SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
CĪON Investment Corporation
(Exact name of Registrant as specified in its charter)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
On December 17, 2012, Flatiron Funding, LLC (“Flatiron”), a newly-formed, wholly-owned, special purpose financing subsidiary of CĪON Investment Corporation (the “Company”), entered into a total return swap (“TRS”) with Citibank, N.A. (“Citibank”). The agreements between Flatiron and Citibank, which collectively establish the TRS, are referred to herein as the TRS Agreement.
A TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS and interest payments in return for periodic payments based on a fixed or variable interest rate. A TRS effectively adds leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure of a TRS, a TRS typically offers lower financing costs than are offered through more traditional borrowing arrangements.
The TRS with Citibank enables the Company, through its ownership of Flatiron, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to Flatiron borrowing funds to acquire loans and incurring interest expense to a lender.
The obligations of Flatiron under the TRS are non-recourse to the Company and the Company’s exposure under the TRS is limited to the value of the Company’s investment in Flatiron, which generally will equal the value of cash collateral provided by Flatiron under the TRS. Pursuant to the terms of the TRS, Flatiron may select loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of the lesser of (a) $150.0 million and (b) 140% of the aggregate amount of cash contributed to the equity capital of the Company during the first nine months of the TRS and not withdrawn during that period (the “Maximum Portfolio Amount”). Flatiron is required to initially cash collateralize a specified percentage of each loan (generally 25% of the market value of such loan) included under the TRS in accordance with margin requirements described in the TRS Agreement. Under the terms of the TRS, Flatiron has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash collateral required to be posted with Citibank nor any other assets of Flatiron are available to pay the debts of the Company.
Each individual loan must meet criteria described in the TRS Agreement, including a requirement that substantially all of the loans be rated by Moody’s and S&P and quoted by a nationally-recognized pricing service. Under the terms of the TRS, Citibank, as calculation agent, determines whether there has been a failure to satisfy the portfolio criteria in the TRS. If such failure continues for 30 days following the delivery of notice thereof, then Citibank has the right, but not the obligation, to terminate the TRS. Flatiron receives from Citibank all interest and fees payable in respect of the loans included in the TRS. Flatiron pays to Citibank interest at a rate equal to, in respect of each loan included in the TRS, the floating rate index specified for such loan + 1.25% per annum. In addition, upon the termination or repayment of any loan subject to the TRS, Flatiron will either receive from Citibank the appreciation in the value of such loan or pay to Citibank any depreciation in the value of such loan.
Under the terms of the TRS, Flatiron may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the value of the underlying loans after such value decreases below a specified amount. The limit on the additional collateral that Flatiron may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral already posted by Flatiron. The amount of collateral required to be posted by Flatiron is determined primarily on the basis of the aggregate value of the underlying loans.
The Company has no contractual obligation to post any such additional collateral or to make any interest payments to Citibank. The Company may, but is not obligated to, increase its investment in Flatiron for the purpose of funding any additional collateral or payment obligations for which Flatiron may become obligated during the term of the TRS. If the Company does not make any such additional investment in Flatiron and Flatiron fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by Flatiron under the TRS. In the event of an early termination of the TRS, Flatiron would be required to pay an early termination fee.
Citibank may terminate the TRS on or after December 17, 2013 (the “Call Date”). Flatiron may terminate the TRS at any time upon providing no more than 30 days prior notice to Citibank. Any termination prior to the Call Date will result in payment of an early termination fee to Citibank based on the maximum notional amount of the TRS. Under the terms of the TRS, the early termination fee will equal the present value of a stream of monthly payments that would be owed by Flatiron to Citibank for the period from the termination date through and including the Call Date. Such monthly payments will equal the product of 60% of the Maximum Portfolio Amount, multiplied by 1.25% per annum. Other than during the first nine months and last 180 days of the term of the TRS, Flatiron may be required to pay a minimum usage fee in connection with the TRS.
In connection with the TRS, Flatiron has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default and termination events, the TRS Agreement contains the following termination events: (a) a failure to satisfy the portfolio criteria for at least 30 days following delivery of notice thereof; (b) a failure to post initial cash collateral or additional collateral as required by the TRS Agreement; (c) a default by Flatiron or the Company with respect to indebtedness in an amount equal to or greater than the lesser of $10 million and 2% of the Company’s net asset value at such time; (d) a merger of Flatiron or the Company meeting certain criteria; (e) either the Company or Flatiron amending its constituent documents to alter its investment strategy in a manner that has or could reasonably be expected to have a material adverse effect; (f) the Company ceasing to be the sole owner of Flatiron; (g) the Company ceasing to be the manager of Flatiron or having authority to enter into transactions under the TRS on behalf of Flatiron, and not being replaced by an entity reasonably acceptable to Citibank; (h) CĪON Investment Management, LLC, or a successor acceptable to Citibank, ceasing to be the Company’s investment adviser or Apollo Investment Management, L.P. or an affiliate thereof, or a successor acceptable to Citibank, ceasing to be the sub-adviser to the Company; (i) Flatiron failing to comply with its investment strategy or restrictions to the extent such non-compliance has or could reasonably be expected to have a material adverse effect; (j) Flatiron becoming liable in respect of any obligation for borrowed money, other than arising under the TRS Agreement; (k) the Company or Flatiron dissolves or liquidates; and (l) the Company violates certain provisions of the Investment Company Act of 1940, as amended (the “1940 Act”), or the Company’s election to be regulated as a business development company (“BDC”) under the 1940 Act is revoked or withdrawn.
For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company will treat the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted by Flatiron under the TRS, as a senior security for the life of that instrument. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the Securities and Exchange Commission (the “SEC”).
Further, for purposes of Section 55(a) under the 1940 Act, the Company will treat each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.
The summary description of the TRS Agreement is a summary only and is qualified in all respects by the provisions of such agreement, copies of which are attached hereto as Exhibits 10.1 and 10.2 and are incorporated herein by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.