Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion and other parts of this Annual Report on Form 10-K contain forward-looking information that involves risks and uncertainties (see “Forward-Looking Statements” in this report). 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 for 2021 have been retroactively adjusted to reflect the Reverse Stock Split, which became effective on September 21, 2021.
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. On February 26, 2023, our shares of common stock and our Series A Notes listed and commenced trading in Israel on the TASE under the ticker symbol “CION” and "CION B1", respectively.
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 August 7, 2023, our board of directors, including a majority of the board of directors who are not interested persons, approved the renewal of the second amended and restated investment advisory agreement with CIM for a period of twelve months, commencing August 9, 2023. We have also entered into an administration agreement with CIM to provide us with administrative services necessary for us to operate. 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.
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 senior personnel.
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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).
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 then 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
Q1 2024 Regular Distribution
On March 11, 2024, our co-chief executive officers declared a regular quarterly distribution of $0.34 per share for the first quarter of 2024 payable on March 28, 2024 to shareholders of record as of March 22, 2024.
Portfolio Investment Activity for the Years Ended December 31, 2023 and 2022
The following table summarizes our investment activity, excluding short term investments and PIK securities, for the years ended December 31, 2023 and 2022:
Years Ended December 31,
Net Investment Activity 2023 2022
Purchases and drawdowns
Senior secured first lien debt $ 340,704 $ 524,293
Senior secured second lien debt — 19,932
Unsecured debt 4,200 —
Equity 5,283 6,313
Sales and principal repayments (300,250) (469,760)
Net portfolio activity $ 49,937 $ 80,778
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The following tables summarize the composition of our investment portfolio at amortized cost and fair value as of December 31, 2023 and 2022:
December 31, 2023
Investments Cost(1) Investments Fair
Value Percentage of
Investment
Portfolio
Senior secured first lien debt $ 1,604,111 $ 1,565,171 85.0 %
Senior secured second lien debt 41,280 29,111 1.6 %
Collateralized securities and structured products - equity 2,362 1,096 0.1 %
Unsecured debt 31,693 12,874 0.7 %
Equity 182,738 232,572 12.6 %
Subtotal/total percentage 1,862,184 1,840,824 100.0 %
Short term investments(2) 113,446 113,446
Total investments $ 1,975,630 $ 1,954,270
Number of portfolio companies 111
Average annual EBITDA of portfolio companies $61.7 million
Median annual EBITDA of portfolio companies $33.7 million
Purchased at a weighted average price of par 96.33 %
Gross annual portfolio yield based upon the purchase price(3) 12.12 %
(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.
December 31, 2022
Investments Cost(1) Investments Fair
Value Percentage of
Investment
Portfolio
Senior secured first lien debt $ 1,638,995 $ 1,579,512 90.3 %
Senior secured second lien debt 41,036 38,769 2.2 %
Collateralized securities and structured products - equity 2,687 1,179 0.1 %
Unsecured debt 30,427 22,643 1.3 %
Equity 79,595 107,058 6.1 %
Subtotal/total percentage 1,792,740 1,749,161 100.0 %
Short term investments(2) 10,869 10,869
Total investments $ 1,803,609 $ 1,760,030
Number of portfolio companies 113
Average annual EBITDA of portfolio companies $55.2 million
Median annual EBITDA of portfolio companies $35.0 million
Purchased at a weighted average price of par 97.81 %
Gross annual portfolio yield based upon the purchase price(3) 11.80 %
(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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The following table summarizes the composition of our investment portfolio by the type of interest rate as of December 31, 2023 and 2022, excluding short term investments of $113,446 and $10,869, respectively:
