CION Investment Corporation

Greetings and welcome to the Scion Investment Corporation's third quarter 2024 conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If you require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Charlie Maricia, Managing Director and Head of Investor Relations. Thank you, Charlie. You may begin.

Good morning and welcome to Scion Investment Corporation's third quarter 2024 earnings conference call. An earnings press release was distributed earlier this morning before market open. A copy of the release along with a supplemental earnings presentation is available on the company's website at .scionbdc.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. Joining me on today's call will be Mark Gatto, Scion Investment Corporation's Co-Chief Executive Officer, Greg 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.

Thank you, Charlie. Good morning, everyone, and thanks for joining our call today. I am pleased with Scion's quarterly results as we continue to navigate a highly competitive with persistent uncertainty in the broader capital markets. The Fed's rate cut during the quarter, the first such move in four years, represented the first steps towards a potentially more normalized inflation and lower interest rate environment. However, we continue to maintain a conservative and prudent outlook as we have for the past several quarters heading into the end of the calendar year. As Keith will discuss later on the call, we were very active in managing the right side of our balance sheet in the third quarter, which resulted in unsecured debt making up the majority of our overall debt funding mix for the first time. These transactions have given us a more flexible balance sheet that we believe is better positioned to withstand any potential volatility in the capital markets heading into next year without meaningfully increasing our cost of capital. We were also pleased with the execution of our public baby bond offering, which was more than three times oversubscribed and saw strong interest from both existing and new institutional investors, as well as a strong showing from retail investors. Our offering is the largest standalone baby bond in the publicly listed BDC space today. This is a significant step in the evolution of Scion as a public company, and we were thrilled to see the strong investor support. Moving now to our quarterly results, Scion reported 40 cents in quarterly net investment income for the third quarter, driven primarily by a mix of interest income from our portfolio, as well as transaction fees from our quarterly investment activity, more than covering our 36 cents base quarterly dividend. Our net asset value declined quarter over quarter to $15.73, down from 16.08 in the second quarter, driven primarily by fair value marks in our equity portfolio, somewhat offset by over earning our base dividend and In our prior calls, we anticipate some volatility in the equity book, given the relatively large size of our David Bridal's position. Greg will provide some additional details later in the call. Over the longer term, we are pleased with our track record of preserving Scion's net asset value since listing as a public company in 2021. We also remain pleased with the credit performance of our portfolio as our continue to navigate an unpredictable macroeconomic environment. Following an extensive review process utilizing both our internal valuation team and external specialists, we downgraded six loans, offset by upgrading three loans on our internal risk rating scale. We added one new loan to non accrual status during the quarter, bringing total non accruals to .85% of the portfolio at fair value, up modestly from 1.36 last quarter. At the end of the quarter, loans rated four or five comprised less than 2% of our overall portfolio at fair value. Once again, we were active purchasers of our common stock in Q3, buying back approximately 166,000 shares at an average price of $12.09. Early in the quarter, we renewed our share repurchase authorization through 2025, reflecting our view that shares remain undervalued and preserving our strong alignment with shareholders. Since the inception of our buyback through the end of the third quarter, we have repurchased over 3.5 million shares at an average price of $10.09. The market environment during the third quarter remained highly competitive, and many of the trends we have observed in earlier quarters have continued to affect deal volumes, pricing, and lender protections. However, we are also seeing some green shoots as our deal pipeline continues to rebuild following the typical late summer slowdown, and a broader thaw in the M&A market has been constructive following an extensive period of more sluggish activity. As Greg will discuss later, we are certainly seeing a healthy amount of deal opportunities, but we remain highly selective with regards to deploying into new transactions given these dynamics. Additionally, we believe the increased flexibility of our balance sheet and sufficient liquidity should allow Scion to remain nimble and take advantage of opportunities that may arise in a higher volatility environment. With that, I will now turn the call over to Greg to discuss our portfolio and investment activity during the quarter.

