Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this Quarterly Report on Form 10-Q, “we,” “us,” “our” or similar terms include CĪON Investment Corporation and its consolidated subsidiaries. In addition, the term "portfolio companies" refers to companies in which we have invested, either directly or indirectly through our consolidated subsidiaries.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021. In addition to historical information, the following discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking information that involves risks and uncertainties. Amounts and percentages presented herein may have been rounded for presentation and all dollar amounts, excluding share and per share amounts, are presented in thousands unless otherwise noted. In addition, all share and per share amounts have been retroactively adjusted to reflect the Reverse Stock Split discussed below and in Note 3 to our consolidated financial statements included in this report.
Forward-Looking Statements
Some of the statements within this Quarterly Report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve numerous risks and uncertainties, including statements as to:
• our future operating results;
• our business prospects and the prospects of our portfolio companies, including our and their ability to achieve our respective objectives as a result of COVID-19;
• the impact of the investments that we expect to make;
• the ability of our portfolio companies to achieve their objectives;
• our current and expected financings and investments;
• the adequacy of our cash resources, financing sources and working capital;
• the use of borrowed money to finance a portion of our investments;
• the timing of cash flows, if any, from the operations of our portfolio companies;
• our contractual arrangements and relationships with third parties;
• the actual and potential conflicts of interest with CIM and its affiliates;
• the ability of CIM's investment professionals to locate suitable investments for us and the ability of CIM to monitor and administer our investments;
• the ability of CIM and its affiliates to attract and retain highly talented professionals;
• the dependence of our future success on the general economy and its impact on the industries in which we invest, including COVID-19 and the related economic disruptions caused thereby;
• the effects of a changing interest rate environment;
• our ability to source favorable private investments;
• our tax status;
• the effect of changes to tax legislation and our tax position;
• the tax status of the companies in which we invest; and
• the timing and amount of distributions and dividends from the companies in which we invest.
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In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this Quarterly Report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. Other factors that could cause actual results to differ materially include:
• changes in the economy;
• risks associated with possible disruption in our operations or the economy generally due to terrorism, pandemics, or natural disasters; and
• future changes in laws or regulations and conditions in our operating areas;
• the price at which shares of our common stock may trade on and volume fluctuations in the NYSE; and
• the costs associated with being a publicly traded company.
We have based the forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to review any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Overview
We were incorporated under the general corporation laws of the State of Maryland on August 9, 2011 and commenced operations on December 17, 2012 upon raising proceeds of $2,500 from persons not affiliated with us, CIM or its affiliates. We are an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act. We elected to be treated for federal income tax purposes as a RIC, as defined under Subchapter M of the Code.
Our investment objective is to generate current income and, to a lesser extent, capital appreciation for investors. Our portfolio is comprised primarily of investments in senior secured debt, including first lien loans, second lien loans and unitranche loans, and, to a lesser extent, collateralized securities, structured products and other similar securities, unsecured debt, and equity, of private and thinly-traded U.S. middle-market companies. In connection with our debt investments, we may receive equity interests such as warrants or options as additional consideration. We may also purchase equity interests in the form of common or preferred stock in our target companies, either in conjunction with one of our debt investments or through a co-investment with a financial sponsor.
On October 5, 2021, shares of our common stock began trading on the NYSE under the ticker symbol “CION”. The Listing accomplished our goal of providing our shareholders with greatly enhanced liquidity.
We are managed by CIM, our affiliate and a registered investment adviser. Pursuant to an investment advisory agreement with us, CIM oversees the management of our activities and is responsible for making investment decisions for our portfolio. On April 5, 2021, our board of directors, including a majority of directors who are not interested persons, approved the amended and restated investment advisory agreement with CIM for a period of twenty four months, which was subsequently approved by shareholders on August 9, 2021 (as described in further detail below). We and CIM previously engaged AIM to act as our investment sub-adviser.
On July 11, 2017, the members of CIM entered into the Third Amended CIM LLC Agreement for the purpose of creating a joint venture between AIM and CIG. Under the Third Amended CIM LLC Agreement, AIM became a member of CIM and was issued a newly-created class of membership interests in CIM pursuant to which AIM, among other things, shares in the profits, losses, distributions and expenses of CIM with the other members in accordance with the terms of the Third Amended CIM LLC Agreement, which results in CIG and AIM each owning a 50% economic interest in CIM.
On July 10, 2017, our independent directors unanimously approved the termination of the investment sub-advisory agreement with AIM, effective as of July 11, 2017, as part of the new and ongoing relationship among us, CIM and AIM. Although the investment sub-advisory agreement and AIM's engagement as our investment sub-adviser were terminated, AIM continues to perform certain services for CIM and us. AIM is not paid a separate fee in exchange for such services, but is entitled to receive distributions as a member of CIM as described above.
