, which drove a quarterly reduction in the fair value of certain tranches of our term loan investments. We are hopeful that the recently announced strategic initiatives can accelerate our plan to increase long-term equity value for all stakeholders. Second, we experienced a decline in the mark on our term loan in Anthem Sports and Entertainment, driven primarily by the company’s continued strategic business shift away from a subscription-based to a variable-driven revenue model.

A shift which requires time to ramp financial results. The overall credit performance of our portfolio has held up well despite a shifting macroeconomic backdrop, and we continue to observe encouraging EBITDA growth trends on an LTM basis in the first quarter. As a result of our quarterly valuation process, we downgraded five investments in three portfolio companies on our internal risk rating scale and upgraded four investments in three portfolio companies. Similar to the prior quarter, loans risk-rated four or five represent a very small portion of the portfolio, comprising 128 basis points of the portfolio at fair value. Overall, non-accruals in the portfolio also remain relatively low at 1.2% of the portfolio at fair value. At a high level, we believe the credit performance of the portfolio is strong, especially amidst a rapidly changing operating environment.

We repurchased approximately 186,000 shares of our common stock at an average price of $11.68 during the quarter and have continued to repurchase shares in the second quarter as the recent tariff-induced market volatility has resulted in a broad sell-off in the capital markets. As of last Friday, we are over 70% of the way through our authorized repurchase program, which we believe, along with continued insider purchasing, has preserved a strong alignment with our shareholders. While tariffs and trade deal negotiations have amplified volatility in the capital markets, we believe our portfolio has several mitigating characteristics. We remain in constant communication with our portfolio company management teams and also went through our portfolio on a line-by-line basis to gauge the potential impact of prolonged tariffs on each company, both to China specifically and to a broader basket of other countries.

In doing this analysis, our estimation is that approximately 6% of the portfolio at fair value is at our highest classification of tariff risk, defined as heavily dependent on China with little ability to change in the near term. The vast majority of the portfolio measured at fair value has nominal or relatively low China exposure, and we believe should not be disproportionately impacted if a trade war persists. With respect to David’s Bridal specifically, for years, the company has been diversifying the supply chain outside of China, which we believe insulates the company from a more severe shock while tariff disputes play out. That being said, continuing macro uncertainty that could lead to a prolonged decrease in consumer confidence could certainly affect David’s and others in our portfolio.

While it remains to be seen and we will watch closely, we believe our portfolio, which is entirely focused on the U.S. middle market and is most concentrated in B2B services, was deliberately constructed to avoid highly cyclical directly consumer-facing industries that may be most susceptible to pricing pressures from a sustained trade war. As we think about this environment, we continue to see opportunities on the direct lending side both in our existing portfolio as well as new transactions, but remain highly selective given our investment capacity and broader market trends. We also believe that our secondary investment capabilities will allow us to opportunistically take advantage of technical or tactical dislocations in the lightly syndicated loan market that may arise during periods of volatility.

We believe CION’s dynamic and differentiated investment approach, which we outlined in great detail at our Investor Day last quarter, allows CION to flex into wherever we see the greatest risk-adjusted returns while still preserving our conservative first lien focus in the middle market. With that said, however, as we look to the year ahead, we stand ready to support our portfolio companies as they navigate what could be an unusually difficult operating environment. As management teams are trying to weigh longer-term strategic decisions against a rapidly evolving macroeconomic backdrop, we believe that focusing on our existing portfolio is likely the most prudent approach in this environment from the perspective of a lending partner to our companies and the fiduciary to our stakeholders.

Our first lien focus and majority unsecured debt funding mix supports the defensive posture of our outlook, but we have also seen just over the past few weeks how quickly things can change in either direction. Accordingly, we continue to be hyper-focused on regularly assessing both our portfolio and the broader market to deliver the best results for our shareholders. With that, I will now turn the call over to Gregg Bresner to discuss our portfolio and investment activity during the quarter.

