CION Investment Corporation

Good morning and welcome to Scions Investment Corporation's third quarter 2026 earnings conference call. 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.sionbdc.com in the Investor Relations Resources section and should be reviewed in conjunction with the company's Form 10-Q filed with the SEC. As a reminder, this conference is being recorded for replay purposes. Please note that today's conference call may contain forward-looking statements which are not guaranteed 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 Michael Reisner, Scions Investment Corporation's Co-Chief Executive Officer, Gregg Bresner, President and Chief Investment Officer, and Keith Franz, Chief Financial Officer. With that, I would now like to turn the call over to Michael Reisner. Please go ahead, Michael.

Thank you, and good morning, everyone. Last quarter, we told you management had a plan to strengthen Scions' balance sheet. This quarter, we executed on it. We repaid $114.8 million of public Israeli bonds in full at maturity, which avoided any contractual make-hold fees prior to that date. After expiration of the make-hold period, we also fully repaid the $200 million outstanding under our JP Morgan secured facility and completed its early termination. Further, we completed a new non-recourse off-balance sheet joint venture, Senior Loan Fund Partners, with a large institutional partner. As a result, we ended the quarter at 1.3 times net debt to equity, down from 1.52 times last quarter and lower than the approximately 1.35 times target we previously provided. The execution of this deleveraging plan impacted our near-term earnings during the quarter. We reported net investment income of 25 cents per share compared to 29 cents last quarter. are partially impacted by one-time non-recurring items. Our net asset value ended the quarter at $13.20 per share, down 2.7% from $13.57 last quarter, mostly from unrealized mark-to-market price decreases on certain investments and distributions in excess of NII. Gregg will walk you through the specific names with transactions this quarter. Our near-term earnings decline was largely the result of strategic decisions we made rather than an overall decline in the credit quality of the portfolio. To retain cash for deleveraging, we made no new platform investments this quarter. Our only investments were follow-ons to our existing portfolio companies. New platform investments often provide enhanced economics through incremental origination and structuring fees, and this quarter there were none. In addition, our earnings were impacted by our debt repayment activity. Most specifically, the early repayment and termination of our J.P. Morgan facility ahead of its scheduled maturity. That alone reduced NII by approximately 3 cents per share due to the accelerated amortization of the facility's remaining debt issuance costs. We were also impacted by non-recurring costs associated with forming the new joint venture, the reduction of a deferred fee on a legacy tranche of a portfolio company as a result of a new priming tranche that we led for the company, and the elimination of accrued income on our term loan investment in Thrill One, following the company's post-bankruptcy reorganization in which we received a new investment tranche. Together, all these items reduced NII by roughly 15 cents per share. We announced the completion of our deleveraging in our September 29th press release, but I think it bears repeating. In a single quarter, We reduced our balance sheet debt from $1.17 billion to $897 million. The joint venture was also another validator of certain of our loan marks. Last quarter, we sold more than $54 million of our assets at approximately 99% of par. This quarter, a large independent institutional partner comprehensively diligence 20 of our first lien loans and purchased them through the joint venture for $180 million. or 99.8% of PAR. As Gregg will discuss, our total sales and repayments this quarter came in at a blended value above 99.6% of PAR, further confirmation of certain of our fair value marks. Firstly, investments dipped to about 72% of the portfolio, largely because our portfolio is smaller after deleveraging and after selling certain loans to the JV, where we hold now an equity interest. We expect that percentage to rise as we seek to continue to monetize equity positions such as Longview Power, which alone currently represents more than 6% of our total investment portfolio. The media is still focused on private credit defaults and macroeconomic risk. Fitch's US private credit default rate recently reached 6.3%. Against that backdrop, we are very pleased with how our portfolio is performing. We've placed no new names on non-accrual status this quarter, and 97.8% of our portfolio is risk rated 3 or better. Gregg will take you through some of these details. We've previously announced declared base distributions of $0.10 per share for each of October, November, and December, which is unchanged at $0.30 for the fourth quarter. For 2027, we expect to set base distributions at $0.25 per share per quarter. And here are the reasons. First, we have reduced our debt on our balance sheet, which makes Scion a stronger company, but also leaves us with a smaller earning portfolio. Second, until we have completed share repurchases, we will be selective about growing our investment portfolio through new platform deals, resulting in a reduction in the fees they tend to generate for us. We'd rather pay a distribution we are confident we can cover from core earnings than stretch to keep a level that depends on robust transaction activity. We continue to expect the publicly announced sale of Longview Power to a strategic acquirer to close in the fourth quarter of 2026 or the first quarter of 2027, subject to regulatory approval. We expect significant gains on the sale, which we believe will provide us with enhanced liquidity and our first priority will be to seek the resumption of share repurchases. We did not repurchase shares in the third quarter and I want to explain why. First, we were conserving cash to complete our deleveraging strategy. Second, we were in possession of material non-public information about David's Bridal and Pearl, which prevented us from signing a new repurchase plan. Gregg will walk you through the proposed David's Bridal and Pearl transactions, so I'll focus on why it matters to Scion shareholders. David's Bridal is our largest exposure. If the transactions are completed, our consolidated investment will be divided into two separately governed companies and a meaningful percentage of that investment would be publicly traded. That would provide our investors with visible market values for the publicly traded portion of those investments and we believe will give us a path to monetize and reduce our exposure over time. These transactions are currently under a non-binding letter of intent. There is no assurance that a definitive agreement will be signed or that the transactions will close on the terms or timeline publicly disclosed or at all. However, we are cautiously optimistic. Last quarter, we said the market seems worried about four things. Our marks, our ability to deliver, the dividend and software exposure. Since then, third parties have priced certain of our loans at or near our marks once again. We have delivered below our target. We've given you our 2027 base distribution expectations in advance based on our reasonable estimate of core earnings and software is still around 2% of our portfolio. With the Longview sale expected to close in the coming months, we intend to seek the resumption of repurchases of our stock at what we believe is a significant discount to its value. With that, I will now turn the call over to Gregg.