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On December 4, 2017, the members of CIM entered into the Fourth Amended CIM LLC Agreement under which AIM performs certain services for CIM, which include, among other services, providing (a) trade and settlement support; (b) portfolio and cash reconciliation; (c) market pipeline information regarding syndicated deals, in each case, as reasonably requested by CIM; and (d) monthly valuation reports and support for all broker-quoted investments. AIM may also, from time to time, provide us with access to potential investment opportunities made available on Apollo's credit platform on a similar basis as other third-party market participants. All of our investment decisions are the sole responsibility of, and are made at the sole discretion of, CIM's investment committee, which consists entirely of CIG personnel.
The amended and restated investment advisory agreement was approved by shareholders on August 9, 2021 at our reconvened 2021 annual meeting of shareholders. As a result, on August 10, 2021, we and CIM entered into the amended and restated investment advisory agreement in order to implement the change to the calculation of the subordinated incentive fee payable from us to CIM that expresses the hurdle rate required for CIM to earn, and be paid, the incentive fee as a percentage of our net assets rather than adjusted capital.
Upon the occurrence of the Listing on October 5, 2021, we and CIM entered into the second amended and restated investment advisory agreement in order to implement the changes to the advisory fees payable from us to CIM that (i) reduced the annual base management fee, (ii) amended the structure of the subordinated incentive fee on income payable from us to CIM and reduced the hurdle and incentive fee rates, and (iii) reduced the incentive fee on capital gains payable from us to CIM (as described in further detail in Notes 2 and 4 to our consolidated financial statements included in this report). Also, a complete description of the second amended and restated investment advisory agreement is set forth in Proposal No. 3 in our definitive proxy statement filed on May 13, 2021.
On September 21, 2021, we effected a two to one reverse split of our shares of common stock under which every two shares of our common stock issued and outstanding were automatically combined into one share of our common stock, with the number of issued and outstanding shares reduced from 113,916,869 to 56,958,440. The Reverse Stock Split Amendment also provided that there was no change in the par value of $0.001 per share as a result of the Reverse Stock Split. The Reverse Stock Split did not modify the rights or preferences of our common stock.
We seek to meet our investment objective by utilizing the experienced management team of CIM, which includes its access to the relationships and human capital of its affiliates in sourcing, evaluating and structuring transactions, as well as monitoring and servicing our investments. We focus primarily on the senior secured debt of private and thinly-traded U.S. middle-market companies, which we define as companies that generally possess annual EBITDA of $75 million or less, with experienced management teams, significant free cash flow, strong competitive positions and potential for growth.
Revenue
We primarily generate revenue in the form of interest income on the debt securities that we hold and capital gains on debt or other equity interests that we acquire in portfolio companies. The majority of our senior debt investments bear interest at a floating rate. Interest on debt securities is generally payable quarterly or monthly. In some cases, some of our investments may provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued, but unpaid, interest generally will become due at the maturity date. In addition, we may generate revenue in the form of commitment and capital structuring fees, monitoring fees, fees for providing managerial assistance and possibly consulting fees and performance-based fees. Any such fees generated in connection with our investments will be recognized when earned.
Operating Expenses
Our primary operating expenses are the payment of management fees and subordinated incentive fees on income under the investment advisory agreement and interest expense on our financing arrangements. Our investment advisory fees compensate CIM for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. We bear all other expenses of our operations and transactions.
Recent Developments
First Amendment to the Third Amended JPM Credit Facility
On March 28, 2022, 34th Street entered into the JPM First Amendment. Under the JPM First Amendment, the aggregate principal amount available for borrowings was increased from $575,000 to $675,000, subject to conditions described in the JPM First Amendment. Additional advances of up to $100,000 under the JPM First Amendment bear interest at a floating rate equal to the three-month SOFR, plus a credit spread of 3.10% per year, and a LIBOR to SOFR credit spread adjustment of 0.15%. 34th Street incurred certain customary costs and expenses in connection with the JPM First Amendment. No other material terms of the Third Amended JPM Credit Facility were revised in connection with the JPM First Amendment.
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2022 More Term Loan
On April 27, 2022, we entered into the More Term Loan Agreement with More Provident, which provided for an unsecured term loan to us in an aggregate principal amount of $50,000. On April 27, 2022, we drew down $50,000 of borrowings under the 2022 More Term Loan. After the deduction of fees and other financing expenses, we received net borrowings of approximately $49,000, which we used for working capital and other general corporate purposes.
Advances under the 2022 More Term Loan bear interest at a floating rate equal to the three-month SOFR, plus a credit spread of 3.50% per year and subject to a 1.0% SOFR floor, payable quarterly in arrears. Advances under the 2022 More Term Loan mature on April 27, 2027. We have the right to, at our option, prepay all or any portion of advances then outstanding together with a prepayment fee equal to the higher of (i) zero, or (ii) the discounted present value of all remaining interest payments that would have been paid by us through the maturity date with respect to the principal amount of such advance that is to be prepaid or becomes due and payable pursuant to the More Term Loan Agreement. The discounted present value portion of the prepayment fee is calculated by applying a discount rate on the same periodic basis as that on which interest on advances is payable equal to the three-month SOFR plus 2.00%.
