CION Investment Corporation

Thank you, good morning, and welcome to the Scion Investment Corporation's second quarter 2023 earnings conference call. An earnings press release was distributed earlier this morning before market opened. A copy of the release, along with a supplemental earnings presentation, is available on the company's website at www.dionbdc.com. in the investor resources section and should be reviewed in conjunction with the company's form 10Q 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. Speaking on today's call will be Michael Reisner, Zion Investment Corporation's Co-Chief Executive Officer, Greg Bresner, President and Chief Investment Officer, and Keith Franz, Chief Financial Officer. With that, I'd like to turn the call over to Michael Reisner. Please go ahead, Michael.

Thank you. Good morning, everyone, and thank you for joining us. As mentioned, I am joined today by Greg and Keith, as well as other members of senior management, including my co-CEO, Mark Gatto. I will start our call today with an overview of our second quarter results. Greg will review our investment activity during the quarter, and Keith will provide additional detail on our financial results. After Keith's prepared remarks, we will open the call to questions. As we reported this morning, we had yet another quarter of income exceeding our $0.34 a share dividend, which led to our announcing a supplemental dividend this morning of an additional $0.05 a share for the next two quarters. Net investment income was $0.43 a share, a 21.4% increase year over year. While income from last quarter was higher due to a distribution from our Eagle Tree joint venture and other equity dividends from a deleveraging portfolio company, We are pleased that our income continues to outperform our dividend without the periodic dividends and a higher than anticipated cash balance throughout Q2. I will note that, as previously advised, distributions from our Eagle Tree joint venture are expected to be periodic in nature, and we believe there will be more meaningful income in the coming quarter from that entity. Therefore, the lack of a dividend this quarter is simply reflective of the structural construction of the portfolio in that entity. Additionally, as Greg will discuss, the quality of opportunities in our pipeline remains strong, and the delays and closings we experienced during the quarter have subsided. In fact, we have closed $54 million in new investments since the end of the quarter, such that our investable cash balance for this current quarter will be more in line with our expectations as compared to the second quarter. Moreover, we believe that our cautious view of the economy over the last few quarters and underwriting on the basis that the economy was in or entering into a recession is a meaningful factor as to why the portfolio is performing well. We placed one new investment on non-accrual this quarter, an additional investment with Jenny Craig was added, and took three names off of non-accrual. The percentage of our portfolio on non-accrual fell to 1.69% of fair value, down from 3.47% from last quarter. The percentage of names that we have risk-rated four or five decreased to less than 1% of the portfolio, with 99% of our book now rated three or higher. As we said last quarter, we believe the stress names identified in Q1 were idiosyncratic in nature and limited to those in consumer-facing industries. On the financing side, we successfully extended our J.P. Morgan and UPS senior secure facilities. We continue to remain conservatively levered relative to our peers with a net debt to equity ratio of 1.04 times. And we'll seek to increase leverage in the coming quarters to achieve our target of 1.25 times, but we'll continue to do so in a prudent fashion. Our net asset value increased 20 cents a share to $15.31 from $15.11 last quarter, all in part due to our share buyback as well as an increase in the illiquid portion of our portfolio and continuing to out-earn our dividends. Regarding the share buyback, this month we expect to extend our repurchase plan for another year, which we will continue to utilize in a prudent fashion to drive long-term shareholder value. In Q2, we repurchased approximately 328,600 shares at an average price of $9.81 per share for a total repurchase amount of $3.2 million. Through the end of Q2, we have repurchased shares totaling approximately $2.3 million for a total repurchase amount of $22.3 million since the beginning of the repurchase program was implemented in August 2022. We believe that despite media headlines discussing the decreased likelihood of a recession, now is not the time to take unnecessary risk. We believe we have demonstrated that we have the ability to drive shareholder returns by being highly diversified in predominantly senior secured floating rate loans while remaining conservatively levered. We remain highly diversified with our investment portfolio of $1.69 billion spread across 112 distinct issuers with an average investment size of $15 million. Our investment portfolio is 89.3% senior secured, 87% in first lien investments. The weighted average leverage or net debt to EBITDA of our portfolio companies decreased slightly to 4.83 times as compared to 5.1 times in Q1. The weighted average interest coverage of our portfolio companies of two times was relatively in line with the prior quarter. With that, I'll now turn the call over to Greg.

