Nuveen Churchill Direct Lending Corp. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and six months ended June 30, 2020. The company is a non-diversified, externally managed business development company focused primarily on senior secured and unitranche loans to U.S. middle-market companies. It intends to qualify as a regulated investment company for the year ending December 31, 2020. The company changed its name from Nuveen Churchill BDC, Inc. effective June 1, 2020.
The portfolio consisted entirely of first-lien term loans at June 30, 2020. All debt investments had floating interest rates, primarily based on LIBOR. The company had 42 portfolio companies versus 46 at December 31, 2019.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 |
|---|---|---|
| Total investment income | $2.6 million | $5.5 million |
| Net investment income | $1.3 million | $1.9 million |
| Net realized gain on investments | $0.1 million | $0.1 million |
| Net unrealized depreciation | $(3.6) million | $(7.6) million |
| Net decrease in net assets from operations | $(2.1) million | $(5.5) million |
| Net investment income per share | $0.34 | $0.53 |
| Net decrease in net assets per share | $(0.54) | $(1.53) |
Net investment income represented approximately 52% of quarterly investment income and 35% of six-month investment income. The six-month ratio of net investment income to average net assets was 5.26%, compared with 8.36% in the prior-year period. The ratio of net expenses to average net assets was 10.74%, compared with 11.21% in the prior-year period.
- Net assets were $80.1 million at June 30, 2020, compared with $66.2 million at December 31, 2019.
- NAV per share was $18.28, down from $20.00 at December 31, 2019.
- Investment fair value was $161.7 million, down from $178.8 million at year-end; amortized cost was $169.3 million.
- Cash and cash equivalents were $10.9 million, plus $0.1 million of restricted cash.
- Six-month operating cash flow was $14.9 million, compared with $(62.6) million in the prior-year period.
- Six-month financing cash flow was $(7.5) million; cash and restricted cash increased by $7.5 million to $11.0 million.
- Debt outstanding was $91.9 million, net of deferred financing costs, versus $118.3 million at December 31, 2019. Gross borrowings were $91.9 million under a $175.0 million facility.
- The financing facility had $79.1 million available for borrowing, subject to collateral and covenant requirements, and matures October 28, 2022.
- Asset coverage was 187.1%, compared with the company’s 150% minimum framework.
- Weighted-average portfolio yield was 5.97% at cost and 6.25% at fair value, down from 6.84% at both measures at December 31, 2019.
Material Changes Versus Comparable Periods
- Six-month investment income declined to $5.5 million from $7.4 million, primarily because of a smaller portfolio, lower investment activity and lower LIBOR.
- Six-month net investment income declined to $1.9 million from $3.2 million. Interest and debt financing expense fell to $1.9 million from $3.4 million, but this was more than offset by lower investment income and higher professional, directors’ and administrative expenses.
- Results shifted from a $3.4 million increase in net assets from operations in the prior-year period to a $5.5 million decrease, primarily due to unrealized depreciation.
- The portfolio recorded $7.6 million of net unrealized depreciation in the first six months, compared with $0.1 million of unrealized appreciation in the prior-year period. Management attributed the decline primarily to COVID-19-related market deterioration, wider credit spreads and weaker portfolio-company performance.
- Debt investments declined in fair value by approximately $17.1 million from year-end, while debt outstanding declined by approximately $26.5 million.
- The company issued 1,069,522 common shares for $20.0 million on May 7, 2020. Total capital commitments were $291.4 million at June 30, 2020, of which $205.2 million remained undrawn.
- Six portfolio companies were downgraded because of COVID-19-related changes in financial condition and performance: two companies totaling $8.4 million were assigned internal rating 5, and four companies totaling $18.1 million were assigned rating 6. No loans were on non-accrual status.
Outlook, Risks, Contingencies and Unusual Items
Management provided no formal earnings or dividend guidance. It expects the portfolio to grow as additional capital is raised, but acknowledged that COVID-19 could impair portfolio-company liquidity, cash interest payments, new originations, valuations and distributions.
- COVID-19 created significant uncertainty, including potential borrower defaults, covenant breaches, requests for waivers, refinancing difficulty, valuation volatility and reduced investment opportunities.
- All portfolio investments were Level 3 fair-value measurements using significant unobservable inputs. Estimated values may differ materially from realizable values in a forced or illiquid sale.
- The portfolio was concentrated in high-tech industries at 25.1% of fair value, banking, finance, insurance and real estate at 10.5%, telecommunications at 7.5%, consumer goods durable at 7.9%, business services at 7.9% and consumer services at 7.0%.
- Unfunded loan commitments totaled $4.7 million, primarily to NJEye LLC, North Haven Spartan US Holdco LLC, TailWind Randys LLC and other portfolio companies.
- The Adviser had $1.9 million of unreimbursed expense payments outstanding at June 30, 2020. These payments may be reimbursable under specified conditions.
- All loans and borrowings were floating rate. Management warned that lower rates may compress net investment income, while higher rates may increase borrowing costs and borrower stress.
- LIBOR transition remains a risk for investments and financing arrangements extending beyond 2021. The company was evaluating the impact of related accounting guidance.
- There were no material legal proceedings, defaults upon senior securities or material changes to disclosure controls.
- Subsequent events included a $10.0 million additional investor commitment on July 8, a planned $20.0 million share issuance announced July 23, and a $0.28-per-share dividend declared August 4, 2020, payable approximately August 11.
Most Important Facts for Investors to Verify
- Whether COVID-19-related downgrades lead to non-accruals, defaults, additional valuation losses or reduced distributions.
- The sustainability of the 5.97% portfolio yield and net investment income after the decline in LIBOR.
- The quality and methodology of the Level 3 valuations, especially for the most affected consumer-services and other cyclical exposures.
- Actual drawdowns under the $205.2 million of remaining capital commitments and the timing of portfolio deployment.
- Compliance with financing-facility asset coverage, liquidity and other covenants, including the October 2022 maturity.
- Potential reimbursement obligations related to the Adviser’s $1.9 million of unreimbursed expense support.
- Progress in replacing LIBOR in portfolio loans and financing arrangements.
- Whether the planned August equity issuance and subsequent $0.28 dividend occurred as described.