Advances under the 2022 More Term Loan are our general unsecured obligations that rank pari passu with all existing and future unsecured unsubordinated indebtedness issued by us, rank effectively junior to any of our secured indebtedness (including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness, and rank structurally junior to all existing and future indebtedness (including trade payables) incurred by certain of our subsidiaries, financing vehicles or similar facilities.
The More Term Loan Agreement contains other terms and conditions, including, without limitation, affirmative and negative covenants such as (i) information reporting, (ii) maintenance of our status as a BDC within the meaning of the Investment Company Act of 1940, as amended, (iii) minimum shareholders’ equity of 60% of our net asset value as of the year ended December 31, 2021 plus 50% of the net cash proceeds of the sale of certain equity interests by us after April 27, 2022, if any, (iv) a minimum asset coverage ratio of not less than 150%, and (v) an unencumbered asset coverage ratio of 1.25 to 1.00, provided that (a) first lien senior secured loans and cash represent more than 65% of the total value of unencumbered assets used by us for purposes of the ratio and (b) equity interests or structured products in the aggregate represent less than 15% of the total value of unencumbered assets used by us for purposes of the ratio. In addition, the More Term Loan Agreement contains customary events of default with customary cure and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, breach of covenant, cross-default under our other indebtedness or derivative securities in an outstanding aggregate principal amount of at least $25,000, certain judgments and orders, and certain events of bankruptcy.
COVID-19
The rapid spread of COVID-19, and associated impacts on the U.S. and global economies and the financial and credit markets, initially had negatively impacted, and may again negatively impact, our business operations and the business operations of some of our portfolio companies. We cannot at this time fully predict the impact of COVID-19, including new variants, such as Delta and Omicron, on our business or the business of our portfolio companies, its duration or magnitude or the extent to which it will negatively impact our portfolio companies’ operating results or our own results of operations or financial condition, including, without limitation, our ability to pay distributions to our shareholders. We expect that certain of our portfolio companies will continue to experience economic distress for the foreseeable future and may significantly limit business operations if subjected to prolonged economic distress. These developments could result in a decrease in the value of certain of our investments.
COVID-19 initially had adverse effects on our investment income and may again have adverse effects in the future. These adverse effects may require us to restructure certain of our investments, which could result in reductions to our investment income or in impairments on our investments. In addition, disruptions in the capital markets have resulted in illiquidity in certain market areas. These market disruptions and illiquidity initially had an adverse effect on our business, financial condition, results of operations and cash flows. These events initially limited our investment originations, which may occur again in the future, and may also have a material negative impact on our operating results.
We will continue to carefully monitor the impact of COVID-19 on our business and the business of our portfolio companies. Because the full effects of COVID-19 are not capable of being known at this time, we cannot estimate the impacts of COVID-19 on our future financial condition, results of operations or cash flows, including its effects on us with respect to our compliance with covenants in our financing arrangements with lenders.
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Portfolio Investment Activity for the Three Months Ended March 31, 2022 and 2021 and the Year Ended December 31, 2021
The following table summarizes our investment activity, excluding short term investments and PIK securities, for the three months ended March 31, 2022 and 2021 and the year ended December 31, 2021:
Three Months Ended
March 31, Year Ended
December 31,
Net Investment Activity 2022 2021 2021
Purchases and drawdowns
Senior secured first lien debt $ 136,698 $ 181,990 $ 868,031
Unsecured debt — — 20,000
Equity 1,125 1,644 32,008
Sales and principal repayments (61,031) (189,274) (827,958)
Net portfolio activity $ 76,792 $ (5,640) $ 92,081
The following tables summarize the composition of our investment portfolio at amortized cost and fair value as of March 31, 2022 and December 31, 2021:
March 31, 2022
Investments Cost(1) Investments Fair
Value Percentage of
Investment
Portfolio
Senior secured first lien debt $ 1,648,172 $ 1,597,364 91.8 %
Senior secured second lien debt 55,547 36,875 2.1 %
Collateralized securities and structured products - equity 3,695 2,632 0.2 %
Unsecured debt 27,404 27,280 1.6 %
Equity 54,504 75,383 4.3 %
Subtotal/total percentage 1,789,322 1,739,534 100.0 %
Short term investments(2) 15,763 15,763
Total investments $ 1,805,085 $ 1,755,297
Number of portfolio companies 115
Average annual EBITDA of portfolio companies $48.9 million
Median annual EBITDA of portfolio companies $32.8 million
Purchased at a weighted average price of par 98.06 %
Gross annual portfolio yield based upon the purchase price(3) 8.64 %
(1) Represents amortized cost for debt investments and cost for equity investments. Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on our investments.
(2) Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less.
(3) The gross annual portfolio yield does not represent and may be higher than an actual investment return to shareholders because it excludes our expenses and all sales commissions and dealer manager fees and does not consider the cost of leverage.
