Nuveen Churchill Direct Lending Corp. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; financial statements are unaudited. Nuveen Churchill is an externally managed business development company investing primarily in senior secured loans to U.S. middle-market companies. Its shares began trading on the NYSE as NCDL in January 2024.
Financial and operating performance
| Metric | Q1 2024 | Q1 2023 or comparison |
|---|---|---|
| Total investment income | $51.6 million | $34.0 million; up about 52% |
| Net investment income | $29.7 million | $17.8 million; up about 67% |
| Net realized and unrealized investment result | $0.3 million gain | $5.0 million loss |
| Increase in net assets from operations | $30.0 million | $12.7 million |
| Net investment income per share | $0.56 | $0.62 |
| NAV per share | $18.21 at March 31 | $18.13 at December 31, 2023 |
| Total return based on NAV | 2.93% | 2.39% |
Investment income growth reflected a larger deployed portfolio and higher interest income. Expenses before expense support and waived incentive fees were $26.3 million, versus $16.2 million a year earlier. Interest and debt financing expense was $16.9 million, compared with $12.7 million; the average borrowing rate rose to 7.65% from 6.76%. The $4.5 million income incentive fee was waived under the post-IPO advisory terms. Annualized net-expense ratio after expense support and waived fees was 10.04%.
At quarter-end, investments had $1.795 billion fair value, principally first-lien loans (88.95% of investment fair value); subordinated debt was 9.28% and equity 1.77%. The portfolio comprised 195 companies across 26 industries. Business services (19.03%), healthcare and pharmaceuticals (11.91%), and high-tech industries (10.64%) were the largest industry exposures. Weighted-average debt and income-producing investment yield was 11.55% at cost; 94.69% of debt investments were floating-rate.
Balance sheet, cash flow and liquidity
- Total assets were $1.875 billion and net assets were $998.2 million at March 31, up from $1.731 billion and $747.9 million, respectively, at December 31, 2023. Share issuance was a major contributor to net-asset growth.
- Cash and cash equivalents were $64.1 million. Gross secured debt obligations were $825.5 million; secured borrowings on the balance sheet, net of deferred financing costs, were $817.2 million.
- Asset coverage was 220.92%, versus 178.57% at year-end. Reported available borrowing capacity at quarter-end was $431.5 million, subject to collateral, covenants and asset-coverage limits.
- Operating activities used $97.6 million, primarily reflecting $204.3 million of investment purchases partly offset by $54.9 million of repayments and sales. Financing activities provided $94.3 million, including $241.7 million from share issuance and $323.0 million of borrowings, offset principally by $449.4 million of debt repayments and $19.3 million of cash distributions. Cash and cash equivalents plus restricted cash declined $3.2 million.
Material changes and notable items
- The January IPO issued 5.5 million shares at $18.05 per share and generated $99.3 million in proceeds. The company also received $142.4 million from the final private-offering capital drawdown in January.
- In March, the company completed a $297.0 million CLO securitization (CLO-III). The new securitization and IPO were significant financing and capital-structure developments.
- Investment purchases were $204.3 million versus $99.9 million in Q1 2023; the portfolio increased to $1.815 billion at amortized cost from $1.294 billion a year earlier. The company funded 23 new portfolio companies and sold or received repayment from seven.
- Q1 realized a $3.6 million investment loss, mainly from final realization of an underperforming debt position; Q1 2023 had a $6.5 million realized gain, largely from equity realizations. Unrealized results improved by $15.2 million year over year, from an $11.1 million loss to a $4.1 million gain.
- One portfolio company was on non-accrual at March 31, with $2.3 million fair value and approximately 0.13% of investments at fair value; none was on non-accrual at year-end. The weighted-average internal risk rating remained 4.14.
Outlook, risks and contingencies
Management said private-credit conditions remained attractive and it was monitoring borrower effects from elevated interest rates and the broader economic environment. It noted modest spread tightening, increased prepayments and higher M&A activity, and said it was focusing on defensive businesses with strong free cash flow. Management reported no broad-based deterioration at the time but cautioned that portfolio-company performance could be affected by economic conditions. No formal earnings or yield guidance was provided.
- Interest-rate sensitivity is material: the filing estimates a 100-basis-point rate move changes annual net interest income by approximately $2.2 million in either direction, based on quarter-end balances and assumptions.
- Most investments are privately held and valued using significant unobservable inputs; actual sale proceeds may differ materially from reported fair values. PIK income was $2.0 million, or 3.86% of investment income, and is accrued income rather than current cash receipts.
- Unfunded investment commitments totaled $179.4 million. Management stated it believed available resources were adequate to meet them. The company reported compliance with debt covenants and no material legal proceedings or material changes to previously disclosed risk factors.
- After quarter-end, the revolver commitment was increased from $185 million to $250 million. The Board declared a $0.45-per-share second-quarter dividend payable around July 29, 2024. The share-repurchase plan allows up to $99.275 million of purchases below NAV; $2.1 million had been repurchased through May 3, leaving approximately $97.2 million. The filing also reports that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether portfolio credit quality, non-accrual exposure and recoveries from underperforming investments change in subsequent quarters.
- How floating-rate assets and liabilities, rate floors, and any rate cuts affect net investment income and borrowing costs.
- Whether investment valuations—most of which rely on Level 3 inputs—are supported by borrower performance and eventual realizations.
- How the IPO, CLO-III, debt repayments, available borrowing capacity and $179.4 million of unfunded commitments affect leverage and liquidity.
- Whether distributions remain supported by taxable income and cash generation, and the extent to which the repurchase plan is actually used while shares trade below NAV.