Business Overview and History: Nuveen Churchill Direct Lending Corp. (NYSE:NCDL) is a leading business development company (BDC) that is externally managed by its investment adviser, Churchill DLC Advisor LLC, and its sub-adviser, Churchill Asset Management LLC. The company’s primary focus is on generating attractive risk-adjusted returns through current income by investing primarily in senior secured loans to private equity-owned U.S. middle market companies.
Nuveen Churchill Direct Lending Corp. was formed on March 13, 2018 as a Delaware limited liability company and converted into a Maryland corporation on June 18, 2019, prior to the commencement of operations. The company elected to be regulated as a BDC under the Investment Company Act of 1940 and has also elected to be treated as a regulated investment company (RIC) for U.S. federal income tax purposes.
NCDL began conducting private offerings of its shares of common stock to accredited investors in March 2020, raising capital through a series of drawdowns over the following years. The company completed its final private offering closing on April 28, 2023. In 2019, NCDL entered into an investment advisory agreement with Churchill DLC Advisor LLC, which in turn delegated substantially all of its day-to-day portfolio management obligations to Churchill Asset Management LLC through a sub-advisory agreement. The company also entered into an administration agreement with Churchill BDC Administration LLC to provide certain administrative services.
During its early stages, NCDL faced some challenges in establishing its portfolio and building out its relationships with private equity sponsors, as is typical for a newly formed BDC. However, the company was able to leverage Churchill’s extensive network of over 500 middle market private equity firms to source attractive investment opportunities. By the end of 2021, NCDL had deployed over $700 million into a diversified portfolio of senior secured and junior debt investments as well as equity co-investments.
The company’s investment objective is to generate attractive risk-adjusted returns primarily through current income by investing primarily in senior secured loans to private equity-owned U.S. middle market companies, which it defines as companies with approximately $10 million to $250 million of annual EBITDA. NCDL primarily focuses on investing in U.S. middle market companies with $10 million to $100 million in EBITDA, which it considers the core middle market.
NCDL’s portfolio is comprised primarily of first-lien senior secured debt and unitranche loans, although it also opportunistically invests in junior capital opportunities, including second-lien loans, subordinated debt, and equity co-investments and similar equity-related securities. The company entered into an investment advisory agreement with Churchill DLC Advisor LLC in December 2019, which subsequently delegated substantially all of its day-to-day portfolio management obligations to Churchill Asset Management LLC through a sub-advisory agreement.
In January 2024, NCDL completed its initial public offering, listing its shares on the New York Stock Exchange under the ticker symbol “NCDL”. The IPO raised $99.3 million in gross proceeds, which NCDL used to continue growing and diversifying its investment portfolio. Prior to the IPO, the company had conducted private offerings of its shares of common stock to accredited investors since March 2020, holding its final closing on April 28, 2023.
NCDL has a number of wholly-owned subsidiaries that play key roles in its operations, including Churchill NCDLC CLO-I, LLC, Churchill NCDLC CLO-II, LLC, and Churchill NCDLC CLO-III, LLC, which have completed term debt securitizations, as well as Nuveen Churchill BDC SPV IV, LLC and Nuveen Churchill BDC SPV V, LLC, which primarily invest in first-lien senior secured debt and unitranche loans. The company also has NCDL Equity Holdings LLC, which was formed to hold certain equity-related securities.
Financial Condition and Performance: As of September 30, 2024, NCDL’s investment portfolio had a fair value of $2.05 billion, comprised of 90.1% first-lien debt, 8.3% subordinated debt, and 1.7% equity investments. The company’s weighted average internal risk rating was 4.2, and it had only three investments on non-accrual status, representing 0.55% of the portfolio’s fair value.
For the nine months ended September 30, 2024, NCDL generated net investment income of $0.58 per share, fully covering its regular quarterly distribution of $0.45 per share as well as a $0.10 per share special distribution. The company’s net asset value (NAV) per share increased to $18.15 as of September 30, 2024, up from $18.03 as of June 30, 2024.
Financials: NCDL’s debt-to-equity ratio stood at 1.11x as of September 30, 2024, which is within the company’s target leverage range of 1.0x to 1.25x. The company had $361 million in available liquidity as of the end of the third quarter, providing ample flexibility to fund new investments and commitments.