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December 31, 2021
Investments Cost(1) Investments Fair
Value Percentage of
Investment
Portfolio
Senior secured first lien debt $ 1,564,891 $ 1,526,989 91.6 %
Senior secured second lien debt 55,455 38,583 2.3 %
Collateralized securities and structured products - equity 3,885 2,998 0.2 %
Unsecured debt 26,777 26,616 1.6 %
Equity 53,379 70,936 4.3 %
Subtotal/total percentage 1,704,387 1,666,122 100.0 %
Short term investments(2) 87,917 87,917
Total investments $ 1,792,304 $ 1,754,039
Number of portfolio companies 113
Average annual EBITDA of portfolio companies $50.4 million
Median annual EBITDA of portfolio companies $36.3 million
Purchased at a weighted average price of par 98.13 %
Gross annual portfolio yield based upon the purchase price(3) 8.62 %
(1) Represents amortized cost for debt investments and cost for equity investments. Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on our investments.
(2) Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less.
(3) The gross annual portfolio yield does not represent and may be higher than an actual investment return to shareholders because it excludes our expenses and all sales commissions and dealer manager fees and does not consider the cost of leverage.
The following table summarizes the composition of our investment portfolio by the type of interest rate as of March 31, 2022 and December 31, 2021, excluding short term investments of $15,763 and $87,917, respectively:
March 31, 2022 December 31, 2021
Interest Rate Allocation Investments Cost Investments Fair Value Percentage of
Investment
Portfolio Investments Cost Investments Fair Value Percentage of
Investment
Portfolio
Floating interest rate investments $ 1,539,482 $ 1,474,698 84.8 % $ 1,454,429 $ 1,403,097 84.2 %
Fixed interest rate investments 175,308 170,264 9.8 % 176,326 172,162 10.3 %
Non-income producing investments 50,970 71,863 4.1 % 49,845 67,532 4.1 %
Other income producing investments 23,562 22,709 1.3 % 23,787 23,331 1.4 %
Total investments $ 1,789,322 $ 1,739,534 100.0 % $ 1,704,387 $ 1,666,122 100.0 %
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The following table shows the composition of our investment portfolio by industry classification and the percentage, by fair value, of the total assets in such industries as of March 31, 2022 and December 31, 2021:
March 31, 2022 December 31, 2021
Industry Classification Investments Fair Value Percentage of
Investment Portfolio Investments Fair Value Percentage of
Investment Portfolio
Services: Business $ 320,042 18.4 % $ 240,316 14.4 %
Healthcare & Pharmaceuticals 244,993 14.1 % 250,049 15.0 %
Media: Diversified & Production 134,373 7.7 % 139,399 8.4 %
Services: Consumer 121,488 7.0 % 119,365 7.2 %
Chemicals, Plastics & Rubber 107,079 6.2 % 109,860 6.6 %
Diversified Financials 101,597 5.8 % 101,032 6.1 %
High Tech Industries 84,764 4.9 % 65,544 3.9 %
Capital Equipment 83,305 4.8 % 82,795 5.0 %
Media: Advertising, Printing & Publishing 81,747 4.7 % 94,610 5.7 %
Consumer Goods: Durable 57,098 3.3 % 58,124 3.5 %
Retail 57,066 3.3 % 56,726 3.4 %
Hotel, Gaming & Leisure 51,909 3.0 % 50,855 3.0 %
Beverage, Food & Tobacco 47,319 2.7 % 49,054 2.9 %
Banking, Finance, Insurance & Real Estate 40,233 2.3 % 40,634 2.4 %
Aerospace & Defense 38,484 2.2 % 38,279 2.3 %
Energy: Oil & Gas 37,073 2.1 % 32,164 1.9 %
Consumer Goods: Non-Durable 36,984 2.1 % 45,682 2.7 %
Construction & Building 27,270 1.6 % 27,585 1.7 %
Telecommunications 24,710 1.4 % 24,649 1.5 %
Automotive 17,851 1.0 % 14,367 0.9 %
Transportation: Cargo 13,141 0.8 % 14,106 0.8 %
Metals & Mining 11,008 0.6 % 10,927 0.7 %
Subtotal/total percentage 1,739,534 100.0 % 1,666,122 100.0 %
Short term investments 15,763 87,917
Total investments $ 1,755,297 $ 1,754,039
Our investment portfolio may contain senior secured investments that are in the form of lines of credit, delayed draw term loans, revolving credit facilities, or unfunded commitments, which may require us to provide funding when requested in accordance with the terms of the underlying agreements. As of March 31, 2022 and December 31, 2021, our unfunded commitments amounted to $95,995 and $107,247 , respectively. As of May 5, 2022, our unfunded commitments amount ed to $105,147. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for us. Refer to the section “Commitments and Contingencies” for further details on our unfunded commitments.
Investment Portfolio Asset Quality
CIM uses an investment rating system to characterize and monitor our expected level of returns on each investment in our portfolio. These ratings are just one of several factors that CIM uses to monitor our portfolio, are not in and of themselves determinative of fair value or revenue recognition and are presented for indicative purposes. CIM rates the credit risk of all investments on a scale of 1 to 5 no less frequently than quarterly. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (i.e., at the time of acquisition), although it may also take into account under certain circumstances the performance of the portfolio company’s business, the collateral coverage of the investment and other relevant factors.
