Nuveen Churchill Direct Lending Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are against December 31, 2022. The company is an externally managed, non-traded BDC investing primarily in senior secured loans to U.S. middle-market companies. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Investment income | $34.0 million | $14.1 million in Q1 2022 |
| Net investment income | $17.4 million; $0.60 per share | $9.1 million; $0.44 per share in Q1 2022 |
| Realized and unrealized investment results | $6.5 million realized gain; $11.1 million unrealized depreciation; $4.7 million net loss | $36 thousand realized gain; $2.4 million unrealized depreciation in Q1 2022 |
| Net increase in assets from operations | $12.7 million; $0.44 per share | $6.8 million; $0.33 per share in Q1 2022 |
| Net assets / NAV per share | $517.5 million / $18.01 | $525.0 million / $18.32 at December 31, 2022 |
| Investments at fair value | $1.257 billion | $1.200 billion at December 31, 2022 |
| Cash and cash equivalents | $49.6 million | $39.3 million at December 31, 2022 |
| Secured borrowings, net of financing costs | $763.7 million | $699.8 million at December 31, 2022 |
| Quarterly cash flows | $41.1 million used in operations; $51.4 million provided by financing; cash increased $10.3 million | $69.4 million used in operations and $57.6 million provided by financing in Q1 2022 |
Performance, portfolio and capital
- Investment income more than doubled year over year, primarily due to a larger invested portfolio and higher benchmark rates. Weighted-average portfolio yield on debt and income-producing investments at cost rose to 11.03% from 10.61% at year-end 2022; 95.32% of debt investments were floating-rate.
- Interest and debt financing expense rose to $12.7 million from $3.0 million. Average daily borrowings were $738.1 million versus $421.6 million, and the reported average borrowing rate increased to 6.76% from 2.69%.
- Operating expenses before expense support were $16.6 million versus $5.1 million. The filing reports an annualized net-expense ratio of 12.91% and an annualized net-investment-income ratio of 13.51% for Q1 2023; the ratios are affected by the company’s leveraged structure and are not conventional operating-company margins.
- Portfolio fair value was concentrated in first-lien loans (87.13%); subordinated debt was 11.10% and equity investments 1.77%. The portfolio included 153 companies across 23 industries, versus 145 companies across 22 industries at year-end.
- The weighted-average internal risk rating improved to 4.08 from 4.14. One investment, GA Foods, was on non-accrual, with fair value of $8.4 million (0.67% of investments). Ratings 7 and 10 included 1.19% and 0.67% of portfolio fair value, respectively.
- Q1 purchases were $99.9 million, compared with $39.6 million of principal repayments and investment sales. Operations generated $12.7 million, but distributions declared were $21.8 million, including $6.0 million from realized gains. NAV per share fell to $18.01. The reported total return, including distributions, was 2.39%.
- Asset coverage was 167.31%, down from 174.41% at year-end and above the 150% statutory minimum. Available borrowing capacity was reported as $194.1 million, in addition to $359.7 million of undrawn shareholder commitments. Unfunded loan commitments totaled $110.6 million.
Material changes, outlook and risks
- Management attributed $11.1 million of unrealized depreciation mainly to wider credit spreads and modest softening in portfolio-company credit metrics. It said it was not seeing broad deterioration at the time of filing, while noting the possibility of recession and negative effects on borrowers.
- The company cites inflation, supply-chain and labor pressures, geopolitical uncertainty, interest-rate volatility, financial-market instability and strain among small and regional banks as risks. Rising rates can increase income on floating-rate assets but also raise borrowing costs; management’s modeled net-income impact was positive $1.1 million for a 100-basis-point increase and negative $274 thousand for a 25-basis-point decrease, based on March 31 positions and stated assumptions.
- Most investments lack readily available market quotations and are Level 3 fair-value measurements. Fair values depend on estimates and unobservable inputs and may differ materially from proceeds in a sale. The Adviser became the valuation designee effective for the March 2023 quarter, subject to Board oversight.
- Debt outstanding totaled $768.9 million before deferred financing costs. The $17.5 million subscription facility was due in September 2023; the SMBC facility’s draw period was scheduled to end in November 2023. The company reported compliance with facility covenants at quarter-end.
- The company declared quarterly distributions of $0.50 per share from income and a $0.26 special/supplemental distribution from realized gains. It intends to make quarterly distributions but gives no fixed future distribution or earnings guidance. It reported no material legal proceedings and no defaults on senior securities.
- A follow-on private offering was underway. The filing reports an April 20 issuance of 2,205,038 shares for approximately $40 million. It also reports final offering commitments on April 28 as “$1,230” in the financial-statement notes, while the MD&A describes approximately $1.2 million; the amount is unclear and should be verified. The company also disclosed a Chief Compliance Officer transition effective May 12, 2023.
Important facts for investors to verify
- Reconcile the April 28 follow-on offering commitment figure and confirm proceeds and share issuance details.
- Review the GA Foods non-accrual, watch-list exposures and credit developments underlying the quarter’s unrealized depreciation.
- Assess whether portfolio income can continue to cover distributions and materially higher financing costs, including under changing rate conditions.
- Confirm borrowing availability, facility maturities and covenant headroom, particularly for the subscription and SMBC facilities.
- Evaluate the valuation process and assumptions for the predominantly Level 3 investment portfolio, and the resulting sensitivity of NAV.