December 31, 2023 December 31, 2022
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 $ 1,521,848 $ 1,475,126 80.1 % $ 1,539,214 $ 1,477,630 84.5 %
Non-income producing investments 154,419 184,175 10.0 % 76,061 104,619 6.0 %
Fixed interest rate investments 155,244 131,533 7.2 % 166,297 157,006 9.0 %
Other income producing investments 30,673 49,990 2.7 % 11,168 9,906 0.5 %
Total investments $ 1,862,184 $ 1,840,824 100.0 % $ 1,792,740 $ 1,749,161 100.0 %
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 December 31, 2023 and 2022:
December 31, 2023 December 31, 2022
Industry Classification Investments Fair Value Percentage of
Investment Portfolio Investments Fair Value Percentage of
Investment Portfolio
Services: Business $ 282,237 15.3 % $ 336,055 19.2 %
Healthcare & Pharmaceuticals 238,624 13.0 % 237,082 13.6 %
Media: Diversified & Production 135,037 7.3 % 134,927 7.7 %
Retail 135,000 7.3 % 74,718 4.3 %
Media: Advertising, Printing & Publishing 116,100 6.3 % 105,375 6.0 %
Services: Consumer 107,195 5.8 % 115,849 6.6 %
Energy: Oil & Gas 104,893 5.7 % 68,756 3.9 %
Construction & Building 104,727 5.7 % 46,007 2.6 %
Diversified Financials 85,733 4.7 % 99,819 5.7 %
Chemicals, Plastics & Rubber 82,597 4.5 % 66,753 3.8 %
Beverage, Food & Tobacco 68,780 3.7 % 45,396 2.6 %
Consumer Goods: Durable 59,955 3.3 % 60,735 3.5 %
Banking, Finance, Insurance & Real Estate 52,272 2.8 % 43,836 2.5 %
Hotel, Gaming & Leisure 50,906 2.8 % 46,739 2.7 %
Capital Equipment 49,571 2.7 % 41,580 2.4 %
Consumer Goods: Non-Durable 42,381 2.3 % 47,886 2.8 %
High Tech Industries 22,671 1.2 % 56,501 3.2 %
Containers, Packaging & Glass 18,480 1.0 % 19,551 1.1 %
Telecommunications 17,768 1.0 % 18,302 1.1 %
Environmental Industries 15,336 0.8 % — —
Metals & Mining 13,957 0.8 % 15,780 0.9 %
Automotive 12,403 0.7 % 16,255 0.9 %
Transportation: Cargo 12,201 0.7 % 12,417 0.7 %
Aerospace & Defense 12,000 0.6 % 38,842 2.2 %
Subtotal/total percentage 1,840,824 100.0 % 1,749,161 100.0 %
Short term investments 113,446 10,869
Total investments $ 1,954,270 $ 1,760,030
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 December 31, 2023 and 2022, our unfunded commitments amounted to $47,349 and $71,420 , respectively. As of March 6, 2024, our unfunded commitments amount ed to $53,048. 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.
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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.
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 December 31, 2023 and 2022, excluding short term investments of $113,446 and $10,869, respectively:
December 31, 2023 December 31, 2022
Investment Rating Investments
Fair Value Percentage of
Investment Portfolio Investments
Fair Value Percentage of
Investment Portfolio
1 $ 98,255 5.3 % $ 24,450 1.4 %
2 1,603,975 87.2 % 1,424,681 81.5 %
3 120,132 6.5 % 260,662 14.9 %
4 10,304 0.6 % 39,032 2.2 %
5 8,158 0.4 % 336 —
$ 1,840,824 100.0 % $ 1,749,161 100.0 %
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 March 6, 2024:
Investments Fair
Value Percentage of
Investment
Portfolio
Senior secured first lien debt $ 1,529,482 85.0 %
Senior secured second lien debt 27,633 1.5 %
Collateralized securities and structured products - equity 1,096 0.1 %
Unsecured debt 4,135 0.2 %
Equity 237,198 13.2 %
Subtotal/total percentage 1,799,544 100.0 %
Short term investments(1) 160,358
Total investments $ 1,959,902
Number of portfolio companies 111
Average annual EBITDA of portfolio companies $60.4 million
Median annual EBITDA of portfolio companies $32.8 million
Purchased at a weighted average price of par 96.48 %
Gross annual portfolio yield based upon the purchase price(2) 11.76 %
(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 Years Ended December 31, 2023 and 2022
Our results of operations for the years ended December 31, 2023 and 2022 were as follows:
Years Ended December 31,
2023 2022
Investment income $ 251,010 $ 194,898
Operating expenses and income taxes 145,988 106,693
Net investment income after taxes 105,022 88,205
Net realized loss on investments and foreign currency (31,927) (32,750)