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The following is a description of the conditions associated with each investment rating used in this ratings system:
Investment Rating Description
1 Indicates the least amount of risk to our initial cost basis. The trends and risk factors for this investment since origination or acquisition are generally favorable, which may include the performance of the portfolio company or a potential exit.
2 Indicates a level of risk to our initial cost basis that is similar to the risk to our initial cost basis at the time of origination or acquisition. This portfolio company is generally performing in accordance with our analysis of its business and the full return of principal and interest or dividend is expected.
3 Indicates that the risk to our ability to recoup the cost of such investment has increased since origination or acquisition, but full return of principal and interest or dividend is expected. A portfolio company with an investment rating of 3 requires closer monitoring.
4 Indicates that the risk to our ability to recoup the cost of such investment has increased significantly since origination or acquisition, including as a result of factors such as declining performance and noncompliance with debt covenants, and we expect some loss of interest, dividend or capital appreciation, but still expect an overall positive internal rate of return on the investment.
5 Indicates that the risk to our ability to recoup the cost of such investment has increased materially since origination or acquisition and the portfolio company likely has materially declining performance. Loss of interest or dividend and some loss of principal investment is expected, which would result in an overall negative internal rate of return on the investment.
For investments rated 3, 4, or 5, CIM enhances its level of scrutiny over the monitoring of such portfolio company.
The following table summarizes the composition of our investment portfolio based on the 1 to 5 investment rating scale at fair value as of March 31, 2022 and December 31, 2021, excluding short term investments of $15,763 and $87,917, respectively:
March 31, 2022 December 31, 2021
Investment Rating Investments
Fair Value Percentage of
Investment Portfolio Investments
Fair Value Percentage of
Investment Portfolio
1 $ 45,685 2.6 % $ 47,221 2.8 %
2 1,499,344 86.2 % 1,373,509 82.5 %
3 183,674 10.6 % 233,223 14.0 %
4 6,952 0.4 % 8,201 0.5 %
5 3,879 0.2 % 3,968 0.2 %
$ 1,739,534 100.0 % $ 1,666,122 100.0 %
The amount of the investment portfolio in each rating category may vary substantially from period to period resulting primarily from changes in the composition of such portfolio as a result of new investment, repayment and exit activities. In addition, changes in the rating of investments may be made to reflect our expectation of performance and changes in investment values.
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Current Investment Portfolio
The following table summarizes the composition of our investment portfolio at fair value as of May 5, 2022:
Investments Fair
Value Percentage of
Investment
Portfolio
Senior secured first lien debt $ 1,666,700 92.2 %
Senior secured second lien debt 36,875 2.0 %
Collateralized securities and structured products - equity 2,631 0.2 %
Unsecured debt 26,657 1.5 %
Equity 74,241 4.1 %
Subtotal/total percentage 1,807,104 100.0 %
Short term investments(2) 22,417
Total investments $ 1,829,521
Number of portfolio companies 119
Average annual EBITDA of portfolio companies $45.2 million
Median annual EBITDA of portfolio companies $31.6 million
Purchased at a weighted average price of par 98.15 %
Gross annual portfolio yield based upon the purchase price(2) 8.83 %
(1) Short term investments represent an investment in a fund that invests in highly liquid investments with average original maturity dates of three months or less.
(2) The gross annual portfolio yield does not represent and may be higher than an actual investment return to shareholders because it excludes our expenses and all sales commissions and dealer manager fees and does not consider the cost of leverage.
Results of Operations for the Three Months Ended March 31, 2022 and 2021
Our results of operations for the three months ended March 31, 2022 and 2021 were as follows:
Three Months Ended
March 31,
2022 2021
Investment income $ 41,683 $ 36,303
Operating expenses and income taxes 22,200 18,704
Net investment income after taxes 19,483 17,599
Net realized loss on investments and foreign currency (69) (4,128)
Net change in unrealized (depreciation) appreciation on investments (11,525) 36,243
Net increase in net assets resulting from operations $ 7,889 $ 49,714
Investment Income
For the three months ended March 31, 2022 and 2021, we generated investment income of $41,683 and $36,303, respectively, consisting primarily of interest income on investments in senior secured debt, collateralized securities and structured products, and unsecured debt of 112 and 107 portfolio companies held during each respective period. Our average investment portfolio size, excluding our short term investments, increased $187,917, from $1,514,911 for the three months ended March 31, 2021 to $1,702,828 for the three months ended March 31, 2022.
