Nuveen Churchill Direct Lending Corp. quarterly report, Q3 FY2021

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Nuveen Churchill Direct Lending Corp. — Form 10-Q Summary

Business context and reporting period

Nuveen Churchill Direct Lending Corp. is a closed-end, externally managed 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, 2021, with comparisons to the corresponding 2020 periods and December 31, 2020 balance-sheet data. The company had 17,802,137 common shares outstanding as of November 10, 2021 and does not have publicly traded securities.

Financial performance and key metrics

  • Net assets: $313.0 million at September 30, 2021, compared with $157.6 million at December 31, 2020.
  • NAV per share: $19.27 at September 30, 2021, compared with $18.74 at December 31, 2020.
  • Investments at fair value: $655.8 million, up from $335.3 million at December 31, 2020. The portfolio comprised 86.8% first-lien term loans, 12.2% subordinated debt and 1.1% equity investments.
  • Investment income: $9.9 million for the third quarter and $23.7 million for the first nine months, compared with $3.0 million and $8.5 million, respectively, in the prior-year periods.
  • Net investment income: $5.8 million for the third quarter and $12.6 million for the first nine months, compared with $1.4 million and $3.3 million, respectively, in 2020.
  • Net realized and unrealized investment gains: $2.8 million in the third quarter and $5.4 million for the first nine months, compared with $3.3 million and a $4.2 million loss, respectively, in the prior-year periods.
  • Net increase in net assets from operations: $8.6 million for the third quarter and $17.9 million for the first nine months, compared with $4.6 million and a $0.9 million decrease, respectively, in 2020.
  • Per-share operating results: Net investment income was $0.41 for the third quarter and $1.12 for the first nine months. Net increase in net assets from operations was $0.60 and $1.60, respectively.
  • Distributions: $6.2 million in the third quarter and $12.7 million for the first nine months. The quarterly dividend declared in September 2021 was $0.38 per share, compared with $0.31 in June 2021 and $0.30 in March 2021.
  • Financial highlights: Nine-month total return was 8.30%, compared with negative 3.42% in 2020. The annualized ratio of net expenses to average net assets was 6.87%, while the ratio of net investment income to average net assets was 7.61%.

Cash flow, debt and liquidity

  • Cash and restricted cash: $15.2 million at September 30, 2021, up from $12.7 million at December 31, 2020.
  • Operating cash flow: The company used $306.5 million in operating activities during the first nine months, primarily reflecting $417.6 million of investment purchases partially offset by $103.2 million of investment repayments and sales.
  • Financing cash flow: Financing activities provided $309.0 million, including $150.0 million from common-share issuances and $244.5 million of secured borrowings, partially offset by $76.5 million of borrowing repayments and $8.7 million of distributions.
  • Debt: Secured borrowings outstanding were $360.1 million before deferred financing costs, compared with $192.2 million at December 31, 2020. The consolidated balance-sheet liability was $356.7 million net of deferred financing costs.
  • Credit facilities: Total commitments were $475.0 million, with $360.1 million drawn, $114.9 million unused and $86.8 million available for borrowing based on collateral and covenant requirements.
  • Asset coverage: The asset coverage ratio was 186.9%, compared with 182.0% at December 31, 2020, above the company’s 150% minimum requirement. The company reported compliance with all credit-facility covenants.
  • Capital commitments: Investor commitments totaled $519.7 million, of which $208.5 million remained undrawn, including $33.8 million of undrawn commitments from TIAA.
  • Unfunded portfolio commitments: $74.0 million at September 30, 2021, compared with $29.5 million at year-end 2020.

Material changes versus prior comparable periods

  • The portfolio expanded substantially, with investments at fair value nearly doubling from $335.3 million at year-end 2020 to $655.8 million at September 30, 2021. The number of portfolio companies increased from 61 to 88 during the first nine months.
  • The company purchased $417.6 million of investments during the first nine months of 2021, versus $74.2 million in the prior-year period, while proceeds from repayments and sales increased to $103.2 million from $33.2 million.
  • Investment income and net investment income increased primarily because of greater investment activity and deployed capital. Interest and debt-financing expenses also increased with higher borrowings.
  • Investment valuation improved: the company recorded $5.0 million of net unrealized appreciation for the first nine months of 2021, compared with $4.4 million of net unrealized depreciation in 2020. Management attributed the improvement to tighter credit spreads, better portfolio-company performance and reduced COVID-19 effects.
  • Portfolio composition became more diversified by industry and security type. Services: Business represented 19.0% of fair value, High Tech Industries 11.1%, Beverage, Food and Tobacco 9.3%, and Healthcare and Pharmaceuticals 7.4%.
  • Weighted-average yield on debt and income-producing investments increased to 6.75% at September 30, 2021 from 6.60% at December 31, 2020. Floating-rate loans represented 96.14% of debt investments.
  • The Subscription Facility commitment increased from $30.0 million to $50.0 million and its maturity was extended to September 9, 2022. The fundraising period for private share offerings was extended to March 13, 2022.

Guidance, outlook, risks and unusual items

  • Management expects the portfolio and investment income to continue growing as additional private-offering capital is raised, but provides no formal earnings or distribution guidance.
  • COVID-19 continues to create uncertainty regarding portfolio-company operating results, investment valuations, liquidity, deal sourcing and access to capital. Further portfolio depreciation could reduce NAV and increase the risk of breaching credit-facility covenants.
  • All portfolio investments were non-controlled and non-affiliated. Most investments were valued using Level 3, unobservable inputs; only $10.3 million, or approximately 1.5% of total investments at fair value, was classified as Level 2. Actual realizable values could differ materially from reported fair values.
  • No portfolio loans were on non-accrual status at September 30, 2021. Loans with PIK provisions had a fair value of $20.9 million, or approximately 3.2% of total investments, and generated $68,000 of PIK income during the first nine months.
  • The company had $2.6 million of unreimbursed expense support owed to the Adviser. The Adviser provided $467,000 of expense support during the first nine months.
  • LIBOR transition presents risk because both portfolio investments and borrowings reference LIBOR. Contract modifications, lower asset yields or higher borrowing costs could adversely affect results.
  • Other disclosed risks include valuation uncertainty, leverage and interest-rate sensitivity, illiquidity, competition, related-party conflicts, RIC and BDC qualification requirements, tax-law changes, ESG-related reputational risks and regulatory changes.
  • Subsequent to quarter-end, the company raised $9.3 million of additional commitments, issued 1,546,427 shares for $30.0 million on November 1, 2021 and received approval to renew its Investment Advisory Agreement through December 31, 2022.

Important facts for investors to verify

  • Whether the rapid increase in investments, leverage and unfunded commitments remains supported by capital availability, portfolio cash flows and asset-coverage headroom.
  • The sensitivity of NAV and earnings to Level 3 valuation assumptions, credit-spread movements and portfolio-company performance.
  • The sustainability of the $0.38-per-share quarterly distribution relative to net investment income, taxable income and available cash.
  • The effect of LIBOR replacement provisions on both floating-rate portfolio income and borrowing costs.
  • Whether COVID-19, refinancing conditions or industry concentration could lead to non-accruals, covenant breaches or realized losses.
  • The terms and timing of any future exchange listing or other liquidity event; the filing states that failure to complete a permissible liquidity event within five years of the initial closing, subject to extensions, would require best efforts to wind down or liquidate the company.