Business context and reporting period
Nuveen Churchill Direct Lending Corp. is an externally managed business development company and regulated investment company focused primarily on senior secured loans to U.S. middle-market, often private-equity-owned businesses. This Form 10-K reports the fiscal year ended December 31, 2022; figures below are annual unless identified as year-end balances. Financial statements were audited by PwC, which issued an unqualified opinion.
Key financial and portfolio metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Total investment income | $82.5 million | $36.3 million |
| Net investment income | $45.5 million; $1.95 per share | $20.3 million; $1.58 per share |
| Net realized gain (loss) | $(0.3) million | $0.8 million |
| Change in unrealized appreciation (depreciation) | $(27.9) million | $6.2 million |
| Net increase in net assets from operations | $17.3 million; $0.74 per share | $27.3 million; $2.12 per share |
| Portfolio fair value at year-end | $1.200 billion | $773.0 million |
| Net assets / NAV per share at year-end | $525.0 million / $18.32 | $374.1 million / $19.39 |
| Secured borrowings at year-end | $705.4 million | $410.0 million |
| Cash and cash equivalents at year-end | $39.3 million, plus $0.1 million restricted cash | $35.2 million, plus $0.1 million restricted cash |
- Net investment income grew as the portfolio expanded and floating-rate yields increased. Total expenses before expense support were $37.2 million, including $25.7 million of interest and debt financing expense; the reported expense support was $0.2 million.
- Portfolio fair value was below amortized cost of $1.226 billion. Debt investments represented 97.72% of portfolio fair value, with first-lien term loans at 86.62%; equity investments were 2.28%.
- Weighted average yield on debt and income-producing investments at cost was 10.61%, versus 6.93% in 2021. About 95.42% of debt investments bore floating rates.
- The company reported $427.8 million of cash used in operating activities, mainly reflecting $502.3 million of investment purchases, and $431.9 million provided by financing activities. Financing included $174.6 million from share issuance and $762.2 million of secured borrowing proceeds, partly offset by $466.8 million of repayments.
- Year-end asset coverage was 174.41%, above the 150% statutory threshold. Debt availability was reported at $253.9 million, and undrawn shareholder capital commitments were $359.7 million.
Material changes versus the prior comparable period
- Investment income rose to $82.5 million from $36.3 million, while net investment income increased to $45.5 million from $20.3 million. Higher deployed capital and rising benchmark rates were the stated drivers.
- Net assets from operations fell to $17.3 million from $27.3 million, primarily because 2022 recorded $27.9 million of net unrealized depreciation, compared with $6.2 million of unrealized appreciation in 2021. Management attributed the valuation decline mainly to wider credit spreads and modest weakening in portfolio-company credit metrics amid macroeconomic and geopolitical uncertainty.
- NAV per share declined to $18.32 from $19.39; reported total return was 3.83% for 2022 versus 11.22% for 2021.
- The portfolio grew from 96 to 145 companies; investments at amortized cost increased to $1.226 billion from $770.3 million. New investments totaled $502.3 million, versus $610.7 million in 2021, while repayments and sales fell to $49.3 million from $181.1 million.
- Borrowings increased, and the company completed a $448.3 million term debt securitization in May 2022. Average daily borrowings rose to $566.2 million from $287.3 million, and average borrowing cost, including unused fees, rose to 4.29% from 3.00%.
- Internal risk ratings show a modest shift toward weaker categories: ratings 5 and 6 together represented 9.98% of portfolio fair value at year-end 2022, compared with 5.91% in 2021. One investment, fair-valued at $8.9 million or 0.74% of the portfolio, was rated 9; one loan was on non-accrual.
Outlook, commentary, risks and unusual items
- Management said it was not seeing broad deterioration in the portfolio at year-end, but cited supply-chain disruption, labor and resource shortages, commodity inflation, rapidly rising rates, market instability, geopolitical uncertainty and possible U.S. recession. It reported increased oversight of credits in vulnerable industries and an intention to favor defensive businesses with strong free cash flow.
- No numerical earnings or portfolio guidance was provided. Investment activity may vary with market conditions, originations, repayments and available capital.
- Interest-rate exposure is material: management’s year-end sensitivity model estimated that a 100-basis-point rate increase would raise annual net income by $4.4 million, while a 25-basis-point decrease would reduce it by $1.1 million, assuming the portfolio and borrowings were otherwise unchanged. Floating-rate borrower stress and higher funding costs remain risks.
- Valuations are inherently uncertain: nearly all portfolio investments were Level 3, using significant unobservable inputs. Fair values may differ materially from realizable proceeds, particularly in a forced sale.
- Other key risks include portfolio-company defaults, concentration in private middle-market borrowers, illiquidity, leverage and financing-covenant constraints, conflicts of interest with the affiliated adviser and other managed funds, and maintaining BDC and RIC status. PIK and other accrued non-cash income may create distributions or tax obligations without corresponding cash receipts.
- Shares were not publicly traded, and transfers generally require adviser consent; the filing describes a potential exchange listing or other liquidity event, but provides no assurance one will occur. If no permitted liquidity event occurs within five years of the March 2020 initial closing, subject to possible extensions, the company expects to use best efforts to wind down or liquidate.
- Post-period developments: on March 7, 2023, the Board designated the Adviser as valuation designee and approved a follow-on private offering expected to have closings through the quarter ending June 30, 2023.
Important facts for investors to verify
- Review the drivers and portfolio-company composition of the $27.9 million unrealized depreciation, including the rating-9 investment and non-accrual loan, and assess subsequent performance and recoveries.
- Confirm debt terms, borrowing-base availability, covenant headroom and securitization cash-flow tests; reported asset coverage was 174.41% against a 150% minimum.
- Assess whether higher floating-rate income can persist after considering rising financing costs, borrower ability to service debt and potential recession effects.
- Examine the basis and sensitivity of Level 3 valuations, including the effect of wider spreads and changes in borrower credit metrics.
- Verify dividend coverage and the sources of distributions. Declared per-share distributions rose through 2022, reaching $0.50 for the December declaration; a portion may be reinvested in shares rather than paid in cash.
- Consider the absence of a public market, transfer restrictions, possible dilution from future share issuance, and the timing and feasibility of a liquidity event.