Net change in unrealized appreciation (depreciation) on investments 22,219 (5,314)
Net increase in net assets resulting from operations $ 95,314 $ 50,141
Investment Income
For the years ended December 31, 2023 and 2022, we generated investment income of $251,010 and $194,898, respectively, consisting primarily of interest income on investments in senior secured debt, collateralized securities and structured products, and unsecured debt of 113 and 128 portfolio companies held during each respective period. Higher LIBOR and SOFR rates during the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily contributed to the increase in interest income generated on our investments. In addition, certain of our equity investments paid large dividends during the year ended December 31, 2023, increasing dividend income to $8,406 from $1,457 during the year ended December 31, 2022.
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Operating Expenses and Income Taxes
The composition of our operating expenses and income taxes for the years ended December 31, 2023 and 2022 was as follows:
Years Ended December 31,
2023 2022
Management fees $ 26,856 $ 27,361
Administrative services expense 3,971 3,348
Subordinated incentive fee on income 22,277 18,710
General and administrative 7,382 7,278
Interest expense 85,556 49,624
Income tax (benefit) expense, including excise tax (54) 372
Total operating expenses and income taxes $ 145,988 $ 106,693
The increase in interest expense was primarily the result of (a) higher LIBOR and SOFR rates during the year ended December 31, 2023 compared to the year ended December 31, 2022, and (b) higher average borrowings under our financing arrangements during the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase in subordinated incentive fee on income was primarily the result of the increase in investment income during the year ended December 31, 2023 compared to the year ended December 31, 2022, which was partially offset by the increase in interest expense during the year ended December 31, 2023 compared to the year ended December 31, 2022.
The composition of our general and administrative expenses for the years ended December 31, 2023 and 2022 was as follows:
Years Ended December 31,
2023 2022
Professional fees $ 2,178 $ 1,778
Transfer agent expense 911 1,124
Valuation expense 853 821
Dues and subscriptions 800 791
Director fees and expenses 696 632
Insurance expense 675 833
Accounting and administrative costs 637 524
Printing and marketing expense 351 708
Other expenses 281 67
Total general and administrative expense $ 7,382 $ 7,278
Net Investment Income After Taxes
Our net investment income after taxes totaled $105,022 and $88,205 for the years ended December 31, 2023 and 2022, respectively. The increase in net investment income was a result of an increase in our investment income during the year ended December 31, 2023 as compared to the year ended December 31, 2022, which was partially offset by an increase in our operating expenses during the same period, which was driven primarily by increases in interest expense and the subordinated incentive fee on income.
Net Realized Loss on Investments and Foreign Currency
Our net realized loss on investments and foreign currency totaled $(31,927) and $(32,750) for the years ended December 31, 2023 and 2022, respectively. During the year ended December 31, 2023, net realized losses were driven primarily by the restructure of certain investments while net realized losses during the year ended December 31, 2022 were driven primarily by the write-off of certain investments.
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Net Change in Unrealized Appreciation (Depreciation) on Investments
The net change in unrealized appreciation (depreciation) on our investments totaled $22,219 and $(5,314) for the years ended December 31, 2023 and 2022, respectively. This change was driven primarily by mark-to-market price changes on certain investments during the year ended December 31, 2023. During the year ended December 31, 2022, unrealized depreciation was driven primarily by the underperformance of certain investments, which was partially offset by the realization of previously unrealized losses due to the write-off of certain investments.
