CION Investment Corporation

Good morning and welcome to Scion Investment Corporation's fourth quarter and year-end 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.scionbdc.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 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 Reznor, Dion Investment Corporation's Co-Chief Executive Officer, Greg Bresner, President and Chief Investment Officer, and Keith France, Chief Financial Officer. With that, I would now like to turn the call over to Michael Reznor. 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 Seager Management. I will start our call today with an overview of our fourth quarter and year-end 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 a very strong fourth quarter and 2023 overall, which saw us continue to demonstrate solid credit performance with an increase of almost 3% to our net asset value quarter over quarter and almost 2% year over year, and net income of $0.94 per share, an increase of 8% quarter over quarter. Our ROE was 23.4% for the quarter and 11% for the year. Our net investment income ROE was 10% for the quarter and 12.1% for the year. Our net investment income of $0.40 per share once again out-earned our base dividend. Because of our continued ability to out-earn our base dividends, Coupled with our ability to drive returns by our yield-enhancing features and opportunistic buying of lightly syndicated deals at discounts, which Greg will speak more about, we are announcing today our intention to declare a mid-year supplemental dividend, payable July 12th to shareholders of record as of June 28th. The exact amount of the supplemental dividend will be announced next quarter. Our portfolio continued to deliver resilient credit performance. as the percentage of our portfolio on non-accrual is now below 1% of fair value. Perhaps an even better indication of our credit performance, the percentage of names that we have risk-rated 4 or 5, which represents our higher credit risk names, is also below 1% of the portfolio at fair value, which compares favorably to many other BDCs. 99% of our book is risk-rated 3 or higher. Again, a favorable benchmark when looking at our peers. At quarter end, we were still leveraged conservatively on a net basis at 1.1 times. Our net asset value increased 43 cents per share to $16.23, owing in part to mark-to-market adjustments to the portfolio, as well as the accretive nature of our share repurchase program. Our NAV continues its recent improvement and is now back to where it was two years ago. Despite the higher interest rate environment we have been operating in, and compares favorably with the net asset values of our peers, which have mostly experienced decreasing to flat net asset values over the same period. During Q4, we repurchased approximately 280,000 shares at an average price of $10.35 per share for a total repurchase amount of $2.9 million. We have repurchased a total of approximately 2.8 million shares for a total repurchase amount of $27 million since the beginning of the repurchase program we put in place in August 2022 through the end of 2023. We intend to continue to be active repurchasing our shares in the coming quarters. While many consider this the golden age of private credit, more and more of our BDC peers continue to depart from their traditional niche of lending to true middle market companies as banks retrenched in 2023. However, as banks start to resume lending activity, we believe that having a defensible niche in the middle market is paramount. As I mentioned last quarter, many BDCs are going after larger companies where leverage is higher, spreads are lower, and covenants, if even present, are looser. To that end, just recently, a Bloomberg article was titled, quote, Private Credit Cuts Pricing to Fend Off Wall Street Deal Grab, end quote. as many large BDCs participated in a loan with a spread of only 475 basis points over the base rate with 1.5% OID, one of the cheapest private credit deals in recent memory. The company in question has an EBITDA of approximately $500 million. By comparison, the weighted average EBITDA of our portfolio is $34 million. We almost always receive meaningful lender protections and covenants. Our weighted average spread is 750 basis points over the base rate, and our average OID is between 2% and 3%. While there is nothing wrong in and of itself with the deal I referenced, we believe from a risk-adjusted perspective, our style of lending is superior. At almost $2 billion in total assets... We are large enough to be an impactful player to borrowers in the middle market without being so large that we are forced to buy the market or sacrifice economics or borrower protections in an effort to put money to work. Finally, before I turn the call to Greg, I wanted to announce that we are welcoming a new member to our senior management team this week, as Charlie Orestia has joined us as a managing director and head of investor relations. Charlie was previously part of the IR team at Focus Financial Partners, and before that was an analyst at J.P. Morgan. With that, I'll now turn the call over to Greg.