Thank you, Mark, and good morning, everyone. Our Q3 net investment income benefited from a diverse combination of coupon income, transaction fees, and yield enhancing provisions such as MOLICs and prepayment premiums. We remain highly selective with new investments as we were effectively at full investment during most of the quarter as we successfully achieved our targeted leverage level of 1.25 times. In addition, we've been passing on a historically higher percentage of potential investments based on credit and pricing considerations. As Mark discussed in his remarks, market conditions remain competitive as capital inflows continue to chase transactions resulting in lower coupon spreads, higher leverage attachment levels, and easing credit terms throughout the leverage loan markets. We continue to strategically focus on first-lead investing at the top of the capital structure and prefer to utilize secured yield enhancing provisions such as PIC features, call protection, make-hold provisions, and MOLICs to incrementally enhance yields at 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 relative to our fund size helped us to invest in first-lead loans at higher spreads when compared to the overall loan markets during the quarter. The weighted average coupon for our total funded first-lead debt investments for the quarter was the equivalent of SOFR plus 6%. We also continued our highly selective focus on secondary investments where we see attractive risk return profiles or the opportunity to acquire lightly syndicated first-lead loan trotches at significant discounts to par due to technical reasons where we expect to have active roles in the processes that drive the refinancing or restructuring of the investments. Historically, we've been able to realize healthy recoveries on our first-lead restructured reorganized transactions as our realized weighted average total recoveries have been in excess of the advertised cost of those investments at the time of the restructuring. During the quarter, we successfully exited our restructured first-lead term loan investment in heritage power that we acquired at approximately 58% of par value. We ultimately achieved an unliberated total cash return of approximately 1.4 times our gross investment cost over a three-year period and exited with a significant realized gain of several million dollars. The majority of our annual PIC income is strategically 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 cashflow sweeps upon collections or through coupon structures where PIC is incremental to our cash interest. Over 60% of our PIC investments are in portfolio companies risk-rated either one or two and .4% risk-rated three or better. As a result, we believe this PIC income may not compare to restructured PIC driven by a deterioration in credit. During the quarter, we received significant par pay-downs within our litigation finance investments. We expect that trend to continue over the next several quarters. Litigation finance investments now comprise approximately 17% of our PIC income. Turning now to our Q3 investment and portfolio activity, our third quarter pipeline consisted of add-on and refinancing investment opportunities for our portfolio companies as well as a new platform acquisition transaction. We completed a new private direct first lien financing for Ascension Property Services where we served as co-leader ranger. We additionally completed add-on investments for portfolio companies including David's Bridal, Statmed, Community Tree Service, K&N, American Clinical Services, and Stengel Architecture. We also completed first lien refinancings for portfolio companies including Senex and Avacyn Young and an incremental secondary equity investment in Longview Power. During Q3, we made a total of $97 million in new investment commitments across one new and 10 existing portfolio companies of which $78 million was funded. Approximately 23% were direct first lien loans to new portfolio companies, 76% primary first lien loans to existing portfolio companies, and 1% for equity investments in existing portfolio companies. We also funded a total of $15 million of previously unfunded commitments. We had sales and repayments totaling $154 million for the quarter which consisted of the full pay down of investment tranches in WIS, Global Tail Link, Homer City, News Cycle, USALCO, and Fluid Control, the refinancing of our first lien investments in Senex and Avacyn Young, and the sale of our investments in PowerS Presents and Heritage Power. Approximately 49 million or nearly 40% of our total repayments for the quarter occurred on the last day of the quarter. We expect to redeploy these proceeds into our active Q4 pipeline. As a result of all these activities, our net funded investments decreased by approximately $61 million during the quarter. In terms of portfolio performance, our net asset value per share decreased from 16.08 in Q2 to 15.73 per share in Q3, driven primarily by unrealized net mark declines of approximately 22 million which represents approximately 1% of our total $1.8 billion portfolio. Approximately 75% of our net portfolio decline was driven by declines in the unrealized value of our equity investments of which 90% related to our equity investments in David's Bridal. As we mentioned on previous quarterly calls, we expect to see significant quarter to quarter volatility in the marks of David's Bridal's equity due to the larger overall relative size of our investment as well as the highly seasonal nature of the company's operations and working capital profile. Of note, we also saw declines in the unrealized mark value of our equity investments in TMK TriMark and Healthway. TriMark's revenue demand from its diversified restaurant base is still experiencing the lingering macro effects of higher inflation and interest rates. In terms of unrealized mark gains, we had mark increases in the unrealized value of our debt investments in IWCO and Homer City Generation as well as our equity investments in Carestream Health, our Scion EGLE Tree Joint Venture, Longview Power, and Burlips, all of which were driven by stronger underlying performance trends. From a portfolio credit perspective, our non-accruals increased from .4% of fair value in Q2 to .8% in Q3. We added one name to the non-accrual this quarter, our term-owned investment in StatMed. Scion led a super senior financing for StatMed in partnership with the company's private equity sponsor to help fund the growth of its new subscription-based offering to the pharmaceutical industry, which we expect to grow rapidly. The terms of the priority super senior round are initially dilutive to the StatMed term loan mark valuation, which is the primary driver of our decision to place on non-accrual for now. There are several names, including StatMed, that we continue to reevaluate for potential return to accrual status based on financial performance, transaction-related, and other positive developments. On an absolute basis, non-accruals continue to be largely in line with 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 with 85% in first-line investments. Approximately 98% of our portfolio remains risk-rated three or better. Our risk-rated investments, which are investments where we expect full repayment but are either spending more engagement time and or have seen the increased risk since the initial asset purchase increased from approximately .1% of the portfolio in 2.2 to .8% in 2.3, driven primarily by our investments in Hollander and Trimark. I will now turn the call over to Keith.

