CION Investment Corporation

Good morning, and welcome to Scion Investment Corporation's fourth quarter and year-end 2025 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-K 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 numbers of factors, including those described in the company's filings with the SEC. Joining me on today's call will be Michael Reisner, Sign 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 turn the call over to Michael Reisner. Please go ahead, Michael.

Thank you, and good morning, everyone. Before I address our quarterly results, I want to step back for a moment and highlight what I believe is the most important takeaway from this quarter. We believe that our core first lien portfolio, which represents approximately 81% of our investments, continues to perform well. Weighted average interest coverage across our portfolio increased quarter over quarter from 1.94 times to 2.26 times. Even the growth in our portfolio companies primarily continues on a positive trajectory, and our risk-rated four and five names held steady at approximately 2.4% of the portfolio at fair value. We added one new term loan to non-accrual status during the quarter, healthway, and overall non-accruals remained essentially flat compared to the prior quarter at 1.78% of the portfolio at fair value. I would also note that our software exposure stands at approximately 1.8% of the portfolio at fair value, a reflection of our longstanding and intentional decision to avoid that sector. For investors who have expressed concern about software concentrations in BDC portfolios broadly, we believe our position should provide meaningful comfort, and Greg will speak further to our sector discipline. Overall, we are not seeing the material cracks in private credit that the press has been eager to report. Now, turning to our NAV, our net asset value decreased 7.4% quarter-over-quarter to $13.76. down from $14.86 at the end of September. I want to stress that this decline was driven almost entirely by unrealized mark-to-mark adjustments and a handful of equity positions, specifically Juice Plus, 4Wall Entertainment, David's Bridal, and Addison Young. These are unrealized marks, not realized credit losses, and as we have discussed on prior calls, our equity book can introduce meaningful quarter-to-quarter volatility into our NAV. We have always been transparent with the market about this potential volatility, and this quarter, this volatility caused our NAV to decline. We believe this potential volatility should be evaluated in the context of a portfolio whose core lending book is demonstrably healthy and whose equity positions retain long-term appreciation potential. Greg will walk through each of these names in detail. I am also pleased with our capital markets execution during and subsequent to the quarter. We raised $172.5 million in senior unsecured notes during the fourth quarter across 2027 and 2029 maturities. And subsequent to quarter ends, we raised an additional $135 million in unsecured public baby bonds due in 2031, a combined $307.5 million in unsecured borrowings that further strengthens the flexibility and duration of our balance sheet. Keith will discuss both transactions in greater detail, but we believe that continued access to the unsecured debt markets at these levels reflects the confidence institutional investors have in our credit profile. We also repurchased approximately 556,000 shares during the quarter at an average price of $9.37 per share, which we continue to view as prudent and accretive use of our capital. Looking ahead, we continue to see a resilient underlying economy While we are mindful of the ongoing geopolitical uncertainty, the underlying domestic economy continues to show resilience, and we believe conditions remain broadly supportive for our portfolio companies for the remainder of 2026. Our portfolio companies, the vast majority of which serve business-to-business end markets in the U.S. middle market, generally continue to perform in line with or better than our expectations. Despite the volume of cautionary commentary in the financial press around private credit, We are simply not seeing broad-based deterioration in our portfolio, and we remain confident in the durability of our first lean focus strategy for the remainder of the year. With that, I'll turn the call over to Greg to discuss our portfolio and investment activity during the quarter.