Thank you, Michael, and good morning, everyone. As Michael discussed, during the quarter, we focused on completing our deleveraging plan as we seek to position the company to recommence share repurchases. We also exclusively focused our Q3 funded investment activity on supporting our existing portfolio companies, and we received approximately $45 million in full repayments from borrowers during the quarter. We limited our Q3 investment activities to our existing portfolio companies for corporate investments, working capital, and other strategic transactions. The weighted average yield for our new direct first lean 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 PIC income is strategically derived from either highly structured first lien investments or our PIC income is incremental to our cash coupon. Together, these categories represented approximately 81% of our total PIC investment income in Q3, down from approximately 85% in Q2. Over 99% of our PIC investments are in first lien assets. As a result, we believe this PIC income Thank you for joining us. We funded add-on investments in existing portfolio companies, including Anthem, ARC, Avison Young, Berlitz, David's Bridal, Innative, StatinMed, and Trademark Global. During Q3, we completed approximately 78 million in investment commitments across 11 existing portfolio companies, of which 72 million was funded. We also funded a total of 11 million of previously unfunded commitments. We had sales and repayments totaling $256 million for the quarter at a blended value of over 99.6% of par, which included our new first lien senior loan joint venture with an institutional investor, where we sold $180 million of such loans at a price over 99.8% of par. We additionally received full repayment of our first lien positions in Core Health Fitness, DermCare Management, and RumbleOn. As a result of all these activities, our net funded investments decreased by approximately 173 million during the quarter. In his commentary, Michael mentioned the announced sale transaction of Longview Power to a strategic buyer. Longview was one of our earliest investments within our opportunistic special situation strategy where we identify and acquire lightly syndicated first lien loan tranches in what we believe are quality companies at significant discounts to par due to technical or balance sheet related issues and then may have an active role in the processes that drive the restructuring or recapitalization of these investments to position the companies for future success. Our investment in Longview began with a discounted first lien term loan purchase in September of 2018, followed by a series of strategic add-on investments. Additional examples of our special situation strategy included our investments in Yakmat, CareStream Health, Southeast Grocers, Tensar, PureStar, Heritage Power, and Dayton Superior. We have a number of special situation investments remaining in the portfolio that have yet to be realized and we are actively working to achieve our monetization success for these investments. As Michael mentioned, our NAV movement during the quarter was driven primarily by unrealized mark-to-market price decreases on certain of our investments. Markets were still somewhat affected by the macro sentiments regarding the potential crack in private credit most specifically the software concentrations within the private capital sector and the potential impact of AI on those investments. As a reminder, Cyan has not been a significant software investor historically and has only 2% of its portfolio in the software sector with no ARR-based loans as of Q3. Our increase in unrealized values during Q3 was driven primarily by our equity investments. Our largest increases for the quarter were our equity positions in CareStream Health, David's Bridal, Juice Plus, and Palmetto Solar. Our largest unrealized decliners for the quarter were our investments in Berlitz, Gilead Martinez, and Addison Young. The decline in the carrying value of our Longview Power equity investment was driven by the company's payment of a cash dividend during the quarter. As we have mentioned on previous quarterly calls, we expect to see significant quarter-to-quarter volatility in the value 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. As we mentioned last quarter, David's is in the process of separating Pearl, David's AI-powered wedding planning, media, commerce, and vendor marketplace platform from David's traditional retail brick-and-mortar operations in order to enhance future prospects for both companies. Post-quarter on October 22nd, David Spritel publicly announced that it executed a letter of intent for a proposed business combination between Pearl and K&F Growth Acquisition Corp 2, a publicly traded special purpose acquisition corporation. The proposed business combination would establish Pearl as a standalone public company as expected to accelerate growth and innovation through its proprietary AI technology, scalable pure play online business model, and continued synergistic relationship with David's Bridal established physical retail business. The executed letter of intent values Pearl at a pro forma enterprise value of 350 million and contemplates a $75 million pipe investment transaction. The parties are working towards the completion of definitive agreements. The targeted closing date for the proposed transaction is during the first half of 2027, subject to the completion of definitive agreements and the satisfaction of closing conditions. Last quarter, we discussed the bankruptcy of Thrill One. During Q3, Thrill One exited bankruptcy with a plan of reorganization whereby our legacy term loan investment was exchanged into a new investment tranche. While this transaction was contemplated and valued in Q2, the exchange resulted in a realized loss on the legacy term loan investment with the unrealized value of the new reorganized investment tranche in Q3. From a portfolio credit perspective, our non-accruals amounted to 1.63% and 4.85% of the total investment portfolio at fair value and amortized cost respectively at the end of Q3, which increased from 1.44% and 4.41% respectively at the end of Q2. There were no new names added or removed from non-accrual status in Q3 and the changes in percentages were driven by the decrease in total portfolio value primarily due to the execution of our deleveraging plan. 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 72% in first lien investments. As Michael discussed, we expect the percentage of first lien investments in the portfolio to increase over the next few quarters as we seek to monetize equity investments such as Longview Power. 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 have seen increased risk since the initial asset purchase increased from approximately 14.1% in Q2 to 17.5% in Q3, the majority of which was driven by the decrease in total portfolio value primarily due to