Net Increase in Net Assets Resulting from Operations
For the years ended December 31, 2023 and 2022, we recorded a net increase in net assets resulting from operations of $95,314 and $50,141, respectively, as a result of our operating activity for the respective periods.
Results of Operations for the Years Ended December 31, 2022 and 2021
Our results of operations for the years ended December 31, 2022 and 2021 were as follows:
Years Ended December 31,
2022 2021
Investment income $ 194,898 $ 157,348
Operating expenses and income taxes 106,693 83,041
Net investment income after taxes 88,205 74,307
Net realized (loss) gain on investments and foreign currency (32,750) 840
Net change in unrealized (depreciation) appreciation on investments (5,314) 43,617
Net increase in net assets resulting from operations $ 50,141 $ 118,764
Investment Income
For the years ended December 31, 2022 and 2021, we generated investment income of $194,898 and $157,348, respectively, consisting primarily of interest income on investments in senior secured debt, collateralized securities and structured products, and unsecured debt of 128 and 153 portfolio companies held during each respective period. Our average investment portfolio size, excluding our short term investments, increased $126,694, from $1,580,948 during the year ended December 31, 2021 to $1,707,642 during the year ended December 31, 2022. In addition, higher LIBOR and SOFR rates during the year ended December 31, 2022 compared to the year ended December 31, 2021 also contributed to the increase in interest income generated on our investments.
Operating Expenses and Income Taxes
The composition of our operating expenses and income taxes for the years ended December 31, 2022 and 2021 was as follows:
Years Ended December 31,
2022 2021
Management fees $ 27,361 $ 31,143
Administrative services expense 3,348 3,069
Subordinated incentive fee on income 18,710 6,875
General and administrative 7,278 9,805
Interest expense 49,624 31,807
Income tax expense, including excise tax 372 342
Total operating expenses and income taxes $ 106,693 $ 83,041
The increase in interest expense was primarily the result of (a) higher average borrowings under our financing arrangements during the year ended December 31, 2022 compared to the year ended December 31, 2021, and (b) higher LIBOR and SOFR rates during the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in subordinated incentive fee on income was primarily the result of entering into (i) the 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 among other things, reduced the annual rate from 2.0% to 1.5%, and further to 1.0% of our average gross assets purchased with leverage resulting in our asset coverage ratio dropping below 200%.
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The composition of our general and administrative expenses for the years ended December 31, 2022 and 2021 was as follows:
Years Ended December 31,
2022 2021
Professional fees $ 1,778 $ 4,214
Transfer agent expense 1,124 1,290
Insurance expense 833 612
Valuation expense 821 904
Dues and subscriptions 791 411
Printing and marketing expense 708 990
Director fees and expenses 632 516
Accounting and administrative costs 524 759
Other expenses 67 109
Total general and administrative expense $ 7,278 $ 9,805
The decrease in general and administrative expenses was primarily the result of higher nonrecurring professional fees incurred during the year ended December 31, 2021 associated with the Listing.
Net Investment Income After Taxes
Our net investment income after taxes totaled $88,205 and $74,307 for the years ended December 31, 2022 and 2021, respectively. The increase in net investment income was a result of an increase in our investment income during the year ended December 31, 2022 as compared to the year ended December 31, 2021, which was partially offset by an increase in our operating expenses during the same period that was driven primarily by increases in the subordinated incentive fee on income and interest expense.
Net Realized (Loss) Gain on Investments and Foreign Currency
Our net realized (loss) gain on investments and foreign currency totaled $(32,750) and $840 for the years ended December 31, 2022 and 2021, respectively. This change was driven primarily by the write-off of certain investments during the year ended December 31, 2022 as compared to fewer investment write-offs during the year ended December 31, 2021.
