Business Context and Reporting Period
Nuveen Churchill Direct Lending Corp. is a closed-end, externally managed, non-diversified business development company and regulated investment company focused primarily on senior secured and unitranche loans to private-equity-owned U.S. middle-market companies. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods and December 31, 2021 balance-sheet data.
As of September 30, 2022, the portfolio comprised 135 companies and was concentrated in first-lien term loans, which represented 87.9% of investments at fair value. The largest industry exposures were Business Services at 21.9%, High Tech Industries at 9.9%, Healthcare and Pharmaceuticals at 9.1%, Telecommunications at 4.4%, and Automotive at 6.6%.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Total investment income | $22.6 million, versus $9.9 million | $53.2 million, versus $23.7 million |
| Net investment income | $12.4 million, versus $5.8 million | $31.3 million, versus $12.6 million |
| Net realized gain (loss) | $(0.5) million, versus $0.4 million | $(0.4) million, versus $0.4 million |
| Net unrealized appreciation (depreciation) | $(5.9) million, versus $2.4 million | $(20.8) million, versus $5.0 million |
| Net increase in net assets from operations | $6.0 million, versus $8.6 million | $10.0 million, versus $17.9 million |
| Net investment income per share | $0.51, versus $0.41 | $1.39, versus $1.12 |
Net investment income represented approximately 55.0% of investment income for the quarter and 58.7% for the nine months, based on reported figures. The annualized ratio of net investment income to average net assets was 9.98%, versus 7.61% in the prior-year period; the annualized ratio of net expenses to average net assets was 7.03%, versus 6.87%.
- Net assets increased to $470.8 million from $374.1 million at December 31, 2021, primarily reflecting $115.0 million of net share issuance proceeds and $31.3 million of net investment income, partially offset by $30.2 million of distributions and $21.2 million of net investment losses.
- NAV per share declined to $18.54 from $19.39 at December 31, 2021 and $19.27 at September 30, 2021.
- Investments at fair value increased to $1.103 billion from $773.0 million at December 31, 2021. The portfolio's weighted-average yield increased to 9.76% at fair value from 6.92%, while 95.7% of debt investments bore floating rates.
- Cash and cash equivalents were $37.5 million, plus $0.1 million of restricted cash.
- Secured borrowings were $658.2 million, net of deferred financing costs, compared with $406.4 million at December 31, 2021. Reported asset coverage was 170.9%, versus 191.2%.
- Available borrowing capacity was approximately $293.1 million, consisting of $191.2 million under the Wells Fargo facility, $33.7 million under the Subscription Facility, and $68.2 million under the SMBC facility.
- Cash flow used in operating activities was $339.6 million, primarily reflecting $385.1 million of investment purchases. Financing activities provided $341.9 million, including $115.0 million of equity proceeds and $664.2 million of secured borrowing proceeds, partially offset by $410.0 million of debt repayments and $24.0 million of distributions.
Material Changes Versus Prior Comparable Period
- Investment income more than doubled, primarily because of substantially greater investment activity and higher floating reference rates.
- Interest and debt financing expense increased to $7.3 million for the quarter and $14.6 million for the nine months, from $2.5 million and $7.0 million, respectively. Average daily borrowings increased to $614.0 million for the quarter and $516.8 million for the nine months, while the average interest rate increased to 4.5% and 3.5%, respectively.
- Credit-market spread widening and macroeconomic and geopolitical uncertainty produced $5.9 million of quarterly and $20.8 million of year-to-date unrealized depreciation, compared with unrealized appreciation in 2021.
- The Company completed a $448.3 million term debt securitization on May 20, 2022 through CLO-I. CLO-I debt outstanding at September 30, 2022 was $342.0 million and matures in 2034.
- The SMBC Financing Facility commitment increased from $225.0 million to $300.0 million. The Wells Fargo facility's maximum commitment was reduced from $350.0 million to $275.0 million following the securitization.
- The Company funded 40 new portfolio companies during the nine months, compared with 39 in the prior-year period, and ended the period with 135 portfolio companies versus 88.
- Quarterly distributions increased to $0.47 per share from $0.38 in the comparable 2021 quarter. Nine-month distributions were $1.31 per share versus $0.99.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal earnings or distribution guidance. It expects investment income to grow as remaining capital commitments are drawn and the portfolio expands, but noted that investment activity may vary with credit-market conditions, merger and acquisition activity, competition, economic conditions, and available capital.
Management reported no broad deterioration in portfolio performance as of the filing date and stated that it was emphasizing defensive businesses with low cyclicality and strong free cash flow. The weighted-average internal risk rating remained 4.1. Approximately 90.9% of portfolio fair value was rated “Performing - Stable Risk,” 4.2% “Performing - Management Notice,” and 2.8% “Watch List - Low Maintenance”; no investments were reported in the higher-risk rating categories 8 through 10. No loans were on non-accrual status.
- Key risks include rising interest rates, recession, inflation, supply-chain and labor disruptions, geopolitical instability, credit-spread widening, borrower defaults, competition, and valuation uncertainty for illiquid Level 3 investments.
- Approximately 95.8% of floating-rate debt investments were subject to interest-rate floors. Management's modeled sensitivity indicated that a 100-basis-point rate increase would increase estimated annual net income by $4.0 million, while a 25-basis-point decrease would increase it by $0.1 million; actual results may differ materially.
- Unfunded delayed-draw loan commitments totaled $146.7 million. Management stated that cash, available credit facilities, and investor capital commitments were expected to provide adequate coverage.
- Remaining undrawn shareholder capital commitments were $419.7 million, against total commitments of $905.2 million.
- The 2022 securitization introduces structural subordination and cash-diversion risk: distributions to the Company from CLO-I may be restricted if asset-coverage or interest-coverage tests are not satisfied.
- The portfolio included $49.8 million of loans with PIK provisions, or approximately 4.5% of investments at fair value. PIK income increases reported income but generally is not received in cash until maturity or repayment.
- The Company must maintain RIC and BDC regulatory requirements, including applicable asset coverage and qualifying-asset tests. It was in compliance with credit-facility covenants at September 30, 2022.
- The Company stated that no material legal proceedings were pending or threatened, and no subsequent event requiring disclosure was identified through the financial-statement issuance date.
Important Facts for Investors to Verify
- Reconcile portfolio fair values and Level 3 valuation assumptions, particularly the impact of discount rates and credit-spread changes on NAV.
- Review the $658.2 million debt balance, floating-rate exposure, maturity schedule, covenants, and available borrowing capacity.
- Assess CLO-I's asset-coverage and interest-coverage tests and the potential restriction of cash distributions to the Company.
- Monitor the $146.7 million of unfunded commitments against cash, undrawn facilities, and remaining shareholder capital commitments.
- Compare future cash distributions with net investment income, PIK income, realized gains and losses, and any potential return-of-capital components.
- Confirm the Company's continued RIC and BDC qualification and its ability to maintain at least 150% asset coverage.
- Evaluate exposure to rising funding costs, LIBOR-to-SOFR transition terms, recession risk, and borrower credit deterioration.