Thank you, Michael, and good morning, everyone. Prior to covering our investment and portfolio activity for Q4, I would like to expand on Michael's comments regarding our nominal level of software exposure within the portfolio. We ended the quarter with three software portfolio companies totaling 1.8% of portfolio fair value or 2% on an amortized cost basis. All three of these software companies were underwritten on a performing positive EBITDA basis with a weighted average net tranche level of approximately 4.4 times EBITDA closing. We have no ARR loans in the portfolio. As a firm, we have historically not invested in software as we were unwilling to lend against an ARR growth methodology with negative EBITDA profile at closing. We view the ARR software profile more as a venture-oriented investment with equity-like risk that require return levels well in excess of the yields typically offered on first-mean debt investments. In terms of our Q4 investment activity, we remained highly selective with new portfolio investments and were focused on transactions within our portfolio companies. We also were effectively at full investment during most of the quarter and worked to balance the timing of expected investment pipeline investments versus repayment amounts while maintaining our targeted net leverage range. Overall, we had fewer exiting repayments for the quarter versus our Q3 level as certain repayments drifted into Q1 of 2026. During the quarter, we passed on a historically higher percentage of potential investments in new portfolio companies based on credit and pricing considerations. While secondary credit market conditions were choppy in Q4 due to speculation regarding tariffs and interest rate policies, the government shutdown, and market concerns regarding potential cracks in private credit, there remained a significant bifurcation from the new issue market. New issue pricing continued to be driven by the hangover of record 2024 private debt fundraising, which translated into lower coupon spreads, higher leverage levels, and looser credit documents in the market. We focused our Q4 activities on incremental opportunities with our portfolio companies. We believe our continued investment selectivity and proportional deployment levels help us to invest in first lien loans at higher spreads when compared to the overall private and public loan markets. The weighted average yield for our new direct first lien investments for the quarter based on our investment cost was the equivalent of SOFR plus 6.43%. As we discussed in previous quarters, the majority of our annual PIC income is strategically derived from either highly structured first lead investments where our PIC income is incremental to our cash coupon. Together, these categories represented approximately 75% of our total PIC investments in Q4. Approximately 73% of our PIC investments are in portfolio companies risk-rated either one or two and 99% risk-rated three or better. As a result, we believe this PIC income does not compare to restructured PIC driven by a deterioration in credit. Turning now to our Q4 investment and portfolio activity. Our Q4 investment activity consisted of a co-lead investment in one new portfolio company, Strained Dental Management, and incremental add-on investments and secondary purchases in existing portfolio companies, including Adaptive Laser, American Clinical, Abbots & Young, BDS Solutions, CareStream Health, CoinMock, David's Bridal, StatinMed, and WorkGenius. We additionally refinanced the first lien debt of SleepCo, Brooklyn Bedding, and Camden with our initial club partners. During Q4, we made a total of approximately $76 million in investment commitments across one new and 14 existing portfolio companies of which $66 million was funded. We also funded a total of $12 million of previously unfunded commitments. We had sales and repayments totaling $79 million for the quarter, which consisted of the full repayment of the first lean term loans for Moss Holding and North Star Travel. As a result of all these activities, our net funded investments decreased by approximately $1 million during the quarter. As Michael referenced, our NAV decreased during the quarter was driven primarily by declines in the unrealized mark-to-market value of our equity portfolio that was concentrated within a subset of equity investments, including Juice Plus, Four Wall Entertainment, David's Bridal, and Avison Young. The common theme among these names is what we internally refer to as the COVID elongation cycle, as each of these names were significantly impacted by both COVID and the labor market, inflation, and interest rate shocks which sequentially followed. which resulted in the restructuring or recapitalization of balance sheets to rebuild the platforms. The reduction in the equity mark of Juice Plus was driven by a reduction in trailing quarterly revenue performance against its fixed cost base as the company worked to complete its restructuring in the third quarter. With its recapitalized balance sheet in Q4, the company immediately pivoted to operational initiatives and investments, to transform its product offerings and sales infrastructure to optimize its go-to market strategy that is more in line with consumer health and wellness trends and spend. The company has been executing on product development, sales management, and information technology initiatives to reposition the growth and profit improvement over the medium term. The marked value of our equity investment in 4.0 entertainment was negatively impacted by reduced trailing EBITDA performance driven primarily by industry factors, including reduced live event activities from cancellations and lower TV and film production as the sector rebuilds pipelines from the wider stripe that delayed the release queue of new scripts and production content. The company successfully restructured its balance sheet in the summer of 2025 and repositioned its sales, business development, and CapEx to focus on an expected rebound in both event and production activities. the company is expecting significant EBITDA improvement in 2026 and has already secured a number of high-profile event wins for 2026. As we have mentioned on previous quarterly calls, we expect to see significant quarter-to-quarter volatility in the marks of David's Vital 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. The decline in the Q4 mark primarily reflects the typical seasonal increase in debt as the company builds inventory ahead of the critical bridal season, which historically begins in mid-January. In addition, we invested incremental capital to accelerate the company's growth of its pearl segment, which is a high-growth, higher-margin digital marketplace platform that expands the company's market participation beyond the $5 billion wedding dress segment in the broader $65-plus billion wedding services industry. The Q4 equity marks in Addison Young were negatively impacted by incremental debt raised in Q4 at the top of the capital structure to support the company's investments in sales and other infrastructure in advance of the expected increase in commercial real estate activity in 2026 and 2027. This incremental increase in the quantum of debt negatively impacted the value of Addison's equity tranches. Zion participated in the latest debt round and continues to lead his company as well-positioned for the expected rebound in commercial real estate. Our investments in Juice Plus, David's Bridal, and Abbots & Young are representative of our opportunistic first lien investment strategy where we acquire either restructured or lightly syndicated first lien loan tranches in quality companies at a discount to par due to technical reasons where we expect to have active roles in the processes that drive the recovery and realization of the investments. Historically, we have been able to realize healthy earnings on our first lean restructured or recapitalized transactions. Illustrative examples include our investments in Longview Power, Yak Mat, Heritage Power, and Dayton Superior. We also had a number of portfolio companies where the equity marks increased for the quarter due to strong financial performance and our projected outlook, including Longview Power, Palmetto Solar, and Playboy. From a portfolio credit perspective, our non-accruals increased slightly, from 1.75% of fair value in Q3 to 1.78% in the fourth quarter. This increase was from the addition of one new name to non-accrual, our term loan investment in HW Acquisition or Healthway. Healthway initiated a primary revolver raise in the fourth quarter that ultimately funded in early 2026 and contained a substantial MOA component that effectively shifted value from the term loan to the revolver tranche. While Cyan participated in the revolver upsize and ultimately benefited on a total position value basis from the incremental accretion in the revolver tranche versus our pro rata ownership of the term loan, the shift in value resulted in non-recrual status for our term loan holding. On an absolute basis, non-recruals continue to be in line with historical experience, and we are pleased with the continued credit performance of our portfolio, particularly in the current environment. Overall, our portfolio remains defensive in nature with approximately 81% in first-name investments. Approximately 98% of our portfolio remains risk-rated 3 or better. Our risk-rated 3 investments, which are investments where we expect full repayment but are either spending more engagement time and or I've seen increased risk to the initial asset purchase, increased from approximately 10.4% in the third quarter to 11.5% in Q4. I'll now turn the call over to Keith.