Gregg Bresner: Thank you, Mark, and good morning, everyone. We’ve remained highly selective with new investments in Q1 as we were effectively at full investment during most of the quarter and worked to maintain our targeted net leverage level of 1.25 times while our loan repayment levels were less than our historical experience, with some slipping into Q2. During the quarter, we passed on a historically higher percentage of potential investments based on credit and pricing considerations as the hangover of record 2024 direct lending fundraising still translated into lower coupon spreads, higher leverage levels, and looser credit documents for many Q1 opportunities. As Mark discussed in his remarks, market conditions changed dramatically during the second half of the quarter, particularly in March, with sentiment souring based on tariff concerns and increased volatility and the first monthly loan outflow we have seen since 2023.

We expect new loan spreads, leverage attachment levels, and credit terms to improve going forward based on the prevailing macroeconomic conditions. We continue to strategically focus on first lien investing at the top of the capital structure and prefer to utilize secured yield enhancement provisions such as PIK features, exit fees, and MOECs to drive yield to the top of the capital structure rather than reaching deeper into capital structures for mezzanine and equity co-investments. We believe our continued investment selectivity and proportional deployment levels helped us to invest in first lien loans at higher spreads when compared to the overall loan markets during the quarter. The weighted average yield for our total funded first lien debt investments for the quarter based on investment cost was the equivalent of SOFR plus 6.3%.

As we discussed in previous quarters, the majority of our annual PIK income is strategically derived from highly structured first lien investments where PIK income is incremental to our cash coupon. For example, we invest in litigation finance portfolios where we are a first lien lender against a diverse mix of thousands of mass tort single event cases. We’re able to attain higher yields with attractive loan-to-value structures by matching flexible PIK timing features with strict cash flow sweeps upon collections from settlements. These investments represent approximately 18% of our current PIK income. We have started to receive increased repayments from our litigation portfolios as the long court docket delays from COVID are starting to thaw and cases are being resolved, settled, and distributed.

Recent higher profile cases that have settled include Gilead and Astral World. Approximately 64% of our PIK investments are in portfolio companies risk-rated either one or two, with 99% risk-rated three or better. As a result, we believe this PIK income may not compare to restructured PIK driven by a deterioration in credit. Turning now to our Q1 investment and portfolio activity. Our Q1 investment activity consisted of approximately two-thirds for add-on investment commitments for existing portfolio companies and one-third for new company investments. We closed the direct first lien financing for one new platform company, Summit Hill Foods, where we served as a co-lead lender. We completed add-on investments for portfolio companies, including Securus Technologies, Bulleit, David’s Bridal, Healthway, HW Lochner, Labgear, Aspira, Moss, AkioRx, FuturePack, Nova Compression, and WorkGenius.

During Q1, we made a total of approximately $65 million in new investment commitments across one new and 12 existing portfolio companies, of which $55 million was funded. Approximately 94% were first lien loans. We also funded a total of $10 million of previously unfunded commitments. We had sales and repayments totaling $49 million for the quarter, which consisted of the full repayment of our first lien investment in Flat World and the sale of our secondary investments in AHF products and AGCO. Post quarter end, we received the full repayment of our direct investments in ALM Global and Manus Bio. As a result of all these activities, our net funded investments increased by approximately $15 million during the quarter. As Mark referenced, our NAV decline for the quarter was driven primarily by declines in the unrealized mark-to-market value of a few of our investments, which incorporated the tariff uncertainty, souring market conditions, and other macroeconomic concerns impacting the debt and equity markets and the comparable public company valuations.

The majority of our net mark-to-market declines were driven by two portfolio companies, David’s Bridal and Anthem Sports. As we mentioned on previous quarterly calls, we expect to see significant quarter-to-quarter volatility in the marks of David Bridal’s equity due to the larger overall relative size of our investment as well as the highly seasonal nature of the company’s operation. The mark-to-market decline in David’s Bridal for the quarter was driven primarily by a new investment round. During the quarter, David’s publicly announced its strategic focus on its digital marketplace business named Pearl, effectively expanding the company’s growth profile from a market leader in the $4 billion wedding apparel market into a fully integrated market leader in the entire $65 billion annual total wedding sector.