Thank you, Michael, and good morning, everyone. Our Q4 net investment income benefited from a diverse combination of the direct pass-through of higher floating interest rates from our loan assets, origination and amendment fees and other prepayment premiums, and other yield enhancing provisions embedded within our primarily first lien portfolio. As Michael referenced, there remains a clear distinction between the increased levels of competition in the large cap markets between the larger asset management platforms and money center banks and the direct middle market private credit sector where we strategically focus. The middle market direct lending sector remains robust and continues to take market share from the lower rated single B syndicated markets, which is consistent with what we are experiencing with our platform as our private direct transaction sourcing remains vibrant. We continue to see attractive direct investment opportunities for which we remain highly selective. While M&A activity remains subdued in Q4, we saw an increase in refinancing opportunities, particularly in conjunction with add-on acquisitions where additional debt capital was required that was beyond the capacity of the incumbent lender groups or the private equity sponsor chose to refinance to provide an additional two years to pursue M&A or sales strategies. We do expect M&A activity to increase in 2024 as we believe buyers and sellers are now accepting the higher for longer reality regarding interest rates. In addition, we continue to benefit from technically driven disruptions in the syndicated loan market where we acquire lightly syndicated first lien loan tranches at significant discounts to par due to issues such as ratings changes, maturity extensions, exchanges, or restructurings that were not suitable for the existing syndicate holders and where we can expect to have active roles in the processes that drive the refinancing or restructuring of the investments. We remain highly selective with new investments as we are still cautious with respect to the U.S. consumer, particularly in light of recent global developments and the persistence of higher interest rates and inflation levels. We continue to strategically focus on first-lead investing and prefer to utilize yield enhancement provisions such as PIC features, call protection, make-all provisions, and MOECs to incrementally enhance yields at the top of the capital structure rather than reaching deeper into capital structures for mezzanine and equity co-investments to achieve incremental yield. Approximately 60% of our annual PIC income is derived from highly structured situations, such as our litigation finance investments, where we can attain higher yields by matching flexible PIC timing features with strict cash flow sweeps upon collections, or through coupon structures where PIC is incremental to our cash interest. Approximately 85% of our PIC investments are in portfolio companies risk-rated either one or two, and 97% risk-rated three or better. Turning now to our Q4 investment and portfolio activity. During Q4, we completed an attractive mix of first lien investments. We completed private direct first lien financing tranches for new platforms, including Nova Compression, North Star Travel, and Tactical Air Support, where we acted as co-leader ranger. We also completed a number of first lien add-on investments for portfolio companies, including WorkGenius, H.W. Lochner, David's Bridal, USALCO, and Moss. The weighted average coupon for our direct investments was approximately SOFR plus 8% for the quarter. We additionally continued our purchases of the lightly syndicated first lien tranches of companies such as Puristar, Yakmat, Avison Young, and Avaline at discounts. These purchases proved to be attractive as PureStar, Yakmat, and Avaline have been recently refinanced, and we have received significant investment income from OID acceleration in Q1 of this year. Avison Young announced the comprehensive recapitalization and deleveraging transaction that is expected to close in Q1 of 2024 and positions the company for future growth and investment. Upon closing, we expect to realize significant accretion to the blended cost of our first lien investment in Abbess & Young. During Q4, we made $152 million in new investment commitments across five new and 15 existing portfolio companies, of which $147 million was funded. These investments were diversified across direct and secondary opportunities with approximately 72 percent in direct private investments. We also funded a total of $7 million of previously unfunded commitments. We had sales and repayments totaling $83 million for the quarter, which primarily consisted of the full repayment of our investments in Cadence, Archer Systems, NWN, and Associated Asphalt. As a result, net funded investment activity increased by approximately $71 million during the quarter. The repayment trend has continued into 2024 as M&A activity has fueled recent Q1 repayments that have resulted in significant OID acceleration and incremental investment income from yield enhancement provisions such as prepayment premiums, make-alls, and MOECs attached to our first lien portfolio. Our non-accruals declined slightly from 1% of fair value at 9-30-23 to 0.9% of fair value at 12-31-23. We added one new name, our second lien investment in Trimac Ambrosia, with approximately $1.5 million of fair market value to non-accrual this quarter. Trimac was in the process of a voluntary restructuring process in Q4 that did not close until January of 2024. As a result of the restructuring, we participated in the backstop group and received a package of backstop fee take-back debt and equity for our first lien and second lien positions in the company. Given the closing of the transaction, we expect to remove Trimark from non-accrual status in Q1 of 2024. Overall, our portfolio remains defensive in nature with 85% in first lien investments and 87% in senior secured investments. I'll now turn the call over to Keith.