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Operating Expenses and Income Taxes
The composition of our operating expenses and income taxes for the three months ended March 31, 2022 and 2021 was as follows:
Three Months Ended
March 31,
2022 2021
Management fees $ 6,655 $ 7,783
Administrative services expense 720 684
Subordinated incentive fee on income 4,133 —
General and administrative 2,222 2,678
Interest expense 8,459 7,548
Income tax expense, including excise tax 11 11
Total operating expenses and income taxes $ 22,200 $ 18,704
The increase in subordinated incentive fee on income was primarily the result of entering into the (i) amended and restated investment advisory agreement in August 2021, which changed the calculation of the subordinated incentive fee to express the hurdle rate required for CIM to earn, and be paid, the incentive fee as a percentage of our net assets rather than adjusted capital, and (ii) the second amended and restated investment advisory agreement in October 2021, which reduced the hurdle rate applicable to the subordinated incentive fee. The decrease in management fees was also primarily due to entering into the second amended and restated investment advisory agreement in October 2021, which reduced the annual rate from 2.0% to 1.5%. The increase in interest expense was primarily the result of higher average borrowings during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
The composition of our general and administrative expenses for the three months ended March 31, 2022 and 2021 was as follows:
Three Months Ended
March 31,
2022 2021
Professional fees $ 633 $ 1,265
Dues and subscriptions 535 169
Transfer agent expense 291 422
Insurance expense 251 132
Valuation expense 179 252
Accounting and administrative costs 157 237
Director fees and expenses 154 103
Printing and marketing expense 5 44
Other expenses 17 54
Total general and administrative expense $ 2,222 $ 2,678
Net Investment Income After Taxes
Our net investment income after taxes totaled $19,483 and $17,599 for the three months ended March 31, 2022 and 2021, respectively. The increase in our investment income after taxes during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 was partially offset by an increase in our operating expenses during the same period, which was driven primarily by an increase in the subordinated incentive fee on income.
Net Realized Loss on Investments and Foreign Currency
Our net realized loss on investments and foreign currency totaled $(69) and $(4,128) for the three months ended March 31, 2022 and 2021, respectively, which was driven primarily by realized losses on the liquidation of our investments in certain portfolio companies during the three months ended March 31, 2021.
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Net Change in Unrealized (Depreciation) Appreciation on Investments
The net change in unrealized (depreciation) appreciation on our investments totaled $(11,525) and $36,243 for the three months ended March 31, 2022 and 2021, respectively. This change was driven primarily by widening credit spreads and decreased multiples in equity markets as well as the underperformance of certain portfolio companies during the three months ended March 31, 2022 that negatively impacted the fair value of certain of our investments, as compared to tightening credit spreads and increased multiples in equity markets during the three months ended March 31, 2021 that positively impacted the fair value of certain of our investments.
Net Increase in Net Assets Resulting from Operations
For the three months ended March 31, 2022 and 2021, we recorded a net increase in net assets resulting from operations of $7,889 and $49,714, respectively, as a result of our operating activity for the respective periods.
Financial Condition, Liquidity and Capital Resources
We generate cash primarily from cash flows from interest, fees and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. We also employ leverage to seek to enhance our returns as market conditions permit and at the discretion of CIM and pursuant to the 1940 Act. On March 23, 2018, an amendment to Section 61(a) of the 1940 Act was signed into law to permit BDCs to reduce the minimum “asset coverage” ratio from 200% to 150% and, as a result, to potentially increase the ratio of a BDC’s debt to equity from a maximum of 1-to-1 to a maximum of 2-to-1, so long as certain approval and disclosure requirements are satisfied. At our Special Meeting of Shareholders on December 30, 2021, shareholders approved a proposal to reduce our asset coverage ratio to 150%. As a result, commencing on December 31, 2021, we are required to maintain asset coverage for our senior securities of 150% (i.e., $2 of debt outstanding for each $1 of equity) rather than 200% (i.e., $1 of debt outstanding for each $1 of equity), which allows us to increase the maximum amount of leverage that we are permitted to incur.
On July 30, 2021, our board of directors, including the independent directors, determined to suspend our pre-Listing share repurchase program commencing with the third quarter of 2021 in anticipation of the Listing. The pre-Listing share repurchase program terminated upon the Listing on October 5, 2021.
On August 9, 2021, our shareholders approved a proposal that authorizes us to issue shares of our common stock at prices below the then current NAV per share of our common stock in one or more offerings for a 12-month period following such shareholder approval. As of the date of this report, we have not issued any shares at prices below our NAV per share pursuant to this authorization.
On September 15, 2021, our co-chief executive officers changed the timing of declaring and paying regular distributions to shareholders from monthly to quarterly commencing with the fourth quarter of 2021. On March 8, 2022, our co-chief executive officers declared a regular quarterly distribution of $0.28 per share for the second quarter of 2022 payable on June 8, 2022 to shareholders of record as of June 1, 2022. We intend to make distributions in an amount sufficient to maintain RIC status each year and to avoid any federal income taxes on income. Therefore, subject to applicable legal restrictions and the sole discretion of our board of directors, we intend to authorize, declare, and pay regular distributions on a quarterly basis. Regular and special distributions in respect of future periods will be evaluated by management and our board of directors based on circumstances and expectations existing at the time of consideration. For an additional discussion of our RIC status and distributions, refer to Note 2 and Note 5, respectively, of our consolidated financial statements included in this report.