Okay, thank you, Greg, and good morning, everyone. During the fourth quarter, net investment income was $18.3 million, or $0.35 per share, compared to $38.6 million, or $0.74 per share, reported in the third quarter. Total investment income was $53.8 million during the fourth quarter, as compared to $78.7 million reported during the third quarter. The decrease in total investment income was driven primarily by lower interest income earned on our investments as a result of certain investments being restructured in the prior quarter and other yield-enhancing prepayment fees and accelerated OID that did not reoccur this quarter. We also had lower transaction fees earned from origination and restructuring activities when compared to the prior quarter, which was slightly offset by an increase in dividend income received from one of our investments during the fourth quarter. On the expense side, total operating expenses were $35.5 million compared to $40.1 million reported in the third quarter. The decrease in operating expenses was primarily driven by lower advisory fees due to lower investment income earned during the quarter. At December 31st, we had total assets of approximately $1.9 billion and total equity or net assets of $708 million with total debt outstanding of $1.1 billion and 51.4 million shares outstanding. Our portfolio at fair value ended the quarter at 1.7 billion, and the weighted average yield on our debt and other income-producing investments at amortized cost was 10.7%, which is slightly down from 10.9% in the third quarter. At December 31st, our NAV was $13.76 per share as compared to $14.86 per share at the end of September. The decrease of $1.10 per share, or 7.4%, was primarily due to unrealized mark-to-market price decreases in our portfolio, mostly from price declines in our equity book, which was slightly offset by the creative nature of our share repurchase program during the quarter. We ended the fourth quarter with a strong and flexible balance sheet with over $1 billion in unencumbered assets, a strong debt servicing capacity, with an interest coverage ratio of over two times and solid liquidity. We had over $120 million in cash and short-term investments and another $100 million available under our credit facilities to further finance our investment pipeline and continue to support our existing portfolio companies. In terms of our debt capital, at December 31st, we continue to have a healthy debt mix with about 65% in unsecured and 35% in senior secured. About 70% of our debt is in floating rate, which aligns well and creates a natural hedge with our mostly floating rate investment portfolio. A well-diversified debt structure is focused on unsecured debt in order to maximize our balance sheet flexibility, and at the same time creates a strong buffer for our financial covenants. At the end of the quarter, our net debt-to-equity ratio increased to 1.44 times from 1.28 times at the end of September. and the weighted average cost of a debt capital was about 7.35%, which is slightly down from the third quarter due to lower SOFA base rates quarter over quarter. The increase in the net leverage ratio was impacted primarily by the quarterly decrease in NAV and an increase in the average debt outstanding during the quarter. During the quarter, total debt increased by $48 million due to the timing of paying down our senior secured debt with a portion of the net proceeds raised from the unsecured debt offering in December. During the quarter, we issued 172.5 million of senior unsecured notes from certain institutional investors, consisting of 125 million in senior unsecured notes with a fixed interest rate of 7.7% due 2029, and 47.5 million in senior unsecured notes with a fixed interest rate of 7.41% due 2027. Subsequent to year end, on February 9th, we completed a public baby bond offering, issuing $135 million on new senior unsecured notes with a fixed interest rate of 7.5% due 2031, which listed and commenced trading on the New York Stock Exchange under the ticket symbol CICC on February 12th. The net proceeds from these offerings were used to fully repay our $125 million in senior unsecured notes due 2026 that matured in February, and the remaining net proceeds will be used to further reduce our outstanding senior secured bank debt. Now turning to distributions, during the fourth quarter, we paid a base distribution to our shareholders at 36 cents per share, which is the same as the third quarter base distribution. For the full year in 2025, we declared and paid total distributions of $1.44 per share, all of which was from our quarterly base distributions. As a result, the trailing 12-month distribution yield through the fourth quarter based on the average NAV was about 9.9%, and the trailing 12-month distribution yield based on the quarter-end market price was 14.9%. As previously announced, we changed the timing of paying base distributions to our shareholders from quarterly to monthly beginning in January 2026 to better align with our shareholder expectations. And as announced this morning, we declared our second quarter base distribution of $0.30 per share, which is the same as the first quarter. The second quarter base distribution will be paid monthly in April, May, and June at $0.10 per share per month. Okay, with that, I will now turn the call back to the operator, who will open the line for questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 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. We'll look for questions. And the first question comes from the line of Eric Zwick. with Lucid Capital Markets. Please proceed.

