Business Context and Reporting Period
Nuveen Churchill Direct Lending Corp. filed its Form 10-K for the fiscal year ended December 31, 2020. The company is a non-diversified, externally managed business development company and intends to qualify as a regulated investment company. It primarily invests in first-lien senior secured and unitranche loans to private-equity-owned U.S. middle-market companies, with limited subordinated debt and equity investments. The company began investment operations in March 2020 following its private offering and changed its name from Nuveen Churchill BDC, Inc. effective June 1, 2020.
Churchill Asset Management LLC performs substantially all day-to-day portfolio-management duties under a sub-advisory agreement with Nuveen Churchill Advisors LLC. The company had no employees and had no public market for its common stock as of year-end.
Key Financial Metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Total investment income | $13.3 million | $15.4 million |
| Net investment income after excise taxes | $5.2 million | $6.4 million |
| Net increase in net assets from operations | $2.1 million | $7.3 million |
| Net asset value per share | $18.74 | $20.00 |
| Net investment income per share | $1.05 | $1.58 |
| Total return | (2.88%) | 10.39% |
| Investments at fair value | $335.3 million | $178.8 million |
| Cash and cash equivalents | $12.6 million | $3.4 million |
| Total net assets | $157.6 million | $66.2 million |
| Secured borrowings, net | $188.3 million | $118.3 million |
| Weighted average yield at fair value | 6.67% | 6.84% |
| Portfolio companies | 61 | 46 |
Net expenses before expense support were $8.5 million, compared with $10.7 million in 2019. Interest and debt-financing expense was $4.5 million, management fees were $1.5 million, and the Adviser provided $424 thousand of expense support. Cumulative unreimbursed expense support was $2.4 million at year-end.
Cash flow used in operating activities was $152.1 million, primarily reflecting $211.2 million of investment purchases partially offset by $51.9 million of repayments and sales. Financing activities provided $161.3 million, including $95.0 million of common-share proceeds and $147.7 million of secured borrowings, partially offset by $74.0 million of borrowing repayments.
Portfolio, Leverage and Liquidity
- Fair value consisted of 96.5% first-lien term loans, 2.9% subordinated debt and 0.6% equity investments.
- Approximately 99.4% of debt investments carried floating rates; 0.6% carried fixed rates.
- High Tech Industries, Services: Business and Containers, Packaging & Glass represented the largest industry exposures at 17.4%, 15.4% and 9.8% of portfolio fair value, respectively.
- The largest portfolio investment was $15.0 million, or 4.46% of portfolio fair value.
- All portfolio investments were classified as Level 3 fair-value measurements, requiring significant unobservable inputs and Board judgment.
- Asset coverage was 182.0%, compared with 155.9% in 2019, and the company reported compliance with applicable credit-facility covenants.
- Total debt obligations were $192.2 million, including $146.1 million under the SPV I Financing Facility, $17.5 million under the Subscription Facility and $28.5 million under the SPV II Financing Facility.
- Available borrowing capacity at year-end was approximately $245.4 million, subject to collateral and covenant requirements. Uncalled investor capital commitments totaled $191.3 million.
- Unfunded portfolio-company loan commitments increased to $29.5 million from $4.2 million.
Material Changes Versus the Prior Comparable Period
- The investment portfolio expanded substantially, with fair value increasing 87.5% to $335.3 million and portfolio companies increasing from 46 to 61.
- Investment income declined 13.6%, and net investment income declined 18.7%, principally because investment activity was limited during the first half of 2020 amid the BDC registration process and the onset of COVID-19.
- Net unrealized depreciation of $3.5 million replaced the $378 thousand of unrealized appreciation recorded in 2019. Management attributed the decline primarily to wider credit spreads and weaker portfolio-company performance related to COVID-19.
- NAV per share declined 6.3% to $18.74, while total return declined to negative 2.88%.
- The company raised approximately $95.0 million through common-share issuances and increased secured borrowings. The SPV I facility was amended to increase its maximum commitment from $175 million to $275 million and extend its maturity to October 2025.
- The company formed SPV II and SPV III in March 2020; they began investing in September 2020 and were consolidated into the financial statements.
- One portfolio company with $2.4 million of fair value was downgraded to Internal Risk Rating 5, and four companies with aggregate fair value of $17.6 million were downgraded to Rating 6. No loans were on non-accrual status at year-end.
Guidance, Outlook, Commentary and Risks
Management expects the portfolio and investment income to grow as additional capital is raised and invested, but provided no formal earnings, distribution or portfolio-growth guidance. Subsequent to year-end, the company obtained $81.9 million of additional commitments in January 2021, issued $15.0 million of common stock in March 2021, and obtained another $48.2 million of commitments in March 2021.
COVID-19 remains the principal near-term uncertainty. Management stated that the pandemic could reduce portfolio-company earnings and liquidity, increase amendments, defaults and non-accruals, depress fair values, restrict investment originations and impair access to debt financing. Further unrealized depreciation could increase the risk of breaching asset-coverage or facility covenants.
- Interest-rate exposure is material because nearly all debt investments and borrowings are floating-rate and generally tied to LIBOR. Management estimated that a 100-basis-point increase in rates would reduce modeled annual net income by approximately $945 thousand, while a 25-basis-point decrease would increase it by approximately $407 thousand.
- LIBOR discontinuation and transition to alternative reference rates, including SOFR, could affect investment income, borrowing costs, valuations and contract terms.
- The portfolio is predominantly below-investment-grade, privately held and illiquid. Valuations may differ materially from realizable sale proceeds.
- Leverage magnifies gains and losses and may restrict distributions if asset-coverage or borrowing covenants are not met.
- The company is dependent on Churchill and Nuveen personnel, has conflicts-of-interest and co-investment risks, and pays management fees based on gross assets, including assets financed with leverage.
- The shares are restricted securities with no public market. If an exchange listing or another permitted liquidity event is not completed within five years of the initial closing, subject to Board-approved extensions, the company expects to use commercially reasonable efforts to wind down or liquidate.
- The company disclosed no material legal proceedings. Disclosure controls were considered effective, but the filing contains no management assessment or auditor attestation of internal control over financial reporting because of emerging-growth-company and newly reporting-company exemptions.
Investor Verification Checklist
- Verify the sustainability of the $1.05 per-share net investment income against the $0.68 per-share 2020 distributions and the effects of expense-support reimbursements.
- Review the $3.5 million unrealized depreciation, Internal Risk Rating downgrades and subsequent-quarter changes in portfolio-company credit quality.
- Confirm debt outstanding, borrowing-base availability, maturity dates and compliance with the 150% asset-coverage requirement.
- Assess the impact of LIBOR replacement, floating-rate floors and changes in benchmark rates on net investment income.
- Examine Level 3 valuation assumptions, particularly market yields, credit-performance discounts and EBITDA multiples.
- Track the $29.5 million of unfunded investment commitments and the $191.3 million of uncalled shareholder commitments for liquidity needs.
- Confirm subsequent capital commitments, the March 2021 share issuance and the company’s progress toward a future exchange listing or other liquidity event.