This strategy, known as aisle to algorithm, has been well received from customers, vendors, and advertisers and emphasizes David’s use of AI and digital media assets to more effectively and efficiently service the entire $65 billion total wedding ecosystem. In conjunction with this initiative, David’s completed a new round of growth that added two institutional investors to our debt and equity tranches. The transaction OID and equity issuance dilution associated with this financing negatively impacted our debt and equity marks for the quarter. In addition, our equity valuation was impacted by the tariff and other macro uncertainties affecting publicly held retailers. While David’s has a diversified supply chain and sources the majority of its merchandise from many countries outside of China, the effects of tariffs and overall impact to David’s business and customers will become more visible in the next few quarters, particularly in the back half of this year as the 2026 buying season kicks in.

The mark-to-market decline in our first lien debt investment in Anthem Sports, a media content business, was driven by trailing revenue performance as the company continues to transition its business model from a subscription-based to advertising and other more variably driven revenue sources. As with most media content-driven businesses, the strategic pivot from the linear subscription model to a variable model requires transition ramp time. The company is also active on a number of corporate development initiatives across its content portfolio. The unrealized mark-to-market equity value declines for our investments at Isagenix and Avison Young were driven by delays in expected revenue pipeline that impacted trailing EBITDA performance. In terms of unrealized mark gains, we had mark increases in the unrealized value of investments, including A4 Insurance, Palmetto Solar, and CHC Medical based on stronger underlying performance trends.

From a portfolio credit perspective, our non-accruals decreased from 1.41% of fair value in Q4 to 1.2% in Q1. We neither added nor removed any names from non-accrual this quarter. Of note, we did further lower the mark value of our term loan investment in Sequoia Healthcare, a name previously placed on non-accrual. Sequoia is a subsidiary of CarePoint Health, which is currently being restructured in a bankruptcy process. Given the uncertainty of the process, we have elected to further reduce our projected recovery. On an absolute basis, non-accruals continue to be largely in line with the historical experience, and we are pleased with the continued credit performance of our portfolio, particularly in the current interest rate environment. Overall, our portfolio remains defensive in nature, approximately 87% in first lien investments.

Over 98% of our portfolio remains risk-rated three or better. Our risk-rated three investments, which are investments where we expect full repayment but are either spending more engagement time and/or have seen increased risk since the initial asset purchase, declined from approximately 10.6% in Q4 to 10.3% in Q1. I’ll now turn the call over to Keith Franz.

Keith Franz: Thank you, Gregg, and good morning, everyone. During the first quarter, net investment income was $19.3 million or $0.36 per share compared to $18.7 million or $0.35 per share reported in the fourth quarter. This is an increase of about $600,000 or $0.01 per share. Total investment income was $56.1 million during the first quarter as compared to $57.9 million reported during the fourth quarter. This is a decrease of $1.8 million or about 3% quarter over quarter. The decrease in total investment income was driven by lower transaction fees from origination and amendment activities as well as lower SOFR rates earned on our investments when compared to the prior quarter. On the expense side, total operating expenses were $36 million compared to $39.2 million reported in the fourth quarter.

The decrease was driven by lower interest expense due to lower SOFR rates and the benefits of repositioning our debt capital during the past few quarters. At March 31, we had total assets of approximately $1.9 billion and total equity or net assets of $757 million with total debt outstanding of $1.1 billion and 53 million shares outstanding. At the end of the quarter, our net debt to equity ratio was 1.39 times, which is higher than 1.27x at the end of Q4. The increase in leverage was directly impacted by the NAV decrease during the quarter and lower than expected repayment activity near the March. Post quarter end through April, after reflecting recent repayment activity, our current net debt to equity ratio is now 1.34 times. Our portfolio at fair value ended the quarter at $1.8 billion, and the weighted average yield on our debt and other income-producing investments at amortized cost was 12.1% at March 31, which is down 15 basis points from the fourth quarter.

At March 31, our NAV was $14.28 per share, as compared to $15.43 per share at the December. The decrease of $1.15 per share was 7.5% was primarily due to mark-to-market price declines in our portfolio mostly due to price volatility from our equity book, which 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 over $1 billion in unencumbered assets, a strong debt service capacity, and solid liquidity. We had over $60 million in cash and short-term investments and an additional $100 million available under our credit facilities to further finance our investment pipeline and continue to support our existing portfolio companies.

