Nuveen Churchill Direct Lending Corp. quarterly report, Q1 FY2022

Business Context and Reporting Period

Nuveen Churchill Direct Lending Corp. filed an unaudited Form 10-Q for the three months ended March 31, 2022. The company is an externally managed, non-diversified business development company and regulated investment company focused primarily on senior secured and unitranche loans to private-equity-owned U.S. middle-market companies.

At March 31, 2022, the portfolio comprised 104 companies and was concentrated in business services, high technology, healthcare and pharmaceuticals, telecommunications, and beverage, food and tobacco. Approximately 87.0% of investments at fair value were first-lien term loans, 11.9% subordinated debt, and 1.2% equity investments.

Financial Highlights

Metric	Three Months Ended March 31, 2022	Three Months Ended March 31, 2021
Total investment income	$14.1 million	$6.2 million
Net investment income	$9.1 million	$2.9 million
Net realized gain	$36 thousand	$95 thousand
Net unrealized appreciation/(depreciation)	$(2.4) million	$0.9 million
Net increase in net assets from operations	$6.8 million	$3.9 million
Net investment income per share	$0.44	$0.34
Net increase in net assets per share	$0.33	$0.45
Dividend declared per share	$0.41	$0.30

Net investment income represented approximately 64% of total investment income. The filing does not provide a conventional GAAP net profit margin; net investment income before investment gains and losses was approximately 64% of investment income, while net increase in net assets from operations was approximately 48% of investment income.

Net assets: $402.7 million at March 31, 2022, compared with $374.1 million at December 31, 2021.
NAV per share: $19.31, compared with $19.39 at December 31, 2021.
Investments at fair value: $828.3 million, compared with $773.0 million at December 31, 2021.
Cash and restricted cash: $23.4 million at March 31, 2022, compared with $35.2 million at December 31, 2021.
Secured borrowings, net of deferred financing costs: $441.0 million, compared with $406.4 million at December 31, 2021.
Asset coverage: 190.5%, compared with 191.2% at December 31, 2021; the statutory minimum is 150%.
Weighted average portfolio yield: 6.75% at fair value and 6.72% at cost, compared with 6.71% and 6.72%, respectively, at year-end.
Floating-rate exposure: 95.82% of debt investments bore floating rates, and 98.40% of those floating-rate investments had interest-rate floors.

Cash Flow, Debt and Liquidity

Operating activities used $69.4 million of cash, primarily reflecting $62.4 million of investment purchases and working-capital movements.
Financing activities provided $57.6 million, including $30.0 million from common-share issuances and $68.6 million of secured-borrowing proceeds, partly offset by $33.8 million of borrowing repayments and $7.2 million of shareholder distributions.
Cash and restricted cash declined by $11.8 million during the quarter to $23.4 million.
Total facility commitments were $625.0 million, with $444.8 million outstanding and $160.5 million available for borrowing subject to collateral and covenant requirements.
The company had $377.3 million of undrawn investor capital commitments and $94.6 million of unfunded delayed-draw investment commitments. Management stated that available assets and financing sources were adequate for near-term requirements.
The SPV I facility was amended on March 31, 2022. Its maximum commitment increased from $275.0 million to $350.0 million, its reinvestment period was extended to March 31, 2025, its maturity was extended to March 31, 2027, and its interest rate changed to daily SOFR plus 2.20%.
The Subscription Facility had $35.5 million outstanding and matures September 9, 2022. The SPV II facility had $158.3 million outstanding and matures November 24, 2025.

Material Changes Versus Prior Comparable Period

Investment income increased 128% to $14.1 million, primarily because of substantially greater portfolio deployment and a larger investment base.
Net investment income increased 214% to $9.1 million. Management attributed the increase to higher investment activity; the ratio of net investment income to average net assets increased to 9.46% from 6.75% on an annualized basis.
Interest and debt financing expenses increased to $3.0 million from $2.2 million, while the average daily borrowing balance increased to $421.6 million from $197.2 million. The average interest rate declined to 2.7% from 3.8%.
Management fees increased to $1.5 million from $0.7 million as deployed capital increased.
Unrealized investment results shifted from $0.9 million of appreciation to $2.4 million of depreciation. Management attributed the depreciation primarily to market volatility, wider credit spreads, inflation, geopolitical uncertainty and other macroeconomic concerns.
Portfolio fair value increased by $55.3 million, while the number of portfolio companies increased from 96 to 104. Nine new portfolio companies were added and one exited during the quarter.
Credit quality remained broadly stable: the weighted average internal risk rating was 4.1 at both March 31, 2022 and December 31, 2021. However, the percentage of investments rated 4 declined to 90.4% from 94.0%, while ratings 5 and 6 increased to 6.4% and 2.8%, respectively, from 4.8% and 1.2%.
No portfolio loans were on non-accrual status at March 31, 2022 or December 31, 2021.

Guidance, Outlook, Risks and Unusual Items

Management expects investment income to grow as the portfolio expands through additional capital raised in the follow-on offering, but cautioned that investment activity and repayments may vary materially.
The company cited inflation, rising and shifting interest rates, supply-chain and labor disruptions, the Russia-Ukraine conflict, COVID-19 effects, financial-market volatility and widening credit spreads as principal sources of uncertainty.
Most investments are illiquid and valued using significant unobservable inputs. At March 31, 2022, Level 3 assets totaled $810.0 million, or approximately 95% of total investments excluding cash equivalents. Changes in discount rates, borrower performance or valuation multiples could materially affect NAV and earnings.
Interest-rate exposure is significant. A modeled 100-basis-point increase in rates was estimated to increase annualized net income by $0.6 million, while a 100-basis-point decrease was not presented; the filing presents a 25-basis-point decrease as increasing net income by approximately $0.1 million because debt reprices differently from investments.
The company remains exposed to the transition from LIBOR to SOFR and other successor rates. The filing states that many contracts contain successor-rate provisions, but some agreements may require modification.
The company has $2.7 million of unreimbursed expense support from the Adviser, subject to the Expense Support Agreement and potential reimbursement conditions.
Subsequent to quarter-end, the company issued 1,800,426 shares for $35.0 million and obtained $21.5 million of additional follow-on offering commitments.
The company priced a proposed $418.3 million debt securitization, plus approximately $79.3 million of retained subordinated notes and $30.0 million of additional loans. Closing remained subject to customary conditions, including required ratings and completion by May 20, 2022.
The proposed securitization would add structural subordination and cash-flow diversion risks: the retained junior securities receive cash only after senior obligations are paid and required coverage tests are satisfied.
The company stated that it was not subject to material legal proceedings and that disclosure controls were effective as of March 31, 2022.

Important Facts for Investors to Verify

Whether the proposed 2022 debt securitization closed on the stated terms and how it changed leverage, liquidity, asset coverage and interest expense.
The sustainability of the $0.41 quarterly dividend relative to recurring net investment income, taxable income and available cash.
Changes in NAV and portfolio fair values following the quarter-end widening of credit spreads and subsequent interest-rate increases.
Migration of portfolio loans into higher-risk internal ratings and any subsequent non-accruals, covenant breaches, restructurings or realized losses.
Availability and continued eligibility of the $160.5 million of borrowing capacity and the $377.3 million of undrawn investor commitments.
Terms and practical effects of the LIBOR-to-SOFR transition on portfolio yields, borrowing costs and credit agreements.
Potential reimbursement of the $2.7 million of Adviser-provided expense support and the effect on future distributions.
Whether the company completes a national exchange listing or another permitted liquidity event within the applicable five-year period.