On September 15, 2021, our board of directors, including the independent directors, approved a share repurchase policy authorizing us to repurchase up to $50 million of our outstanding common stock after the Listing. Under the share repurchase policy, we may purchase shares of our common stock through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at our discretion. Factors are expected to include, but are not limited to, share price, trading volume and general market conditions, along with our general business conditions. The policy may be suspended or discontinued at any time and does not obligate us to acquire any specific number of shares of our common stock.
As part of the share repurchase policy, we intend to enter into a trading plan in the near future adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, based in part on historical trading data with respect to our shares. The 10b5-1 trading plan would permit common stock to be repurchased at a time that we might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan will be administered by an independent broker and will be subject to price, market volume and timing restrictions. Since we have not yet entered into a 10b5-1 trading plan, during the period from September 15, 2021 to May 5, 2022, we did not repurchase any shares of common stock pursuant to the share repurchase policy.
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As further described in Note 1 and Note 4 to our consolidated financial statements included in this report, the second amended and restated investment advisory agreement (i) reduced the annual base management fees payable by us to CIM and (ii) amended the way the subordinated incentive fee on income and the capital gains incentive fee is payable by us to CIM by reducing the hurdle and incentive fee rates and expressing the hurdle rate as a percentage of our net assets rather than our adjusted capital. These changes were effective upon the Listing on October 5, 2021, except for the change to the calculation of the subordinated incentive fee payable to CIM that expresses the hurdle rate required for CIM to earn, and be paid, the incentive fee as a percentage of our net assets rather than adjusted capital, which was effective on August 10, 2021. These changes, in the aggregate, may lead to the payment of higher advisory fees to CIM depending upon our performance.
As of March 31, 2022 and December 31, 2021, we had $15,763 and $87,917 in short term investments, respectively, invested in a fund that primarily invests in U.S. government securities.
JPM Credit Facility
As of March 31, 2022 and May 5, 2022, our aggregate outstanding borrowings under the Third Amended JPM Credit Facility and the JPM First Amendment were $595,000 and $600,000, respectively, and the aggregate unfunded principal amount in connection with the Third Amended JPM Credit Facility and the JPM First Amendment was $80,000 and $75,000, respectively. For a detailed discussion of our Third Amended JPM Credit Facility and the JPM First Amendment, refer to Note 8 to our consolidated financial statements included in this report.
UBS Facility
As of March 31, 2022 and May 5, 2022, our outstanding borrowings under the Amended UBS Facility were $125,000 and $142,500, respectively, and the aggregate unfunded principal amount in connection with the Amended UBS Facility was $25,000 and $7,500, respectively. For a detailed discussion of our Amended UBS Facility, refer to Note 8 to our consolidated financial statements included in this report.
2026 Notes
As of March 31, 2022 and May 5, 2022, we had $125,000 in aggregate principal amount of 2026 Notes outstanding and there was no unfunded principal amount in connection with the 2026 Notes. For a detailed discussion of our 2026 Notes, refer to Note 8 to our consolidated financial statements included in this report.
2021 More Term Loan
As of March 31, 2022 and May 5, 2022, our outstanding borrowings under the 2021 More Term Loan were $30,000 and there was no unfunded principal amount in connection with the 2021 More Term Loan. For a detailed discussion of our 2021 More Term Loan, refer to Note 8 to our consolidated financial statements included in this report.
2022 More Term Loan
As of May 5, 2022, our outstanding borrowings under the 2022 More Term Loan were $50,000 and there was no unfunded principal amount in connection with the 2022 More Term Loan. For a detailed discussion of our 2022 More Term Loan, refer to Note 14 to our consolidated financial statements included in this report.
Unfunded Commitments
As of March 31, 2022 and May 5, 2022, our unfunded commitments amounted to $95,995 and $105,147, respectively. For a detailed discussion of our unfunded commitments, refer to Note 11 to our consolidated financial statements included in this report.
RIC Status and Distributions
To qualify for and maintain RIC tax treatment, we must, among other things, distribute in respect of each taxable year at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. We will incur certain excise taxes imposed on RICs to the extent we do not distribute in respect of each calendar year an amount at least equal to the sum of (1) 98.0% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gains in excess of capital losses, or capital gain net income (adjusted for certain ordinary losses), for the one-year period ending on October 31 of the calendar year and (3) any net ordinary income and capital gain net income from preceding years that were not distributed during such years and on which we paid no federal income tax.
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For an additional discussion of our RIC status and distributions, refer to Note 2 and Note 5, respectively, of our consolidated financial statements included in this report.
Recent Accounting Pronouncements
See Note 2 to our consolidated financial statements included in this report for a discussion of certain recent accounting pronouncements that are applicable to us.
Critical Accounting Policies
Our consolidated financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the consolidated financial statements, we also utilize available information, including our past history, industry standards and the current economic environment, among other factors, in forming our estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses.
