Morningstar DBRS Confirms CION Investment Corporation Long-Term Issuer Rating at BBB (low); Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed the Long-Term Issuer Rating and Long-Term Senior Debt rating of CION Investment Corporation (CION or the Company at BBB (low). The Company's Intrinsic Assessment (IA) is BBB (low), while its Support assessment is SA3, resulting in CION's final credit rating positioned in line with its IA.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings confirmation is supported by CION's established franchise as a scaled business development company (BDC) with an experienced management team working together through several business and economic cycles. Also supportive of the credit ratings is CION's resilient earnings generation capacity, which, over the past three years, 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 credit ratings also consider CION's moderate risk profile, supported by a primarily sponsor-backed first lien senior secured loan portfolio and acceptable level of non-accruals. While the Company's improved mix of unsecured debt is a positive for the credit ratings, recent debt issuances have increased the leverage ratio close to the Company's net leverage ratio target of 1.25x debt-to-equity.

The Stable trend considers Morningstar DBRS' view that the baseline economic scenario in the U.S. is expected to be a soft landing, with GDP growth of 2.5% despite uncertainties around potential easing price pressures and rising geopolitical tensions. CION is expected to still generate solid operating results in this economic environment, even with a modest credit deterioration in portfolio investments and potentially lower earnings.

CREDIT RATING DRIVERS
Sustained strong operating performance accompanied by increased scale, lower levels of non-accruals and payment-in-kind (PIK) interest income would lead to a credit ratings upgrade. Conversely, the credit ratings would be downgraded if there is a sustained increase in net leverage substantially above the Company's target range of 1.0x-1.25x. 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 Assessment: Good/Moderate

CION's franchise is supported by its long tenure in the industry and sufficient scale to compete effectively in the private credit landscape. CION is externally managed by CIM, which is a joint venture between CION Investment Group, LLC (CIG) and Apollo Investment Management (AIM), an Apollo Global Management (Apollo) subsidiary. CION's investments are overwhelmingly sponsored or institutionally backed middle market companies with EBITDA of $75 million or less and an average investment hold size of around $20 million. As of 3Q24, CION's investment portfolio totaled $1.75 billion at fair value, marginally higher year-over-year (YoY). The portfolio was consisted of 103 companies across 24 distinct industries with an average EBITDA of $51.8 million, median EBITDA of $32.8 million, and an average hold size of $17.0 million. The investment portfolio is primarily comprised of first lien investment at 83.1%, followed by 0.2% second lien debt,12.7% equity, 0.04% structured products, and 0.7% unsecured debt investments, with investments in the JV (comprised of a first lien loan and equity) consisting of 3.2% of the portfolio.

Earnings Power Building Block (BB) Assessment: Moderate

The Company's earnings generation capacity is resilient, supported by a scaled investment portfolio of mainly floating rate investments that generates consistent investment income, which, in recent years, has benefitted from higher base rates. Indeed, the gross annual portfolio yield reached a historic high of 12.1% at YE23, though it was lower at 3Q24 at 10.9%. For 9M24, the Company generated a net income of $28.4 million, down 36.0% YoY. While total investment income of $194.5 million was slightly higher YoY, the decrease in net income was driven by higher realized and unrealized losses as well as higher interest expense. PIK income remains above the Company's target of 10.0% of total investment income at 14.7% during 9M24 and 12.6% in 2023. Positively, most of the PIK was in place for structural reasons to incrementally enhance yield and less due to portfolio company amendment requests for liquidity needs.

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

CION'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 103 companies in 24 different industries, which limits portfolio concentrations. Indeed, the Company had only one position above 3% of the portfolio at fair value. This controlled investment constituted 5.4% of the investment portfolio at fair value at 3Q24, primarily due to the appreciation in the common equity of the portfolio company. Meanwhile, the non-accruals rate stood at 3.4% of the portfolio at cost (1.8% at fair value) at 3Q24, consisting of seven portfolio companies. While non-accruals have remained relatively stable YoY, proactive debt restructurings have resulted in realized losses of 1.7% of the portfolio at fair value for 2023 and 1.9%, on an annualized basis, for 9M24.

Funding & Liquidity Building Block (BB) Assessment: Moderate

CION's funding profile has improved with the recent unsecured issuances. However, on the secured side, it still relies on one primary revolving credit facility of $562 million, which was recently extended to June 2027. Of the total $1.07 billion debt outstanding at 3Q24, unsecured debt comprised approximately 49% of the Company's total debt (60% pro forma for a $172.5 million unsecured note issuance that closed in October 2024). At current levels, unsecured debt is well above the Company's target unsecured mix of 30% - 40%. We view the sizeable unsecured debt mix positively as it unencumbers the balance sheet, increasing the Company's financial flexibility. Debt maturities are well-laddered through 2029, with the nearest maturity a $100 million UBS facility that matures on November 19, 2024, but is in the process of being amended and extended. The next notable maturities are $240 million unsecured senior notes due in 2026. Liquidity is sufficient, considering unfunded commitments totaled $71.1 million as of September 30, 2024, compared with available capacity on the credit facilities of $162 million and $83.3 million of cash and short-term investments.

Capitalization Building Block (BB) Assessment: Moderate

Capitalization is considered acceptable, with a gross leverage ratio (debt-to-equity) of 1.28x (net leverage ratio of 1.18x) at 3Q24, 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 3Q24, we estimate that CION would need to incur a loss of $304.8 million, or approximately 17.4% of its investment portfolio at fair value, to breach the buffer to the ACR. On a net leverage basis, the buffer is slightly improved at $345.9 million or 19.7% of the investment portfolio at fair value. As a regulated investment company (RIC), the Company is required to distribute 90% of its ordinary income 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. The Company's capitalization is also constrained by its limited ability to raise new equity capital while its stock trades at a discount to NAV (at 0.73x as of November 8, 2024).

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in US dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Non-Bank Financial Institutions (September 04, 2024) https://dbrs.morningstar.com/research/438927. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

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

The primary sources of information used for these credit ratings include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings 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.

Morningstar DBRS had 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. Morningstar DBRS's trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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