At March 31, we continue to have a healthy debt mix with about 62% in unsecured and 38% in senior secured bank debt, with over 70% in floating rate. During the quarter, the weighted average cost of our debt capital was about 7.5%, which is down 30 basis points from the fourth quarter, driven primarily by the efforts we took to reposition our debt capital during the prior quarters and slightly lower SOFR rates. In terms of our debt structure, during the quarter, we terminated our repurchase facility with UBS and entered into a new three-year $125 million senior secured credit facility with more constructive operating provisions and better economics. The effective credit spread was reduced by 45 basis points. During the past few quarters, we had been active in the debt capital markets.

We closed on six debt transactions, effectively refinancing over 80% of our debt capital while extending the weighted average maturity wall by three years through 2027. The increase in the unsecured debt mix to over 60% of our total debt capital with over 70% in floating rate continues to bring additional strength and flexibility to our balance sheet while only slightly increasing our weighted average cost of debt capital when considering the benefits it brings to our balance sheet. Now turning to distributions. During the first quarter, we paid a base distribution to our shareholders at $0.36 per share, which is the same as the fourth quarter base distribution. The trailing twelve-month distribution yield through the first quarter based on the average NAV was 10.2%, the trailing twelve-month distribution yield based on the quarter-end market price was 14.9%.

As announced this morning, we declared our second quarter base distribution of $0.36 per share, which is the same as the first quarter. The second quarter base distribution will be paid on June 16, to shareholders of record as of June 2. With that, I will now turn the call back to the operator who will open the line for questions.

Operator: Thank you. Our first question is from Eric Zwick with Lucie Capital Markets. Please proceed.

Eric Zwick: Thank you. Good morning. I wanted to start first with a question on Anthem Sports, and I appreciate the detail you gave in the commentary already. Just curious, is that a club deal? If so, are you the lead lender there? And then also curious just about the rationale for the shift in their business model and how long, I know it may be hard to tell, but how long you would expect it to take before the financial performance there returns to prior levels?

Gregg Bresner: Hi, Eric. It’s Gregg. So there are it is a club deal. There’s about five lenders in total in our structure. And we think it will take 24 months approximately to make the transition. And, basically, you’re going from the larger predecessor contracts with the larger media companies had now switched to a strategy of more channels but advertising-based as opposed to fixed subscription fees. And it just takes time to ramp up the new places and new channels and advertising to ramp it up to a full annualized basis.

Eric Zwick: Got it. That’s helpful. And then also just looking at through the SOI and of the industry concentrations that did see some depreciation in the quarter, but there were four that were kind of in the health care and pharma industry. But then I noticed also within that same industry, FuturePack, it looks like doubled your investment there. So just curious kind of what you’re seeing at FuturePack. I do see that they possibly made an acquisition recently, so maybe it was to help fund that. But so curious about FuturePack as well as kind of the broader trends that are impacting that industry today.

Gregg Bresner: Sure. So FuturePack was an acquisition. It’s a relatively large one. And the company now is more of a larger cap company. When we first started, it was lower middle market. And today, it’s the profile of a large cap, very strong earnings track record. So they continue to grow. And we were one of the many lenders who re-upped and increased their exposure because of the acquisition pipeline coming. But it’s primarily driven by very strong earnings growth.

Eric Zwick: Got it. And then just in terms of the health care and pharma industry at large, were the kind of depreciation recorded unrealized depreciation recorded for some of the other investments? Was it related to changes at the FDA or anything else? Just kind of curious.

Gregg Bresner: No. Nothing structural like that. Nothing secular. It was much more just mark-to-market comps trading down, things like that. But more at the micro level, not at all any kind of structural or thematic shift.

Eric Zwick: Got it. And the last one for me, I’ll step aside. Are you guys able to provide any update on potential realized gains over the next quarter or two that you might expect in the equity portfolio? Anything kind of popping up there?

Gregg Bresner: Nothing we can disclose. All private companies, so we have to be very careful about what we can say. But over time, we do expect to have some, but it’s very hard to say right now without going into breaking confidentiality.

Eric Zwick: Thank you for taking my questions this morning.

Operator: We have no further questions at this time. I would like to turn the conference back over to Mark Gatto for closing remarks.

Mark Gatto: Thank you, everybody, for joining us today. We look forward to speaking to you next quarter.

Operator: Thank you. This will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.