Nuveen Churchill BDC Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three months ended March 31, 2020, filed May 7, 2020. The company is a closed-end, externally managed, non-diversified business development company that invests primarily in senior secured loans to private-equity-owned U.S. middle-market companies. It completed its transition from the predecessor entity and elected BDC status on December 31, 2019. The company intends to qualify as a regulated investment company for the year ending December 31, 2020.
At March 31, 2020, the portfolio comprised 44 portfolio companies and consisted entirely of first-lien term loans. All investment loans had floating rates, primarily based on LIBOR.
Key financial metrics
| Metric | Three months ended March 31, 2020 | Comparable period / prior period |
|---|---|---|
| Total investment income | $3.0 million | $3.3 million in Q1 2019 |
| Net investment income | $0.6 million; $0.17 per share | $1.3 million; $0.37 per share |
| Net realized gain (loss) | $(31) thousand | $45 thousand in Q1 2019 |
| Net unrealized appreciation (depreciation) | $(4.0) million | $(0.3) million in Q1 2019 |
| Net increase (decrease) in net assets | $(3.4) million; $(1.04) per share | $1.1 million; $0.30 per share |
| Net asset value per share | $18.96 | $20.00 at December 31, 2019 |
| Net assets | $62.8 million | $66.2 million at December 31, 2019 |
| Fair value of investments | $167.2 million | $178.8 million at December 31, 2019 |
| Cash and restricted cash | $4.3 million | $3.5 million at December 31, 2019 |
| Debt outstanding | $107.9 million | $118.4 million at December 31, 2019 |
| Asset coverage ratio | 158.2% | 150% minimum authorized ratio |
Net cash provided by operating activities was $11.3 million, versus $31.7 million of net cash used in Q1 2019. Financing activities used $10.5 million, reflecting $1.0 million of new borrowings and $11.5 million of repayments. Cash and cash equivalents increased by $0.8 million during the quarter.
Total expenses before expense support were $2.6 million, compared with $2.0 million in Q1 2019. The Adviser provided $0.2 million of expense support, resulting in net expenses of $2.4 million. The annualized ratio of net expenses to average net assets was 15.66%, and the annualized ratio of net investment income to average net assets was 2.74%.
Material changes versus comparable periods
- Investment income declined 12% to $3.0 million, primarily because the portfolio was smaller following repayments and sales before the December 2019 merger.
- Net investment income declined approximately 57% to $0.6 million. Lower income and higher post-BDC operating costs, including professional fees and directors’ fees, contributed to the decline.
- Unrealized depreciation increased substantially to $4.0 million, primarily reflecting the broad market decline and credit-market disruption during the COVID-19 pandemic.
- NAV per share declined from $20.00 at December 31, 2019 to $18.96 at March 31, 2020; total return for the quarter was negative 5.18%.
- The portfolio declined from 46 to 44 companies and from $178.8 million to $167.2 million at fair value. No new portfolio companies were added; two exited the portfolio.
- Three portfolio companies totaling $12.2 million at fair value were downgraded to internal risk rating 5, and three totaling $12.2 million were downgraded to rating 6. No investments were rated 7 through 10, and no loans were on non-accrual status.
- Debt declined by $10.5 million from year-end, while available capacity under the $175.0 million financing facility increased to $65.2 million.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings or distribution guidance. The company expects its portfolio to grow as it raises capital through its private offering. As of March 31, 2020, capital commitments totaled $287.2 million, including $221.0 million remaining undrawn; $100.0 million of commitments were from an affiliated entity.
COVID-19 created significant uncertainty in portfolio-company operating performance, valuations, liquidity, defaults, investment originations and access to capital. Management expects the pandemic and related market disruption could increase requests for covenant waivers, reduce earnings and dividends, impair investment values, and restrict the company’s ability to source and close new investments. Investment advisers and certain service providers were working remotely, creating additional operational risk.
All investments were Level 3 fair-value measurements, requiring significant unobservable inputs and judgment. The reported $4.0 million unrealized depreciation may not reflect amounts ultimately realized in a sale. The portfolio was concentrated in high technology industries at 25.7% of fair value, telecommunications at 7.6%, business services at 8.0%, and banking, finance, insurance and real estate at 10.1%.
The financing facility has a $175.0 million commitment, bears interest at one-month LIBOR plus 2.25%, includes asset coverage and liquidity covenants, and matures October 28, 2022. The company had $2.5 million of unfunded investment commitments at quarter-end. The company’s 100% floating-rate portfolio and floating-rate debt create exposure to changes in interest rates and compressed spreads in a low-rate environment.
No distributions were declared during the quarter. Subsequently, the Board declared a $0.17 per-share dividend paid April 21, 2020. On April 23, 2020, the company issued a drawdown notice for approximately $20.0 million through the expected issuance of 1,069,522 shares on or around May 7, 2020. The Adviser’s cumulative unreimbursed expense support was $1.9 million at March 31, 2020.
Most important facts for investors to verify
- Whether COVID-19-related deterioration results in additional internal-rating downgrades, non-accruals, covenant breaches, defaults or further valuation losses.
- The sustainability of distributions relative to net investment income, available operating funds and the company’s RIC distribution requirements.
- The terms, availability and covenant compliance of the financing facility, including the 158.2% asset coverage ratio and $65.2 million of borrowing availability.
- The collectability and potential reimbursement timing of the $1.9 million in unreimbursed Adviser expense support.
- The reliability of Level 3 valuations and the effect of changes in market yields, credit performance and borrower leverage on NAV.
- The pace and pricing of capital drawdowns, including the subsequent $20.0 million equity issuance and remaining undrawn commitments.
- Exposure to LIBOR transition risk, as the company was evaluating the impact of the new reference-rate reform accounting guidance.