Net Change in Unrealized (Depreciation) Appreciation on Investments
The net change in unrealized (depreciation) appreciation on our investments totaled $(5,314) and $43,617 for the years ended December 31, 2022 and 2021, respectively. This change was driven primarily by the underperformance of certain investments during the year ended December 31, 2022, which was partially offset by the realization of previously unrealized losses due to the write-off of certain investments. In contrast, during the year ended December 31, 2021, tightening credit spreads and increased multiples in equity markets positively impacted the fair value of certain of our investments.
Net Increase in Net Assets Resulting from Operations
For the years ended December 31, 2022 and 2021, we recorded a net increase in net assets resulting from operations of $50,141 and $118,764, 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. As a result, we also generate cash from our existing financing arrangements and may generate cash from future borrowings, as well as future offerings of securities including public and/or private issuances of debt and/or equity securities. We use cash primarily to (i) purchase investments in new and existing portfolio companies, (ii) pay for the cost of operations (including paying advisory fees to and reimbursing CIM), (iii) make debt service payments related to any of our financing arrangements and (iv) pay cash distributions to the holders of our shares.
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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. As a result of receiving shareholder approval on December 30, 2021, effective December 31, 2021, we are required to maintain asset coverage for our senior securities of 150% rather than 200%, which allows us to increase the maximum amount of leverage that we are permitted to incur. We may from time to time enter into additional financing arrangements or increase the size of our existing financing arrangements. Any such increase to our leverage would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors.
As of December 31, 2023 and 2022, our asset coverage ratio was 1.81 and 1.92, respectively. We seek to carefully consider our unfunded commitments for the purpose of planning our ongoing financial leverage and liquidity requirements.
On September 15, 2023, our shareholders authorized us to issue shares of our common stock at prices below the then current NAV per share in one or more offerings for a 12-month period following such shareholder approval. As of the date of this report, we are not engaged in discussions to issue any such shares.
As of December 31, 2023, we had cash of $8,415 and short term investments of $113,446 invested in a fund that primarily invests in U.S. government securities. Cash and short term investments as of December 31, 2023, taken together with our available debt, is expected to be sufficient for our investing activities and to conduct our operations in the near term. As of December 31, 2023, we had $153 million available under our secured financing arrangements.
Our short-term cash needs include the funding of additional portfolio investments, the payment of operating expenses including interest expense, management fees, incentive fees, administrative services expense and general and administrative expenses, as well as paying distributions to our shareholders. Our long-term cash needs will include principal payments on outstanding financing arrangements and funding of additional portfolio investments. Funding for short and long-term cash needs will come from cash provided from operating activities and/or unused net proceeds from financing activities. We believe that our liquidity and sources of capital are adequate to satisfy our short and long-term cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to us in sufficient amounts in the future.
Post-Listing Share Repurchase Policy
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. On June 24, 2022, our board of directors, including the independent directors, increased the amount of shares of our common stock that may be repurchased under the share repurchase policy by $10 million to up to an aggregate of $60 million. 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 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.
On August 29, 2023, as part of the share repurchase policy, we entered into a new trading plan with an independent broker, Wells Fargo, 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 permits 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 expires on August 29, 2024, and is subject to price, market volume and timing restrictions.
During the year ended December 31, 2023, we repurchased an aggregate of 1,114,848 shares under the 10b5-1 trading plan for an aggregate purchase price of $11,518, or an average purchase price of $10.33 per share.
From January 1, 2024 to March 6, 2024, we repurchased an aggregate of 340,505 shares of common stock under the 10b5-1 trading plan for an aggregate purchase price of $3,750, or an average purchase price of $11.01 per share. From the inception of the initial 10b5-1 trading plan in August 2022 through March 6, 2024, we repurchased an aggregate of 3,114,318 shares of common stock under the 10b5-1 trading plan for an aggregate purchase price of $30,714, or an average purchase price of $9.86 per share.
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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 an excise tax of 4% 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. 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.
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 any supplemental and/or 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.
