DBRS Morningstar Assigns Long-Term Credit Ratings of BBB (low) to CION Investment Corporation with a Stable Trend

DBRS, Inc. (DBRS Morningstar) has assigned initial public credit ratings to CION Investment Corporation (CION or the Company), including a Long-Term Issuer Rating and Long-Term Senior Debt rating of BBB (low). The trend on all the ratings is Stable. The Company’s Intrinsic Assessment (IA) is BBB (low), while its Support Assessment is SA3, resulting in CION’s final ratings positioned in line with its IA.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings and Stable trend are supported by CION’s established franchise, with a long track record as a business development company (BDC) and an experienced management team who have worked together through several business and economic cycles. The credit ratings also consider the Company’s strategic reliance on club loan originations often in a non-lead arranger role, which limits its discretion in restructuring problematic credits, as well as CION’s recent investment portfolio credit performance deterioration. However, this is balanced by CION’s predominantly first lien investment portfolio, which is well diversified, with lower average hold sizes. The credit ratings also incorporate the quality of earnings generation, which has benefitted from higher base rates at the net investment income level, but also has a higher percentage of non-cash payment-in-kind (PIK) income.

The Stable trend considers the turmoil in the U.S. banking system and the potential for a worsening macroeconomic environment. While the bank failures in March of this year had no direct impact on CION, overall bank stress and financial market volatility may pressure middle market companies with limited access to capital. The lender-friendly private credit market with higher spreads and better documentation is balanced by CION’s somewhat constrained origination capacity due to its limited ability to raise new equity capital while operating within its target leverage range.

CREDIT RATING DRIVERS
Over the longer term, strong operating performance, improved credit fundamentals, and strengthened earnings quality would lead to a credit ratings upgrade. Conversely, the credit ratings would be downgraded if there is a sustained increase in gross leverage substantially above the Company’s target range. A material increase in non-accrual investments or a sizable loss that significantly reduces the Company’s capital buffer to regulatory requirements would also result in a credit ratings downgrade.

CREDIT RATING RATIONALE

Franchise Strength Building Block (BB) Assessment: Good/Moderate

DBRS Morningstar views CION’s franchise as moderate, supported by its long tenure in the industry and sufficient scale to compete effectively in the private credit landscape. CION’s external manager, CIM, is a joint venture between CION Investment Group, LLC (CIG) and Apollo Investment Management (AIM), an Apollo Global Management (Apollo) subsidiary. While Apollo has an economic interest due to this structure, CION’s investment deal flow remains separate from Apollo entities. CION originates transactions from relationships with other direct lenders and intermediaries, actively participating in club transactions where it can deploy meaningful capital while maintaining a diversified investment portfolio.

CION’s portfolio companies are typically sponsor or institutionally-backed middle market companies with EBITDA between $25 to $75 million and an average investment hold size of around $20 million. As of 3Q23, CION’s $1.7 billion credit investment portfolio consisted of 109 portfolio companies across 24 distinct industries with an average EBITDA of $61.3 million and median EBITDA of $33.7 million. The investment portfolio composition at 3Q23 was 82.6% first lien debt, 2.1% second lien debt, 9.8% equity, 0.1% structured products, and 0.8% unsecured debt investments, with investments in the JV (comprised of a first lien loan and equity) consisting of 4.6% of the portfolio.

Earnings Power Building Block (BB) Assessment: Moderate

CION’s earnings generation capacity is resilient, underpinned by a scaled investment portfolio that generates consistent investment income which has benefitted from higher base rates. Indeed, the gross annual portfolio yield has increased by approximately 150 basis points to 11.8% at 3Q23 from 10.3% at 3Q22. For 2022, CION reported a net change in net assets (net income) of $50.1 million, down from $118.8 million in 2021. For 9M23, the Company reported a net income of $44.3 million, up from a net income of $40.6 million in 9M22. Strong net investment income of $88.2 million in 2022 and $83.3 million in 9M23 were partially offset by both realized and unrealized losses on the investment portfolio, as restructurings in the portfolio led to realized losses, and credit spread widening drove unrealized losses. Of note, PIK income as a percentage of total investment income was higher at 11.9% at 9M23, compared to the Company’s target of 10%. We view PIK income growth negatively, as it exposes the Company to higher realized losses should portfolio companies' performance weaken and lead to debt restructurings.

Risk Profile Building Block (BB) Assessment: Good/Moderate

The Company’s risk profile is considered moderate. As CION often is not in a lead-arranger role, it has limited discretion in shaping restructuring terms or outcomes for problematic credits. However, this potentially elevated credit risk is balanced by CION’s long-standing partnership approach it has held with other lenders in resolving underperforming investments. Additionally, the investment portfolio is predominantly comprised of senior secured first lien investments, well diversified across 109 companies in 24 different industries, which limits portfolio concentrations. Indeed, the Company’s largest single borrower of $54.9 million constituted just 3.2% of the investment portfolio at fair value at 3Q23, excluding the Company’s investment in the JV. Meanwhile, the non-accruals rate stood at 3.8% of the portfolio at cost (1.0% at fair value) at 3Q23, driven by weakened performance in several consumer-related portfolio companies. While debt restructurings may resolve current non-accruals in the near-term, we anticipate continued credit deterioration may occur, particularly as middle market companies feel the full effect of higher interest rates combined with operating margin challenges.

Funding & Liquidity Building Block (BB) Assessment: Moderate

CION’s funding profile has evolved with unsecured issuance, but is still reliant on secured credit facilities, with a primary credit facility ($675 million), maturing in 2025. Unsecured debt comprised approximately 40% of the Company’s total debt at 3Q23, pro forma for unsecured notes issuances of $133.7 million during 4Q23, in line with the Company’s target unsecured mix of 30% - 40%. Debt maturities are well-laddered through 2027, with $152 million maturing in 2H24, of which $122 million is a credit facility that will likely be amended and extended. Liquidity is sufficient, considering unfunded commitments of $59.2 million, compared with available capacity on the credit facilities of $103 million and $6.8 million of cash and equivalents.

Capitalization Building Block (BB) Assessment: Moderate

Capitalization is considered acceptable, with a gross leverage ratio (debt-to-equity) of 1.17x (net leverage ratio of 1.03x) at 3Q23, inside of the Company’s target net leverage levels of 1.00x - 1.25x. We believe CION's leverage target and current leverage levels have sufficient cushion to the regulatory limit of 2.0x to absorb potential losses from non-accrual positions. At 3Q23, we estimate that CION would need to incur a loss of $357 million, or approximately 21% of its investment portfolio at fair value, to breach the buffer to the ACR. As a BDC, the Company is required to distribute 90% of its NII as dividends for tax purposes, and this structural inability to retain organic capital to support balance sheet growth is a rating constraint for the BDC industry.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions https://www.dbrsmorningstar.com/research/420144/global-methodology-for-rating-non-bank-financial-institutions (September 1, 2023):. Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar did have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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