Valuation of Portfolio Investments
The value of our assets is determined quarterly and at such other times that an event occurs that materially affects the valuation. The valuation is made pursuant to Section 2(a)(41) of the 1940 Act, which requires that we value our assets as follows: (i) the market price for those securities for which a market quotation is readily available, and (ii) for all other securities and assets, at fair value, as determined in good faith by our board of directors. As a BDC, Section 2(a)(41) of the 1940 Act requires the board of directors to determine in good faith the fair value of portfolio securities for which a market price is not readily available, and it does so in conjunction with the application of our valuation procedures by CIM. In accordance with Rule 2a-5 of the 1940 Act, our board of directors has designated CIM as our “valuation designee.” Our board of directors and the audit committee of our board of directors, which is comprised solely of our independent directors, oversees the activities, methodology and processes of the valuation designee.
There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each asset while employing a valuation process that is consistently followed. Determinations of fair value involve subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations in our consolidated financial statements.
Valuation Methods
With respect to investments for which market quotations are not readily available, CIM, as the valuation designee of our board of directors, undertakes a multi-step valuation process each quarter, as described below:
• the quarterly valuation process generally begins with each portfolio company or investment either being sent directly to an independent valuation firm or initially valued by certain of CIM’s investment professionals and certain members of its management team, with such valuation taking into account information received from various sources, including independent valuation firms, if applicable;
• preliminary valuation conclusions are then documented and discussed by members of CIM’s management team;
• designated members of CIM’s management team review the preliminary valuation, and, if applicable, deliver such preliminary valuation to an independent valuation firm for its review;
• designated members of CIM’s management team and, if appropriate, the relevant investment professionals meet with the independent valuation firm to discuss the preliminary valuation;
• designated members of CIM’s management team respond and supplement the preliminary valuation to reflect any comments provided by the independent valuation firm;
• our audit committee meets with members of CIM’s management team and the independent valuation firms to discuss the assistance provided and the results of the independent valuation firms' review; and
• our board of directors and our audit committee provide oversight with respect to this valuation process, including requesting such materials as they may determine appropriate.
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We shall promptly (but no later than five business days after we become aware) report to our board of directors in writing on the occurrence of matters that materially affect the fair value of the designated portfolio of investments. Material matters in this instance include a significant deficiency or material weakness in the design or effectiveness of CIM’s fair value determination process resulting in a material error in the calculation of net asset value of $0.01 per share or greater.
In addition to the foregoing, certain investments for which a market price is not readily available are evaluated on a quarterly basis by an independent valuation firm and certain other investments are on a rotational basis reviewed by an independent valuation firm. Finally, certain investments are not evaluated by an independent valuation firm unless certain aspects of such investments in the aggregate meet certain criteria.
Given the expected types of investments, excluding short term investments and stock of publicly traded companies that are classified as Level 1, management expects our portfolio holdings to be classified as Level 3. Due to the uncertainty inherent in the valuation process, particularly for Level 3 investments, such fair value estimates may differ significantly from the values that would have been used had an active market for the investments existed. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses that we ultimately realize on these investments to materially differ from the valuations currently assigned. Inputs used in the valuation process are subject to variability in the future and can result in materially different fair values.
For an additional discussion of our investment valuation process, refer to Note 2 to our consolidated financial statements included in this report.
Related Party Transactions
For a discussion of our relationship with related parties including CIM, CIG, and AIA and amounts incurred under agreements with such related parties, refer to Note 4 to our consolidated financial statements included in this report.
Contractual Obligations
On August 26, 2016, 34th Street entered into the JPM Credit Facility with JPM, as amended and restated on September 30, 2016, July 11, 2017, November 28, 2017, May 23, 2018, May 15, 2020, February 26, 2021 and March 28, 2022. See Note 8 to our consolidated financial statements for a more detailed description of the JPM Credit Facility.
On May 19, 2017, Murray Hill Funding II entered into the UBS Facility with UBS, as amended on December 1, 2017, May 19, 2020, November 12, 2020 and December 17, 2020. See Note 8 to our consolidated financial statements for a more detailed description of the UBS Facility.
On February 11, 2021, we entered into the Note Purchase Agreement with purchasers of the 2026 Notes. See Note 8 to our consolidated financial statements for a more detailed description of the 2026 Notes.
On April 14, 2021, we entered into the 2021 More Term Loan with More. See Note 8 to our consolidated financial statements for a more detailed description of the 2021 More Term Loan.
On April 27, 2022, we entered into the 2022 More Term Loan with More Provident. See Note 8 to our consolidated financial statements for a more detailed description of the 2022 More Term Loan.
Commitments and Contingencies
We have entered into certain contracts with other parties that contain a variety of indemnifications. Our maximum exposure under these arrangements is unknown. However, we have not experienced claims or losses pursuant to these contracts and believe the risk of loss related to such indemnifications to be remote.
Our investment portfolio may contain debt investments that are in the form of lines of credit, delayed draw term loans, revolving credit facilities, or other unfunded commitments, which may require us to provide funding when requested in accordance with the terms of the underlying agreements. For further details on such debt investments, refer to Note 11 to our consolidated financial statements included in this report.
We currently have no off-balance sheet arrangements, except for those discussed in Note 7 and Note 11 to our consolidated financial statements included in this report.
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