The following table presents distributions per share that were declared during the years ended December 31, 2023, 2022 and 2021:
Distributions
Three Months Ended Per Share(1) Amount
2021
March 31, 2021 (three record dates) $ 0.2648 $ 15,029
June 30, 2021 (three record dates) 0.2648 15,000
September 30, 2021 (three record dates) 0.2648 15,027
December 31, 2021 (two record dates) 0.4648 26,474
Total distributions for the year ended December 31, 2021 $ 1.2592 $ 71,530
2022
March 31, 2022 (one record date) $ 0.2800 $ 15,948
June 30, 2022 (one record date) 0.2800 15,949
September 30, 2022 (one record date) 0.3100 17,604
December 31, 2022 (two record dates) 0.5800 32,074
Total distributions for the year ended December 31, 2022 $ 1.4500 $ 81,575
2023
March 31, 2023 (one record date) $ 0.3400 $ 18,687
June 30, 2023 (one record date) 0.3400 18,614
September 30, 2023 (two record dates) 0.3900 21,276
December 31, 2023 (three record dates) 0.5400 29,290
Total distributions for the year ended December 31, 2023 $ 1.6100 $ 87,867
(1) The per share distribution amount for 2021 has been retroactively adjusted to reflect the Reverse Stock Split as discussed in Note 3 to the consolidated financial statements included in this report.
On March 11, 2024, our co-chief executive officers declared a regular quarterly distribution of $0.34 per share for the first quarter of 2024 payable on March 28, 2024 to shareholders of record as of March 22, 2024. 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.
JPM Credit Facility
As of December 31, 2023 and March 6, 2024, our aggregate outstanding borrowings under the JPM Credit Facility were $550,000 and the aggregate unfunded principal amount in connection with the JPM Credit Facility was $125,000. For a detailed discussion of our JPM Credit Facility, refer to Note 8 to our consolidated financial statements included in this report.
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UBS Facility
As of December 31, 2023 and March 6, 2024, our outstanding borrowings under the Amended UBS Facility were $122,500 and the aggregate unfunded principal amount in connection with the Amended UBS Facility was $27,500. 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 December 31, 2023 and March 6, 2024, 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 December 31, 2023 and March 6, 2024, 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 December 31, 2023 and March 6, 2024, 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 8 to our consolidated financial statements included in this report.
Series A Notes
As of December 31, 2023 and March 6, 2024, we had approximately $114,844 in aggregate principal amount of Series A Notes outstanding and there was no unfunded principal amount in connection with the Series A Notes. For a detailed discussion of our Series A Notes, refer to Note 8 to our consolidated financial statements included in this report.
2027 Notes
As of December 31, 2023 and March 6, 2024, we had $100,000 in aggregate principal amount of 2027 Notes outstanding and there was no unfunded principal amount in connection with the 2027 Notes. For a detailed discussion of our 2027 Notes, refer to Note 8 to our consolidated financial statements included in this report.
Unfunded Commitments
As of December 31, 2023 and March 6, 2024, our unfunded commitments amounted to $47,349 and $53,048, respectively. For a detailed discussion of our unfunded commitments, refer to Note 11 to 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 U.S. generally accepted accounting principles, or 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.
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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:
• our 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 with 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.
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 NAV 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.
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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. For a discussion of our relationship with CION/EagleTree, refer to Note 7 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, March 28, 2022 and May 15, 2023. 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, December 17, 2020 and June 14, 2023. 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 2026 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. See Note 8 to our consolidated financial statements for a more detailed description of the 2022 More Term Loan.
On February 28, 2023, we entered into a Deed of Trust with Mishmeret Trust Company Ltd., as trustee, pursuant to which we issued our Series A Notes. See Note 8 to our consolidated financial statements for a more detailed description of the Deed of Trust and the Series A Notes.
On November 8, 2023, we entered into the 2027 Note Purchase Agreement with purchasers of the 2027 Notes. See Note 8 to our consolidated financial statements for a more detailed description of the 2027 Notes.
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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