CION Investment Corporation

Good morning and welcome to Scion Investment Corporation's first quarter 2026 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 www.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. Cyan Investment Corporation's Co-Chief Executive Officer, Greg Bresner, President and Chief Investment Officer, and Keith Frantz, Chief Financial Officer. With that, I would now like to turn the call over to Mark Battle. Please go ahead, Mark.

Thank you and good morning, everyone. I want to start this morning the way we have on prior calls, by putting our quarterly results in the proper context before walking through the details. While this was not our strongest quarter from a headline numbers perspective, I want to make clear that the story underneath those numbers is more nuanced than the headline suggests. And we believe there is quite a bit to feel good about as we look at the underlying health of our portfolio. I think it is important that investors and analysts understand what actually drove our results this quarter and evaluate us not quarter to quarter, but on a more long-term basis. Let me start with investment income. We reported 25 cents per share for the first quarter, which is below our monthly base distributions totaling 30 cents per share for the first quarter. This shortfall was driven primarily by lower transaction fees recorded during the quarter due to lower repayment and investment activity and lower dividend income earned on our investments. This shortfall was also driven by higher interest expense during the first quarter due to the refinancing of our lower yielding fixed rate notes and senior secured debt into higher yielding fixed rate unsecured notes and the timing of paying down our debt with the net offering proceeds received from the recent issuances of our new unsecured notes due to potential prepayment penalties. as all of our debt is currently at their contractual minimums. As a result, we carried more excess cash on our balance sheet than we would have under normal operating conditions, essentially sitting on proceeds we could not deploy. This was attributable to a specific capital structure decision we made that we believe was in the long-term interest of our shareholders. which we do not view as a reflection of the underlying earnings power of our portfolio. Greg and Keith will provide further context, but I want to be clear that we believe that the underlying earnings capacity of our portfolio remains intact, and we remain optimistic about the trajectory from here. Turning to NAV, our net asset value declined 4.7% quarter over quarter to $13.11 per share from $13.76 at year end. As we have discussed on prior calls, mark-to-market movements in our portfolio can introduce quarterly volatility, and this quarter was no exception. Importantly, over 80% of the downward movement in our marks this quarter were unrealized in nature and driven by market-level influences. Movements in comparable public company valuations and broader credit spread widening and not by a fundamental credit deterioration at our portfolio companies. This is an important distinction and one that gives us confidence in the underlying resilience of the book. I also want to address something directly that I know has been a topic of conversation in the BDC space broadly, the scrutiny around private credit marks and valuation rigor. We welcome that conversation because we believe that we have an extremely disciplined and transparent valuation process. We utilize four independent third-party valuation providers, and the vast majority of our portfolio is subject to full independent review and scrutiny every quarter. We believe that process is comprehensive and rigorous, and we are committed to maintaining that standard. At the same time, the incorporation of third-party macro assumptions and market-level inputs can at times introduce marks on certain assets that may not fully reflect the underlying credit fundamentals of those positions. particularly given the short and senior nature of our first lien holdings, which represents approximately 81% of the portfolio at the end of Q1. We believe that the heightened need to focus on software credit quality across the private credit industry may have contributed to a broader tightening of third-party valuation assumptions that, given the sector-wide nature of that scrutiny, could have affected our portfolio in a manner disproportionate to our actual exposure. with software representing just 1.8% of our portfolio, well below the 20% to 25% average reported across many private credit portfolios, we do not believe the degree of mark-to-market pressure we experienced this quarter is fully consistent with our underlying fundamentals. On credit quality more broadly, I am pleased to report that our portfolio continues to hold up very well. Our first lien book remains the core of our strategy and continues to perform well. Weighted average interest coverage across the debt portfolio was a healthy 2.08 times for the quarter, a level we view as consistent with the defensive construction of our portfolio. weighted average net leverage on our debt portfolio was 4.62 times, essentially flat, with 4.7 times in the prior quarter. From an internal risk rating perspective, our weighted average risk rating was essentially unchanged at 2.08 versus 2.09 in the prior quarter. And our risk-rated four names improved quarter over quarter to 1.55% of the portfolio at fair value, down from 1.9% in Q4. Our risk-rated five names remained a very small portion of the portfolio at 0.54%. We had seven upgrades and eight downgrades in the quarter. a largely balanced picture that we believe reflects no meaningful deterioration in the overall composition of the book. On non-accruals, I am pleased to share some positive news. Our non-accrual percentage on a fair value basis improved to 1.53% as of March 31st, down from 1.78% in the fourth quarter. The principal new addition to non-recrual status this quarter was Lux Credit Consultants, which was in the midst of a sale process through quarter end. And I'm glad to report that subsequent to quarter close, that sale was successfully completed. As a result, we expect that Lux will be removed from non-recrual status in Q2. Generally, our non-recruals for the quarter were stable and consistent with our historical levels. More broadly, despite the volume of commentary out there about stress in private credit, we are simply not seeing broad-based deterioration across our middle-market borrowers. And that is an important message. We believe that the domestic economy, while not without risks, continues to demonstrate underlying resilience. Our portfolio companies, the majority of which serve B2B and markets, continue to operate in line with or close to our expectations. We remain mindful of the ongoing geopolitical developments and the uncertain macro backdrop. But our ground-level view across 89 portfolio companies and 23 industries reflects a book that we believe is performing well and does not support the broad distress narrative that circulates private credit portfolios in the press. Finally, we repurchased approximately 1.1 million shares during the quarter at an average price of $8.71, and we believe current prices represent a compelling opportunity to acquire our shares at a meaningful discount to fair value. We intend to continue such repurchases while seeking to simultaneously reduce our overall leverage through debt repayments. a combination we believe will position Scion well for the remainder of 2026. Keith will provide additional details on our capital structure and distribution activity. 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.