Thanks. Good morning. I wanted to start with a question on leverage. And you noted that that was up in the quarter. And, you know, some of that was driven by the, you know, fair value marks in the equity portfolio. But it's running, you know, fairly above kind of where you've run in the past. So just curious on your thoughts for the appropriate level of leverage today and how you plan to kind of manage that over the next year or so.

Good morning, Eric. It's Keith. Yeah, so in terms of the elevated leverage, I think the way that we're looking at it is, you know, over the next few quarters, some organic growth in the NAV positions may help. But ultimately, we expect to use some of the scheduled and unscheduled repayment activity we typically receive to de-lever.

That's helpful. Thanks. Next question, just on, you know, PIC income, I think you've previously indicated a desire to reduce the contribution from PIC income. You know, looking at the results in 2025, it was up on both absolute dollar terms as well as a percentage of total investment income. So first, just wondering, could you provide a split of kind of PIC by design versus restructured PIC? And, you know, do you still have plans to, you know, kind of aims to reduce that overall contribution?

Hi, Eric. It's Greg. From your categorization, as we released on this trip, about 75% of our PIC is by design where it's either incremental cash interest or we structured it intentionally that way on a deal basis. So it's about 75% based on those classifications. With respect to going forward, our PIC is concentrated in a few names that we do expect to refinance over the next 12 to 18 months. So we do expect that number organically to come down significantly as those deals repay.

I appreciate the update there. And excuse me, the last one for me. In the press release, you noted that the weighted average interest coverage for the portfolio increased quarter over quarter from 1.9 to about 2.3% if I round, which is nice to see. I'm curious if that was primarily a reflection of just lower interest rates flowing through the portfolio if you're also seeing some improvement in EBITDA as well?

Yes. So it's a combination of both. It's a combination of increased EBITDA as well as the reduction in base rate. So the base rate is obviously more of algebraic, but we did see EBITDA growth over the course.

Thanks for taking my questions today.

Thank you. This concludes the Q&A session. I'd like to turn the call back over to Michael Reisner for closing remarks.

Great. Well, I want to thank everybody for tuning in today and we'll be back to you in a couple months with our Q1 results. Take care, everybody.

Thank you. This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation.