Nuveen Churchill Direct Lending NYSE: NCDL reported second-quarter net investment income of $0.41 per share, covering its $0.36 per-share base quarterly distribution, while credit challenges during the period contributed to a decline in net asset value and an increase in non-accrual investments.
The board declared a total third-quarter distribution of $0.38 per share, comprising the regular $0.36 distribution and a $0.02 supplemental payment. The distribution will be paid Oct. 28 to shareholders of record as of Sept. 30.
Income Holds Steady as Portfolio Shrinks Modestly
Net investment income was unchanged from the first quarter at $0.41 per share. Total investment income, however, declined to $44.3 million from $46.3 million in the prior quarter, which Chief Financial Officer and Treasurer Shai Vichness attributed to a modest reduction in portfolio size and lower portfolio yields.
Total GAAP net income was $0.07 per share, down from $0.18 per share in the first quarter. The second-quarter result included $0.34 per share of net realized and unrealized losses. Net realized losses of approximately $0.23 per share were primarily tied to amendments involving two underperforming debt investments, while unrealized losses totaled $0.11 per share.
Net asset value fell 1.8% quarter over quarter to $17.19 per share as of June 30, from $17.50 per share at the end of March. The company’s investment portfolio had a fair value of $1.9 billion at quarter-end, compared with $2 billion in the first quarter.
Gross originations totaled $12.1 million, down from $82.9 million in the prior quarter, while gross investment fundings were $24.8 million, compared with $85.4 million. Management said the lower activity reflected a decision to manage leverage near the upper end of its target range, as well as the timing of transactions underwritten in the second quarter that closed in July.
Sales and repayments totaled $67.5 million during the quarter, including full repayments on three larger positions totaling $59 million and partial prepayments of another $9 million.
Credit Metrics Remain Stable, Though Non-Accruals Rise
The company added four portfolio companies to non-accrual status during the quarter. Those investments had a combined cost of $33.3 million and a fair value of $18.7 million. At June 30, NCDL had nine investments on non-accrual, representing 2.7% of the portfolio at cost and 1.5% at fair value. That compared with 1.3% at cost and 0.6% at fair value at the end of the first quarter.
Vichness said the newly non-accruing investments were spread across four separate industries and did not reflect a common sector or portfolio-wide trend. Chairman, President and Chief Executive Officer Ken Kencel said the situations were idiosyncratic and that sponsors in each case had provided additional capital and support.
NCDL’s internal watch list increased to 10.8% of fair value from 8.4% in the first quarter. Its weighted average internal risk rating remained 4.3, unchanged from the prior quarter. Management said portfolio companies continued to show weighted average net leverage of 5.2 times and interest coverage of 2.5 times on traditional middle-market first-lien loans, up from 2.3 times in the prior quarter.
The portfolio consisted of 244 companies, up from 236 at the end of March. The top 10 positions accounted for 13.2% of fair value, while the largest single exposure represented 1.6% of the portfolio. Software exposure was 2.4% of portfolio fair value, according to Kencel.
Focus Remains on Senior Lending and Core Middle Market
First-lien loans accounted for 89.6% of the portfolio at June 30, with junior debt representing 7.3% and equity investments representing 3.1%. The company said it continues to target a portfolio of roughly 90% senior loans.
Of the $12.1 million in gross originations, $5.9 million was invested in senior loans and $4.8 million went to equity positions across five companies. Vichness said the company has modestly increased its equity allocation in recent quarters, targeting a range of roughly 3% to 4% of the portfolio, while continuing to emphasize senior secured first-lien lending.
Average spreads on newly originated first-lien loans were approximately 475 basis points over the benchmark rate during the quarter. The weighted average yield on debt and income-producing investments remained 9.3% at cost.
Kencel said direct-lending spreads had widened early in the quarter and had since stabilized at approximately 475 to 500 basis points over for traditional first-lien loans. He said the company saw a material increase in deals reviewed during June and July after a more selective private-equity transaction market earlier in the year.
Capital Structure Changes and New Joint Venture
NCDL’s gross debt-to-equity ratio was 1.29 times at June 30, compared with 1.32 times at the end of the first quarter. Net debt-to-equity was 1.23 times, versus 1.26 times. Management said it aims to operate near the upper end of its target range of 1.0 to 1.25 times debt-to-equity.
In July, the company redeemed its NCDL CLO-III in full at par, including accrued interest, with an aggregate principal balance of $297.9 million. The CLO had carried an interest rate of SOFR plus 211 basis points.
Also in July, NCDL completed a $100 million tap of its existing 2030 unsecured notes, bringing total unsecured notes outstanding to $400 million. Parent company TIAA purchased all of the newly issued notes. Following the transactions, NCDL’s pro forma weighted average cost of debt was SOFR plus 188 basis points, while unsecured notes accounted for approximately 41% of outstanding debt.
The company also formed a joint venture with an institutional investor after quarter-end. The venture has equity commitments of up to $106 million, with NCDL contributing 87.5%. At closing, NCDL sold approximately $150 million of first-lien loans to the venture and expects to grow the vehicle to roughly $300 million in assets over the coming quarters.
About Nuveen Churchill Direct Lending (NYSE:NCDL)
Nuveen Churchill Direct Lending NYSE: NCDL is a closed-end management investment company that seeks to provide shareholders with attractive risk-adjusted returns through a diversified portfolio of direct lending instruments. Established in early 2022, NCDL focuses on privately negotiated debt investments in middle-market companies, primarily within the United States. The fund offers investors access to a segment of the credit markets that has historically been less correlated with public debt markets, aiming to capture yield premiums associated with private lending.
The fund’s investment strategy centers on senior secured loans, unitranche financings and selectively structured mezzanine debt.
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