Nuveen Churchill Direct Lending Corp. 2021 Form 10-K Summary
Business Context and Reporting Period
Annual report for the year ended December 31, 2021, filed March 10, 2022. The Company is a closed-end, externally managed, non-diversified business development company and regulated investment company focused primarily on senior secured loans to private-equity-owned U.S. middle-market companies. The Company commenced investment operations in March 2020 and has no public market for its shares.
Nuveen Churchill Advisors LLC serves as investment adviser, Churchill Asset Management LLC serves as sub-adviser, and Nuveen Churchill Administration LLC provides administrative services. The Company invests primarily in first-lien senior secured and unitranche loans, with opportunistic investments in subordinated debt and equity.
Key Financial Metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total investment income | $36.3 million | $13.3 million |
| Net investment income | $20.3 million | $5.2 million |
| Net realized gains | $0.8 million | $0.4 million |
| Net unrealized appreciation/(depreciation) | $6.2 million | $(3.5) million |
| Net increase in net assets from operations | $27.3 million | $2.1 million |
| Net investment income per share | $1.58 | $1.05 |
| Net asset value per share | $19.39 | $18.74 |
| Total return | 11.22% | (2.88)% |
| Net investment income / average net assets | 8.11% | 5.55% |
At December 31, 2021, net assets were $374.1 million, compared with $157.6 million at December 31, 2020. The investment portfolio had fair value of $773.0 million, versus $335.3 million, and consisted of 96 portfolio companies, versus 61. First-lien term loans represented 88.3% of portfolio fair value, subordinated debt 10.6%, and equity investments 1.1%.
The largest industry exposures were business services at 21.7%, healthcare and pharmaceuticals at 8.4%, high technology at 10.2%, beverage, food and tobacco at 7.8%, and telecommunications at 5.7%. The largest individual investment represented 2.3% of portfolio fair value.
Weighted average yield on debt and income-producing investments was 6.72% at cost and 6.71% at fair value. Approximately 96.42% of loans were floating-rate and 3.58% fixed-rate. No loans were on non-accrual status at year-end. Approximately 94.0% of investments were rated Internal Risk Rating 4, 4.8% rating 5, and 1.2% rating 6; the weighted average rating remained 4.1.
Cash Flow, Debt and Liquidity
Operating activities used $389.1 million of cash, primarily reflecting $610.7 million of investment purchases partially offset by $181.1 million of principal repayments and sales. Financing activities provided $411.7 million, including $209.2 million from common-share issuances and $329.4 million of secured borrowings, partially offset by $111.5 million of borrowing repayments and $14.7 million of distributions. Cash and restricted cash increased by $22.6 million to $35.2 million.
Gross borrowings were $410.0 million at December 31, 2021, compared with $192.2 million at the prior year-end. Borrowings consisted of $231.6 million under the SPV I Financing Facility, $34.0 million under the Subscription Facility, and $144.4 million under the SPV II Financing Facility. The reported asset coverage ratio was 191.2%, compared with 182.0% in 2020, against a required minimum of 150%.
Total facility commitments were $550.0 million, with $86.1 million available for borrowing based on collateral and applicable covenants. Uncalled investor capital commitments were $197.1 million. The Company reported adequate near-term liquidity, including cash and available borrowing capacity, to support its operations and unfunded commitments.
Unfunded delayed-draw investment commitments totaled $93.9 million at year-end. The Company stated that cash and available borrowing capacity were adequate to cover these commitments. Unreimbursed expense support from the Adviser totaled $2.7 million and is subject to conditional reimbursement.
Material Changes Versus the Prior Comparable Period
- Portfolio fair value increased 130.6% to $773.0 million, driven by $610.7 million of purchases and continued capital deployment.
- Total investment income increased 172.8%, and net investment income increased 288.4%, primarily because of the larger investment portfolio.
- Net unrealized results improved from $3.5 million of depreciation to $6.2 million of appreciation, reflecting tighter credit spreads, improved portfolio-company performance, and reduced COVID-19 effects.
- Debt increased by approximately $217.9 million, while the asset coverage ratio improved because equity capital and portfolio assets grew more rapidly than leverage.
- The Company issued approximately $209.2 million of common stock proceeds during 2021. Total capital commitments at year-end were $567.5 million, including $100.0 million from TIAA and its affiliates.
- Quarterly dividends declared increased from $0.28 per share for December 2020 to $0.40 per share for December 2021. Dividends declared for 2021 totaled $1.39 per share.
Guidance, Outlook, Risks and Unusual Items
Management expected the portfolio and investment income to continue growing as additional capital was raised through the private offering and planned follow-on offering. The Company did not provide earnings, NAV, dividend, or portfolio-growth guidance.
COVID-19 remained a material uncertainty, including potential effects on portfolio-company earnings, supply chains, labor availability, loan amendments, defaults, valuations, liquidity, and the ability to source and close new investments. Management reported increased monitoring of vulnerable industries and certain internal-rating downgrades, although no investments were on non-accrual at year-end.
Key structural risks include reliance on Churchill personnel, conflicts of interest with affiliated funds and TIAA, restrictions on affiliate transactions, illiquid Level 3 valuations, leverage and asset-coverage requirements, rising interest rates, and the transition away from LIBOR. A 100-basis-point increase in rates was estimated to reduce annual net income by $1.9 million based on the year-end portfolio and borrowings; larger rate increases were estimated to increase net income as floating-rate asset income rose faster than interest expense.
The Company pays a 0.75% annual management fee on specified average total assets before an exchange listing and no incentive fee before an exchange listing. Following a listing, the management fee would increase to 1.25%, and incentive fees would apply subject to a 6% annual hurdle. The Company is required to distribute sufficient taxable income to maintain RIC status and may recognize taxable income, including PIK income, before receiving cash.
There was no public market for the shares, and transfers generally require Adviser consent and compliance with securities-law exemptions. If an exchange listing or another permissible liquidity event is not completed within five years of the March 2020 initial closing, subject to extensions, the Company expects to pursue a wind-down or liquidation.
Subsequent events included a $30.0 million share issuance in January 2022, additional subscription commitments of approximately $124.1 million in January and February 2022, and approval of a follow-on private offering. On March 8, 2022, the sub-advisory fee allocation was changed, with no economic impact on fees payable by the Company. The audited financial statements received an unqualified opinion from PricewaterhouseCoopers LLP.
Important Facts for Investors to Verify
- Confirm the sustainability of the 2021 increase in net investment income and dividends as leverage, portfolio size, funding costs, and benchmark rates change.
- Review the valuation sensitivity of the predominantly Level 3 portfolio, including discount rates, credit performance, and industry concentrations.
- Reconcile gross borrowings, available facility capacity, asset coverage, and the $93.9 million of unfunded investment commitments.
- Assess the effect of rising interest rates, LIBOR replacement, and potential increases in borrowing costs on net investment income.
- Review the terms, timing, and dilution implications of the follow-on private offering and any potential future exchange listing.
- Monitor COVID-19-related credit deterioration, internal-rating changes, non-accruals, amendments, waivers, and realized or unrealized losses.
- Evaluate the $2.7 million of unreimbursed Adviser expense support and the conditions under which reimbursement may be required.