Nuveen Churchill Direct Lending Corp. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2021. The company is an externally managed, non-diversified business development company and intends to qualify as a regulated investment company. Its objective is to generate current income primarily through senior secured loans to private equity-owned U.S. middle-market companies.
The company’s portfolio consisted primarily of first-lien term loans and unitranche investments. The shares were not listed on a national securities exchange during the period.
Financial Metrics
| Metric | March 31, 2021 / Quarter | Comparable Period or Prior Date |
|---|---|---|
| Total investment income | $6.2 million | $3.0 million in Q1 2020 |
| Net investment income | $2.9 million; $0.34 per share | $0.6 million; $0.17 per share in Q1 2020 |
| Net realized gain on investments | $0.1 million | $0.03 million loss in Q1 2020 |
| Net unrealized appreciation | $0.9 million | $4.0 million depreciation in Q1 2020 |
| Net increase in net assets from operations | $3.9 million; $0.45 per share | $3.4 million decrease; $1.04 decrease per share in Q1 2020 |
| Net assets | $173.8 million | $157.6 million at December 31, 2020 |
| Net asset value per share | $18.89 | $18.74 at December 31, 2020; $18.96 at March 31, 2020 |
| Cash and restricted cash | $24.3 million | $12.7 million at December 31, 2020 |
| Secured borrowings, net of deferred financing costs | $212.3 million | $188.3 million at December 31, 2020 |
| Asset coverage ratio | 180.4% | 182.0% at December 31, 2020 |
Net expenses after expense support were $3.3 million, including $2.2 million of interest and debt financing expenses and $0.7 million of management fees. The Adviser provided $0.2 million of expense support during the quarter; cumulative unreimbursed expense support was $2.5 million.
Operating cash flow was a use of $24.9 million, primarily reflecting $83.9 million of investment purchases, partially offset by $13.7 million of investment repayments and sales. Financing activities provided $36.5 million, including $15.0 million from common-share issuance and $56.4 million of borrowings, partly offset by $32.5 million of debt repayments and $2.3 million of distributions.
Portfolio, Leverage, and Liquidity
- Portfolio investments at fair value were $406.8 million, up from $335.3 million at December 31, 2020.
- First-lien term loans represented 95.9% of portfolio investments at fair value; subordinated debt represented 3.6%; equity investments represented 0.5%.
- The portfolio included 67 companies at March 31, 2021, compared with 61 at year-end 2020. Nine new companies were added and three exited during the quarter.
- The largest industry exposures were Business Services at 16.7%, High Tech at 15.0%, Containers, Packaging and Glass at 10.3%, and Banking, Finance, Insurance and Real Estate at 9.2% of portfolio fair value.
- Weighted-average yield on debt and income-producing investments was 6.51% at fair value, compared with 6.67% at December 31, 2020. Approximately 97.1% of debt investments had floating rates.
- Total debt obligations were $216.0 million, consisting of $148.0 million under the SPV I facility, $14.0 million under the Subscription Facility, and $54.0 million under the SPV II facility.
- Available borrowing capacity was $218.1 million, subject to borrowing-base, collateral, covenant, and other requirements. Remaining undrawn investor capital commitments were $308.2 million within total commitments of $484.4 million.
- Unfunded delayed-draw loan commitments were $27.7 million, compared with $29.5 million at December 31, 2020.
Material Changes Versus Prior Comparable Period
- Investment income more than doubled, primarily because of substantially higher investment activity and a larger portfolio.
- Net investment income increased to $2.9 million from $0.6 million, despite higher interest and debt financing expenses.
- Results benefited from $0.9 million of unrealized appreciation versus $4.0 million of unrealized depreciation in Q1 2020. Management attributed the improvement to tighter credit spreads, improved financial markets, and reduced COVID-19 effects on certain portfolio companies.
- Investment purchases increased to $83.9 million from $2.6 million, while the portfolio expanded from 44 companies at March 31, 2020 to 67 companies at March 31, 2021.
- Net assets increased 10.2% from year-end 2020, supported by $15.0 million of share issuance, reinvested distributions, and operating earnings, partially offset by $2.8 million of shareholder distributions.
- Management fees increased to $0.7 million from $0.3 million, and interest and debt financing expenses increased to $2.2 million from $1.4 million, reflecting greater deployed capital and borrowings.
Guidance, Outlook, Risks, and Unusual Items
Management expects investment income to grow as the portfolio expands through additional capital raised under the private offering, but noted that investment activity and income may vary materially from period to period. The company expects cash, undrawn investor commitments, and available borrowing capacity to support near-term investment and operating needs.
- COVID-19 continues to create uncertainty regarding portfolio-company liquidity, interest payments, investment valuations, access to capital, and the company’s ability to source and close investments.
- All portfolio investments were classified as Level 3 and valued using significant unobservable inputs. Actual realizable values could differ materially from reported fair values.
- Interest-rate risk is significant because most investments and borrowings use floating LIBOR-based rates. The filing’s sensitivity analysis indicates that a 100-basis-point increase in rates would reduce modeled net income by $4.5 million, while larger increases would produce different results based on the company’s assumptions and rate floors.
- LIBOR discontinuation could require amendments or renegotiations of portfolio investment and credit facility agreements and could adversely affect investment income, borrowing costs, or valuations.
- The company was in compliance with its credit facility covenants and asset coverage requirements. However, additional unrealized depreciation or a reduction in NAV could increase the risk of covenant breaches.
- The Subscription Facility had $14.0 million outstanding and was scheduled to mature on September 10, 2021, subject to earlier termination events.
- The company had no loans on non-accrual status as of March 31, 2021.
- On April 12, 2021, the company issued a drawdown notice for 1,845,984 shares for aggregate proceeds of $35.0 million; the shares were issued on April 23, 2021.
Most Important Facts to Verify
- Whether portfolio credit performance remains stable and whether the four investments rated as “Watch List - Low Maintenance” represent emerging impairment risk.
- The sustainability of the $0.30 per-share quarterly distribution relative to taxable income, cash flow, leverage, and potential expense-support reimbursements.
- Availability and borrowing-base capacity under the three credit facilities, particularly as the Subscription Facility approaches maturity.
- The effects of LIBOR transition on portfolio loan yields, investment valuations, and borrowing costs.
- The valuation sensitivity of the predominantly Level 3 portfolio to higher discount rates, wider credit spreads, lower EBITDA multiples, and renewed COVID-19-related deterioration.
- The company’s ability to fund $27.7 million of unfunded commitments while continuing portfolio expansion and meeting debt covenants.