Okay, thank you, Greg, and good morning, everyone. As Mark mentioned, we reported another quarter of solid financial results driven by a combination of income generated from a quarterly investment activity, including amendment and other transaction fees realized during the period. During the quarter, net investment income was $21.6 million, or $0.40 per share, compared to $22.9 million, or $0.43 per share, reported in the second quarter, a decrease of $1.3 million, or $0.03 per share. Total investment income was $59.6 million during Q3, as compared to $61.4 million reported in Q2. The decrease of $1.8 million was driven by lower dividend income recorded during the period, which was slightly offset by higher transaction fees compared to the second quarter. On the expense side, total operating expenses were $38 million, as compared to $38.4 million reported in the second quarter. The decrease was primarily driven by lower advisory fees and interest expense when compared to the prior quarter. At September 30th, we had total assets of approximately $1.9 billion and total equity or net assets of $839 million, with total debt outstanding of $1.07 billion and $53.4 million outstanding. At the end of the quarter, our net debt to equity ratio was 1.18 times, which is slightly higher than 1.13 times at the end of Q2. Our portfolio of fair value ended the quarter at $1.75 billion, down $70 million from the second quarter, reflecting an increase in repayment activity received at the end of the quarter. The weighted average yield on our other income-producing investments at amortized cost was .2% at September 30th, which is down from .8% or about 60 basis points from the second quarter. At September 30th, our NAV was $15.73 per share as compared to $16.08 per share at the end of June. The decrease of $0.35 per share or .2% was due to -to-market price declines in our portfolio, mostly from price volatility in our equity book, which was partially offset by outearning of distributions and the creative nature of a share repurchase program during the quarter. We ended the third quarter with a strong and flexible balance sheet with over $800 million in unencumbered assets, a strong debt service and solid liquidity. We had over $90 million in cash and short-term investments and an additional $162 million available under our credit facilities to further finance our investment pipeline and continue to support our existing portfolio companies. At September 30th, our current debt mix is about 51% in senior secured bank debt and 49% in unsecured loans, which is about 90% in our debt capital. During the quarter, the weighted average cost of our debt capital was about 8.2%, which is 20 basis points lower than the second quarter. In terms of our debt structure, during the quarter, we were very active in the debt capital markets. We recently closed four debt transactions, effectively refinancing 90% of our debt capital while extending the weighted average maturity wall by three years through 2027 and raised almost $300 million in new unsecured debt from new and existing institutional investors. The remaining 10% to be refinanced is our UBS facility where we are actively working with them on new terms and expect to go to documents over the next few weeks. During the period, we amended and extended our senior secured credit facility with JP Morgan for an additional two years with more constructive operating provisions and better economics. The effective credit spread was reduced by 45 basis points. We also refinanced our 30 million unsecured fixed rate term loan for a new three-year unsecured floating rate term loan with a credit spread of 3.8%. And we also upsized our unsecured notes to 2027 by issuing 100 million of three-year unsecured floating rate branch B notes with a $1.5 million. Recently, post quarter end, we completed a public baby bond offering issuing 172.5 million of new unsecured .5% fixed rate notes due 2029, which were lifted and commenced trading on the New York Stock Exchange under the ticker symbol CICB on October 9th. After completing these four financing transactions, our new debt mix will now be approximately 60% unsecured and 40% insecure with over 70% floating rate. The increase in the unsecured debt mix to 60% of our total debt capital brings additional strength and flexibility to our balance sheet, aligns well with our mostly floating rate investments, and expands our group of institutional lending partners 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 third quarter, we paid a base distribution to our shareholders at 36 cents per share, which is the same base distribution we paid in Q2. The trailing 12-month distribution yield through the third quarter, based on the average NAV, was 10.5%. And the trailing 12-month distribution yield based on the quarter end market price was 13.9%. As we announced this morning, we declared our fourth quarter as the first quarter base distribution of 36 cents per share, which is the same as the third quarter. The fourth quarter base distribution will be paid on December 16th to shareholders at record on December 2nd. Okay, with that, I will now turn the call back to the operator who will open a line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please while we poll for questions.