Thank you, Michael, and good morning, everyone. Our Q2 net investment income benefited from a diverse combination of the direct pass through of higher interest rates from our loan assets, origination and amendment fees, prepayment premiums, and other yield enhancing provisions embedded with our primarily first lien portfolio. There continues to remain a clear distinction between the large cap syndicated markets and the direct private credit market where we strategically focus. The private direct lending sector continued to expand its market share with issuance and yield opportunities at the expense of the less active syndicated loan markets, which has sharply lower new issue volume to relatively lackluster LBO and M&A activity. This is consistent with what we are experiencing with our platform as our current private direct transaction inflow remains strong. We are seeing many attractive direct investment opportunities for which we will remain highly selective. We have seen an increase in refinancing opportunities, particularly in conjunction with add-on acquisitions where additional debt capital is required that is beyond the ability of the incumbent lender groups. In addition, we have benefited from the disruption in the syndicated loan market where we have been able to acquire lightly syndicated first lien loan tranches at substantial discounts to par due to the technical and fundamental headwinds from ratings downgrades as well as reduced CLO issuance outflows from loan mutual funds and ETFs. We remain highly selective with new investments as we are still cautious with respect to the U.S. consumer, particularly in the middle and lower markets. M&A activity remains well below the 2022 level and we have seen a number of circumstances where valuation gaps and lengthy negotiations are ultimately not being converted into closed transactions. We are additionally seeing delays in regulatory approvals due to elongated governmental review timetables. These dynamics have resulted in several of our planned investment closings slipping from Q2 to Q3. Turning now to our Q2 investment and portfolio activity, at the end of Q1, we were strategically preserving cash for our expected Q2 investment pipeline. Given the delays in transaction closings that I just referenced, we now expect most of our targeted investment pipeline to be largely funded by the end of August. During Q2, we continued our focus on higher yielding first lien opportunities in both the directly sourced and lightly syndicated loan markets. Our focus in the syndicated markets has been largely higher yielding illiquid opportunities such as investment opportunities with valuation distress due to either technical or capital structure related situations where we expect to have active roles in the processes that drive the refinancing or restructuring of the investments. Also, during Q2, we completed an attractive mix of investments, including our co-lead role in the newly issued private credit facility for PRA events, the secondary purchase of the higher yielding privately structured first lien tranche of RR Donnelly, and the discounted purchases of the lightly syndicated first lien tranches of Abbotson Young, MedPlast, and Florida Foods. Overall, we have seen roughly a 100 to 150 basis point increase in spreads year over year for new direct investments that meet our investment criteria. We ended the quarter with strong liquidity and a conservative net debt to equity profile of approximately 1.04 times, slightly higher than at the end of Q1. We maintained strong liquidity to pursue new investments and maintained strong dry powder to invest in the growth and working capital needs of our portfolio companies. During Q2, we made $62 million in new investment commitments, all of which were funded. These investments were balanced and diversified across direct and secondary opportunities. We also funded a total of $8 million of previously unfunded commitments. We had sales and repayments totaling $55 million for the quarter, which primarily consisted of the full repayment of one investment and the successful restructuring of IPP, United Road, and Isagenix into new debt and equity tranches. As a result, net funded investment activity increased by $15 million during the quarter. Our non-accruals decreased from 3.5% of fair value at $331.23 to 1.7% at $630.23. We removed Sequoia Healthcare, Independent Pet Partners, and United Road from non-accrual status this quarter as we successfully utilized our secured loan positions to restructure our investments in these companies. In July, we worked with Bank of America and David's Bridal Management to help lead the successful restructuring and emergence of David's Bridal out of bankruptcy. We successfully utilized our multiple pre-petition secured holdings and extensive experience with the company and management to structure the purchase of substantially all assets of David's Bridal out of bankruptcy. As a result of the transaction, we are now a secured lender and majority equity owner of David's Bridal and our pre-petition secured debt in David's Bridal will be removed from non-accrual status in Q3. Overall, our portfolio remains defensive in nature with 89% in senior secured investments that is highly diversified across industries and issuers. I'll now turn the call over to Keith.