Prior to covering our investment and portfolio activity for Q1, I would like to expand on Mark's comments regarding our nominal level of software exposure within the portfolio. We have three software portfolio companies totaling approximately 1.8% of portfolio fair value or 2% on an amortized cost basis. We have no ARR loans in the portfolio. As a firm, we've historically not invested in software as we were unwilling to lend against an ARR growth methodology with negative EBITDA profile at closing. In terms of our Q1 investment activity, we remained highly selective with new portfolio investments and focused on transactions within our portfolio companies and the repurchase of our shares. We also worked to balance the timing of investments versus repayment amounts while working to reduce leverage towards our targeted net leverage range. Overall, we had fewer exiting repayments for the quarter versus our Q4 level as certain repayments slipped into Q2. During the quarter, we continued to pass on new investment opportunities based on credit and pricing considerations. While secondary credit market conditions remained choppy based on macro concerns and potential cracks in private credit, there remained a significant bifurcation from the new issue market. New issue cohort pricing continued to be driven by the hangover of record 2024 and 2025 private debt fundraising, which translated into lower coupon spreads, higher leverage levels, and looser credit documents in the new issue market. We focused our Q1 investment 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 6.1%. As we discussed in previous quarters, the majority of our annual PIC income is strategically derived from either highly structured first lien investments or where PIC income is incremental to our cash coupon. Together, these categories represented approximately 82% of our total PIC investments in Q1, up from 75% in Q4 of 2025. Over 99% of our PIC investments are in first lien assets. As a result, we believe this PIC income does not compare to restructured PIC income resulting from a deterioration in credit. Turning now to our Q1 investment and portfolio activity. Our Q1 investment activity consisted of investments in two new portfolio companies, Anchor QEA and Dependable Acquisition, both specialty business service providers, and incremental add-on investments and secondary purchases in existing portfolio companies, including American Clinical, CareStream Health, Coinmoc, David's Bridal, Healthway, Juice Plus, StatinMed, Stanglehill, and WorkGenius. During Q1, we made it a total of approximately 69 million in investment commitments across two new and nine existing portfolio companies, of which 54 million was funded. We also funded a total of $12 million of previously unfunded commitments. We had sales and repayments totaling $38 million for the quarter, which consisted of the full repayment of our first lien holdings in IMW and the men's warehouse. As a result of all of these activities, our net funded investments increased by approximately $28 million during the quarter. As Mark referenced, our NAV decrease during the quarter was driven primarily by declines in the unrealized marked market value of our portfolio. This was in large part driven by reductions in market multiples and resulting valuations due to macro headwinds ranging from the Iranian war and widespread market concerns regarding potential crack in private credit, most specifically the software concentrations within the private capital sector and potential AI impact to those investments. For the quarter, the ratio of mark-to-mark declines versus mark-to-mark increases for our investments was approximately 2 to 1, Our largest unrealized declines for the quarter were from our investments in Lux Credit, FuseFX, LabDeer, which is also known as 4Wall Entertainment, SIMR StatinMed, and the common equity of David's Bridal. Lux Credit represented our largest decline as the sale process for the company resulted in final bids well below the initial indications of interest based on the company's significant asset base and EBITDA profile. Rather than the lenders restructuring and recapitalizing the company with additional investment, the majority of lenders decided to pursue a cash sale transaction and move on rather than restructure and invest. The sale closed early in the second quarter. The marked value of our investments in FuseFX and LabGear were negatively impacted by reduced trailing EBITDA performance and lower multiples as the sector rebuilds event and production pipelines from the writer strike that delayed the release queue of new scripts and production content throughout the industry. Through January and February of 2026, LabGear's performance demonstrated stronger than projected recovery that we expect to continue into Q2. The unrealized decline in the market of our SIMR statin med term loan was driven by both the relative increase in value to priority senior tranches, where Cyan has a larger pro-rata interest, and lower revenue multiples derived from quasi-comparable large-cap biopharma service companies impacted by AI and software concerns. As we have mentioned on previous quarterly calls, we expect to see significant quarter-to-quarter volatility in the marks of David's bridal 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. In the face of difficult macro market sentiment, we also had a number of portfolio companies where the marks increased for the quarter due to stronger financial performance and projected outlook, including Longview Power, Hollander, Trimark, Avison Young, and Services Compression. From a portfolio credit perspective, our non-recruits decreased from 1.78% of fair value in Q4 to 1.53% at the end of Q1. On an amortized cost basis, the number increased from 4.32% of cost to 5.35%. We added one new name to non-accrual, our term one investment in Lux Credit Consultants. Given the sale of the company in early Q2, Lux Credit will be removed from non-accrual next quarter. On an absolute basis, non-accruals continue to be in line with historical experience, and we are pleased with the continued credit performance of our portfolio, particularly in the current macro environment. Overall, our portfolio remains defensive in nature with approximately 81% in first lien investments. Approximately 98% of our portfolio remains risk-rated three or better. Our risk-rated three investments, which are investments where you expect full repayment, but are either spending more engagement time and or have seen increased risks, the initial asset purchase increased from approximately 11.5% in Q4 to 12.9% in Q1. I'll now turn the call over to Keith.