Business context and reporting period
Nuveen Churchill Direct Lending Corp. is an externally managed business development company (BDC) that invests primarily in senior-secured loans to U.S. middle-market companies. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. Its shares were not listed on an exchange; the company completed its final private-offering closing on April 28, 2023.
Key financial metrics
- Second-quarter 2023: Investment income was $37.1 million, up from $16.5 million a year earlier. Net investment income (NII) was $18.3 million ($0.60 per share), versus $9.7 million ($0.44 per share). Net realized and unrealized investment losses totaled $4.0 million, compared with losses of $12.5 million; net increase in net assets from operations was $14.3 million, versus a $2.7 million decrease.
- First half 2023: Investment income was $71.1 million, versus $30.6 million; NII was $35.7 million ($1.20 per share), versus $18.8 million. Net realized gains were $6.7 million, while unrealized depreciation was $15.4 million, resulting in net investment losses of $8.7 million and net increase in net assets from operations of $27.0 million, versus $4.0 million a year earlier.
- Margins and costs: NII was about 49% of investment income in Q2 2023, versus 59% in Q2 2022. Interest and debt financing expense rose to $14.3 million for the quarter and $27.0 million for the half year, from $4.2 million and $7.3 million, respectively. Management attributed the increase to higher borrowings and rates, as well as the 2022 securitization.
- Portfolio and NAV: Investment fair value was $1.351 billion at June 30, compared with $1.200 billion at December 31, 2022. Net assets were $557.5 million; NAV was $17.93 per share, down from $18.32 at year-end. First-lien loans represented 86.7% of investment fair value; subordinated debt 11.5% and equity 1.8%. The weighted-average yield on debt and income-producing investments at cost was 11.37%, up from 10.61% at year-end.
- Cash flow and liquidity: Cash and cash equivalents were $45.4 million. For the six months, operating activities used $120.5 million, largely reflecting investment purchases; financing activities provided $126.7 million, and cash increased $6.2 million. The company reported $247.5 million of available borrowing capacity and $320.9 million of undrawn shareholder commitments. Unfunded loan commitments were $114.7 million.
- Debt: Gross debt outstanding was $825.4 million ($818.6 million net of deferred financing costs on the balance sheet), up from $705.4 million gross at year-end. Asset coverage was 167.54%, above the 150% statutory minimum but down from 174.41%. Average borrowing rates were 7.17% in Q2 and 6.97% for the first half, versus 3.00% and 2.86% in the comparable 2022 periods.
- Distributions: The company declared $1.10 per share from investment income and $0.21 per share from realized gains during the first half. The June declaration included a $0.50 regular distribution and a $0.05 supplemental distribution per share.
Material changes versus comparable periods
- Income rose substantially as the portfolio expanded and floating benchmark rates increased; the portfolio’s weighted-average yield at cost rose from 8.11% at June 30, 2022 to 11.37% at June 30, 2023.
- Financing costs increased sharply alongside higher average borrowings and rates. Despite higher NII, the first-half unrealized loss was $15.4 million, leaving the increase in net assets from operations at $27.0 million.
- Portfolio companies increased from 145 at year-end 2022 to 161 at June 30, 2023. Investment fair value grew, while NAV per share declined from $18.32 to $17.93.
- Credit ratings show some deterioration: 7.64% of portfolio fair value was rated “Performing—Management Notice” (rating 5), and 1.52% was on the watch list at rating 7. Two companies, representing $4.7 million fair value, were rated probable loss; loans on non-accrual were 0.34% of portfolio fair value, down from 0.74% at year-end.
Outlook, risks and unusual items
- Management said it had not observed broad portfolio deterioration, but cited recession risk, inflation, supply-chain and labor pressures, geopolitical instability, banking-system strain, and headwinds in financing and M&A markets. It is monitoring vulnerable credits and says it intends to favor defensive businesses with strong free cash flow.
- Interest-rate movements affect both floating-rate portfolio income and floating-rate borrowing costs. Approximately 94.55% of debt investments were floating-rate; the filing estimates a 100-basis-point rate increase would raise annual net income by $2.3 million, while a 100-basis-point decrease would reduce it by the same amount, based on the portfolio and debt outstanding at June 30.
- Valuation is a key risk: most investments are Level 3, based on significant unobservable inputs, and realized proceeds could differ materially from reported fair values. The Adviser became the board-designated valuation designee effective in Q1 2023, subject to board oversight.
- Nearly all LIBOR-referenced loans had been amended to alternative rates, primarily CME Term SOFR. The filing warns that replacement benchmarks may not produce equivalent economics and may introduce pricing or liquidity risk.
- A new senior secured revolving facility was entered into on June 23, with an initial maximum of $185 million and potential accordion capacity to $300 million; it had no borrowings at quarter-end. The $35 million subscription facility outstanding matures September 8, 2023, and the SMBC facility’s draw period is scheduled to end November 24, 2023.
- After quarter-end, 4,357,515 shares were issued on July 17 for approximately $78.6 million. Management reported no material legal proceedings and no defaults on senior securities.
Important facts for investors to verify
- How much of the portfolio’s fair-value depreciation reflects borrower-specific credit deterioration versus market pricing, and how might that affect NAV?
- Whether NII and distributions remain adequately supported after higher borrowing costs, and how the near-term facility maturities and draw-period deadlines will be managed.
- Current watch-list exposures, non-accrual trends, and the repayment prospects for positions identified as probable loss.
- Availability and terms of undrawn credit capacity and shareholder commitments, including any borrowing-base or covenant restrictions.
- How the post-quarter $78.6 million share issuance affects shares outstanding, NAV per share, and investment capacity.