Business Context and Reporting Period
Nuveen Churchill Direct Lending Corp. is a closed-end, externally managed, non-diversified business development company focused primarily on senior secured loans to private-equity-owned U.S. middle-market companies. The unaudited Form 10-Q covers the three and nine months ended September 30, 2020. The company changed its name from Nuveen Churchill BDC, Inc. effective June 1, 2020 and operates under a private offering and capital-call structure.
The company intends to qualify as a regulated investment company for the year ending December 31, 2020. SPV II and SPV III commenced investment operations during September 2020 and are consolidated.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | Comparable 2019 Period |
|---|---|---|---|
| Total investment income | $3.0 million | $8.5 million | $4.2 million and $11.7 million |
| Net investment income | $1.4 million | $3.3 million | $1.9 million and $5.1 million |
| Net realized gain on investments | $0.1 million | $0.2 million | $0.2 million and $0.3 million |
| Net unrealized appreciation/(depreciation) | $3.1 million | $(4.4) million | $0.1 million and $0.2 million |
| Net increase/(decrease) in net assets from operations | $4.6 million | $(0.9) million | $2.2 million and $5.6 million |
| Net investment income per share | $0.27 | $0.80 | $0.44 and $1.25 |
| NAV per share | $18.86 at September 30, 2020 | $20.00 at December 31, 2019 |
Net assets were $103.5 million at September 30, 2020, compared with $66.2 million at December 31, 2019. Investments at fair value were $215.7 million, versus $178.8 million at year-end 2019. The portfolio comprised approximately 98.8% first-lien term loans, 0.9% subordinated debt and 0.3% equity investments. All portfolio investments were classified as Level 3.
The portfolio had 50 companies at September 30, 2020, compared with 46 at December 31, 2019. High Tech Industries represented 24.0% of portfolio fair value, Services: Business 20.4%, Telecommunications 5.6%, Transportation: Cargo 5.2%, and Services: Consumer 5.3%. The largest individual investment represented 6.9% of portfolio fair value.
Cash Flow, Debt, Liquidity and Distributions
- Cash and cash equivalents were $24.5 million, including $50 thousand of restricted cash, compared with $3.5 million at December 31, 2019.
- Operating activities used $23.2 million during the nine months, including $74.2 million of investment purchases and $33.2 million of principal repayments and investment-sale proceeds.
- Financing activities provided $44.2 million, including $40.0 million from common-share issuances and $42.5 million of secured borrowings, partly offset by $36.0 million of debt repayments and $1.8 million of distributions.
- Secured borrowings totaled $124.9 million before deferred financing costs: $119.9 million under the Financing Facility and $5.0 million under the Subscription Facility.
- Available borrowing capacity was $47.8 million under the Financing Facility and $25.0 million under the Subscription Facility, subject to borrowing-base and covenant requirements.
- The asset coverage ratio was 182.8% at September 30, 2020, above the company’s 150% minimum.
- Capital commitments totaled $302.7 million, of which $196.5 million remained undrawn. TIAA accounted for $100.0 million of commitments, with $33.8 million undrawn.
- Dividends declared during the period were $0.17 per share and $0.28 per share. The Board subsequently declared a $0.23 per-share dividend payable in November 2020.
Material Changes Versus Prior Comparable Period
- Investment income declined 26% for the quarter and 27% for the nine-month period, primarily because the portfolio was smaller during portions of the comparable periods, interest rates declined, and investment activity slowed during the first half of 2020.
- Net investment income declined 29% for the quarter and 36% for the nine months. Lower debt-financing costs partially offset lower investment income.
- Quarterly results benefited from $3.1 million of unrealized appreciation as credit spreads tightened and certain portfolio companies improved after the second-quarter market disruption. Nine-month results still reflected $4.4 million of unrealized depreciation, largely attributable to COVID-19-related market and portfolio-company deterioration.
- Professional fees, directors’ fees and general and administrative expenses increased substantially versus 2019 following the company’s conversion to a BDC and related public-company infrastructure. The Adviser provided $266 thousand of expense support during the nine months.
- Portfolio fair value increased by $36.9 million from year-end 2019, while the number of portfolio companies increased from 46 to 50. The portfolio became more concentrated in High Tech Industries and Services: Business and less exposed to Aerospace & Defense, Healthcare & Pharmaceuticals and Consumer Goods: Non-durable.
- Two portfolio companies totaling $9.2 million of fair value were downgraded to internal risk rating 5, and four companies totaling $18.0 million were downgraded to rating 6, primarily because of COVID-19-related changes in financial condition and performance. No investments were on non-accrual status at September 30, 2020.
Guidance, Outlook, Risks and Unusual Items
- Management expects the portfolio and investment income to grow as additional private-offering capital is raised, but cautions that COVID-19 may restrict portfolio-company cash interest payments, investment originations and portfolio growth.
- COVID-19 remains the principal near-term risk, with potential effects on borrower liquidity, defaults, covenant waivers, valuations, refinancing, capital-market access and the company’s ability to source and close investments.
- Approximately 99.1% of debt investments bore floating rates and 0.9% bore fixed rates. Borrowings also bear floating rates, exposing net investment income to changes in LIBOR and interest-rate spreads. Management’s sensitivity analysis indicates that a 100-basis-point increase in rates would reduce modeled net income by approximately $486 thousand, while a 25-basis-point decrease would increase it by approximately $625 thousand.
- Most investments are illiquid Level 3 assets valued using unobservable inputs. Actual realizable values could differ materially from reported fair values, particularly in a forced sale or continued market disruption.
- The portfolio included $10.7 million of unfunded investment commitments, compared with $4.2 million at December 31, 2019.
- The company had $2.3 million of unreimbursed expense support owed to the Adviser, subject to the terms of the Expense Support Agreement.
- LIBOR transition risk may affect investment income, borrowing costs and the terms or valuation of LIBOR-linked investments and facilities after 2021.
- Subsequent to quarter-end, the Financing Facility was amended to increase total commitments from $175 million to $275 million, extend the reinvestment period to October 2023 and extend maturity to October 2025, subject to revised terms including a 1.50-to-1.00 asset coverage requirement.
- Subsequent equity drawdowns included $20.0 million funded on October 21, 2020 and a $35.0 million issuance expected around November 6, 2020. Additional investor commitments of $7.0 million were obtained in October.
Important Facts for Investors to Verify
- Confirm the sustainability of net investment income and dividends given lower portfolio yields, reduced interest rates and COVID-19-related borrower risks.
- Review the valuation methodology and sensitivity of the $215.7 million Level 3 investment portfolio to credit spreads, borrower performance and discount rates.
- Monitor internal risk-rating downgrades, non-accrual developments, covenant compliance and the performance of the largest portfolio exposures.
- Verify available borrowing capacity, asset coverage and compliance with the amended Financing Facility and Subscription Facility covenants.
- Assess the timing and collectability of the $196.5 million of undrawn shareholder commitments and the company’s ability to deploy that capital profitably.
- Evaluate the effect of the $2.3 million expense-support reimbursement obligation and higher BDC-related operating expenses on future distributions.
- Track LIBOR replacement provisions, refinancing needs and the impact of future rate movements on both portfolio income and borrowing expense.