Nuveen Churchill Direct Lending Corp. — Q3 2023 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2023; financial statements are unaudited. The externally managed BDC invests mainly in senior secured and unitranche loans to U.S. middle-market companies and has elected RIC tax treatment. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Investment income | $41.7m | $22.6m | $112.8m | $53.2m |
| Net investment income | $21.7m | $12.4m | $57.4m | $31.3m |
| Net realized and unrealized investment gain (loss) | $(1.5)m | $(6.4)m | $(10.2)m | $(21.2)m |
| Net increase in net assets from operations | $20.1m | $6.0m | $47.2m | $10.0m |
| Net investment income per share | $0.62 | $0.51 | $1.83 | $1.39 |
- At September 30, 2023, investments had fair value of $1.481bn (amortized cost $1.510bn), total assets were $1.539bn, net assets were $639.0m, and NAV was $17.96 per share, versus $18.32 at year-end 2022.
- Cash and cash equivalents were $36.0m, including $0.05m restricted cash. Secured debt was $866.5m, up from $705.4m at December 31, 2022. Asset coverage was 173.74%, above the 150% minimum.
- For the nine months, operating activities used $234.8m, mainly reflecting investment purchases; financing activities provided $231.5m. Cash and restricted cash declined $3.3m to $36.0m.
- Debt investment yield averaged 11.60% at cost, up from 10.61% at year-end 2022. 94.22% of debt investments were floating-rate. Average borrowing rates rose to 7.17% for the nine-month period from 3.52% in 2022.
- Portfolio fair value was concentrated in first-lien loans (86.29%); healthcare and pharmaceuticals represented 10.94%, high tech 8.55%, and business services 20.58%. The portfolio comprised 174 companies across 24 industries.
Material changes versus prior periods
- Nine-month investment income more than doubled year over year, primarily from a larger deployed portfolio and higher benchmark rates. Portfolio cost grew to $1.510bn from $1.121bn at September 2022.
- Higher borrowings and borrowing costs contributed to the increase in interest and debt financing expense to $43.1m for nine months from $14.6m. Total expenses before expense support rose to $55.6m from $22.1m.
- Nine-month realized and unrealized investment losses narrowed versus 2022. Q3 included a $13.1m realized loss, primarily from final realization of an underperforming debt investment, partly offset by $11.6m of unrealized appreciation.
- Risk-rating categories 5–10 increased to 12.71% of portfolio fair value from 10.72% at year-end 2022. Non-accrual investments decreased to $1.7m, or 0.12% of portfolio fair value, from $8.9m, or 0.74%.
- Net assets increased from $525.0m at year-end 2022, supported by share issuance and operations, while NAV per share declined from $18.32. Nine-month declared distributions totaled $58.5m, including $6.0m from realized gains.
Outlook, risks and notable items
- Management gave no specific earnings or distribution guidance. It reported ongoing credit-market pressure, macroeconomic uncertainty, elevated rates and inflation, geopolitical instability, banking-system strain, and recession risk. It said it was monitoring vulnerable credits and seeking defensive businesses with strong free cash flow; it had not observed broad-based deterioration but cautioned that portfolio performance could worsen.
- Management’s liquidity resources included $36.0m cash and equivalents, $214.7m of available facility borrowings, and $242.4m of undrawn shareholder commitments. Unfunded delayed-draw loan commitments were $182.2m; the company said it believed available resources were adequate to meet them.
- Debt carries floating rates, and interest expense may rise with benchmarks. A modeled 100-basis-point rate increase was estimated to increase annualized net interest cash flow by $4.5m; a 100-basis-point decrease was estimated to reduce it by $4.5m. Actual effects may differ.
- Most investments are illiquid and valued using Level 3 inputs; fair values may differ materially from amounts realized in a sale. The Adviser became valuation designee during Q1 2023, subject to Board oversight.
- The subscription facility expired and was repaid in September. The SMBC facility’s draw period was scheduled to end November 24, 2023. After quarter-end, SPV IV joined the SMBC facility and the company called $100m of shareholder capital, due November 3, 2023.
- Q3 distributions declared were $0.50 per share regular plus $0.05 supplemental. The company intends quarterly distributions but cannot assure a particular amount. Advisory agreements were renewed through December 31, 2024.
- The company reported no material legal proceedings, no defaults on senior securities, and effective disclosure controls and internal control over financial reporting. The filing identifies transition from LIBOR, banking-system strain, valuation uncertainty, rates, inflation and broader economic conditions as risks.
Key facts investors should verify
- Whether the post-quarter $100m capital call was funded and how proceeds affect NAV, portfolio deployment and leverage.
- Portfolio valuation assumptions and movements, especially Level 3 marks, the realized Q3 loss and the increase in lower credit ratings.
- Debt-facility availability, borrowing costs, covenant compliance and the status of the SMBC draw period after its scheduled November 2023 end.
- Coverage of $182.2m in unfunded investment commitments by cash, available credit and remaining shareholder commitments.
- Whether investment income and cash collections support declared distributions, including the supplemental component, given PIK income and the company’s RIC distribution requirements.