For the fiscal year 2023, NCDL reported revenue of $81.97 million and net income of $75.94 million. The company’s operating cash flow (OCF) and free cash flow (FCF) for 2023 were both -$369.53 million. In the most recent quarter (Q3 2024), NCDL generated revenue of $33.78 million and net income of $36.64 million. The OCF and FCF for Q3 2024 were both -$42.27 million.
NCDL’s investment portfolio is well-diversified across multiple industries, with no single industry accounting for more than 33.74% of the total fair value as of September 30, 2024. The company’s largest exposure is to the healthcare and pharmaceuticals sector, which made up 29.19% of the portfolio. Other significant exposures include services – business (33.74%), high tech industries (17.73%), and beverage, food & tobacco (16.65%).
The weighted average yield on debt and income producing investments was 10.94% at fair value as of September 30, 2024. NCDL’s asset coverage ratio, which measures its leverage, stood at 189.89% as of the same date, well above the required minimum of 150%.
Liquidity: The company’s strong liquidity position of $361 million as of September 30, 2024, provides significant flexibility to pursue new investment opportunities and manage its existing portfolio. This liquidity buffer also helps NCDL navigate potential market uncertainties and maintain its financial stability.
NCDL’s cash position stood at $69.30 million as of September 30, 2024. The company has several available credit lines, including a Wells Fargo Financing Facility with $130 million available, an SMBC Financing Facility with $24.20 million available, and a Revolving Credit Facility with $137.30 million available.
Competitive Strengths and Investment Strategy: A key competitive strength of NCDL is its highly differentiated origination and sourcing model, which is built on the Churchill platform’s strong relationships with approximately 500 middle market private equity firms over nearly two decades. The company has commitments to over 310 leading U.S. middle-market private equity funds and sits on over 245 advisory boards, providing it with a significant information and sourcing advantage.
NCDL’s investment strategy is focused on maintaining a highly diversified portfolio across multiple measures, including sponsor, position size, and industry. The company’s rigorous investment process prioritizes credit quality above all else, targeting high-quality, market-leading businesses in recession-resistant industries with strong sponsorship. This disciplined approach has enabled NCDL to maintain a weighted average internal risk rating of 4.2 and limit non-accruals to just 0.55% of the portfolio’s fair value.
NCDL operates through various investment segments, including Aerospace & Defense (6.68% of total investments at fair value), Automotive (6.86%), Banking, Finance, Insurance & Real Estate (4.81%), Beverage, Food & Tobacco (16.65%), Capital Equipment (10.82%), and several other sectors. This diversification helps to mitigate risk and provide exposure to a wide range of middle market opportunities.
Outlook and Risks: Looking ahead, NCDL remains optimistic about its positioning in the core middle market, which it believes offers the most attractive risk-adjusted returns in the current private credit environment. The company expects to continue benefiting from increased M&A and transaction activity as the Federal Reserve cuts interest rates, further supporting its robust investment pipeline.
NCDL intends to continue deploying capital primarily into traditional middle market transactions as it completes the rotation of its portfolio away from more liquid upper middle market assets. The company also plans to maintain its supplemental dividend program, paying out a portion of excess earnings over and above the regular dividend to deliver higher returns to shareholders while also growing its NAV.
Management expects to be able to modestly increase NCDL’s leverage utilization within the target range of 1 to 1.25 times debt-to-equity as it moves through the balance of 2024 and into 2025. This approach aligns with the company’s strategy of prudent growth while maintaining a strong balance sheet.
However, the company does face certain risks, including potential volatility in financial markets, changing economic conditions, and competition in the middle market lending space. Additionally, NCDL’s performance is largely dependent on the continued strength and credit quality of its portfolio companies, which could be impacted by macroeconomic factors or industry-specific challenges.
Conclusion: Nuveen Churchill Direct Lending Corp. has established itself as a leading player in the U.S. middle market lending space, leveraging its deep relationships, rigorous investment process, and focus on diversification to generate consistent returns for shareholders. With a strong balance sheet, ample liquidity, and a favorable market outlook, NCDL appears well-positioned to continue navigating the middle market and delivering value to its investors. The company’s diversified portfolio, strong financial performance, and strategic focus on the core middle market segment provide a solid foundation for future growth and resilience in the face of potential market challenges.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.