Nuveen Churchill Direct Lending Corp. (NYSE:NCDL) Q4 2024 Earnings Call Transcript

Nuveen Churchill Direct Lending Corp. (NYSE:NCDL) Q4 2024 Earnings Call Transcript February 28, 2025

Operator: Welcome to Nuveen Churchill Direct Lending Corp. Fourth Quarter and Full Year 2024 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I’d like to turn the call over to Robert Paun, Head of Investor Relations for NCDL. Robert, please go ahead.

Robert Paun: Good morning, and welcome to Nuveen Churchill Direct Lending Corp’s. Fourth Quarter and Full year 2024 earnings call. Today, I’m joined by NCDL’s Chairman, President and CEO, Ken Kencel; and Chief Financial Officer, Shai Vichness. Following our prepared remarks, we will be available to take your questions. Today’s call may include forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about the company, our current and prospective portfolio investments, our industry, our beliefs and opinions and our assumptions.

These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict. Actual results may differ materially from those expressed or forecasted in the forward-looking statements. We ask that you refer to the company’s most recent filings with the SEC for important risk factors. Any forward-looking statements made today do not guarantee future performance and undue reliance should not be placed on them. The company assumes no obligation to update any forward-looking statements at any time. Our earnings release, 10-K and supplemental earnings presentation are available on the Investor Relations section of our website at ncdl.com. Now I would like to turn the call over to Ken.

Ken Kencel: Thank you, Robert. Good morning, everyone, and thank you all for joining us today. I’d like to start by discussing our results for the fourth quarter and full year, and then I’ll provide some thoughts on the current market and economic environment and our forward outlook for 2025. After that, I’ll hand the call over to Shai for a more detailed discussion of our financial performance. Before I go through our results, I’d like to briefly reflect on the last 12 months. This past year has been a very successful one for NCDL. First, we completed our initial public offering in January of 2024 and listed on the New York Stock Exchange. Second, NCDL generated an ROE of 12.4% on net investment income for the full year. Third, NCDL paid total distributions of $2.10 per share for the year, resulting in an attractive 11.6% yield based on our year-end 2024 net asset value.

Fourth, our investment team deployed over $950 million of new investments within NCDL, an increase of over 40% year-over-year. Additionally, we took steps to continue to optimize our balance sheet and capital structure by issuing $300 million of unsecured notes in January of this year. And finally, our investment portfolio remained resilient as we ended the year with only 1 portfolio company on nonaccrual status, representing 0.1% of the total portfolio at fair value. Overall, we are pleased with our results for the fourth quarter, capping off a strong year of financial and operating performance for the company. During the fourth quarter, we generated net investment income of $0.56 per share, which fully covered our regular distribution and previously declared special dividend, totaling $0.55 per share.

For the full year, we reported net investment income of $2.26 per share. These reflect the continued strong performance of our investment portfolio, primarily driven by the strength of our senior loan investments as well as the shareholder-friendly actions we implemented following our IPO, including the maintenance of our pre-IPO management fee rate and full waiver of incentive fees for 5 quarters. Similar to recent quarters, investment activity during the fourth quarter was primarily focused on senior secured first lien loans from our traditional middle market pipeline. New originations totaled $163 million for the quarter. Based on our current leverage profile, which is near the midpoint of our target range, we remain focused on investing in our traditional middle market pipeline, which benefits from wider spreads and generally more attractive terms while continuing to deploy capital and utilize leverage.

The strength of our earnings during the quarter drove an increase in our net asset value to $18.18 per share at December 31, 2024, up from $18.15 per share at the end of the third quarter. Looking ahead to the start of 2025, we remain confident in the company’s positioning as a leader in the core middle market direct lending space, given our long-standing track record, deep network of sponsor relationships and extensive LP commitments across the broader traditional platform, which enable us to continue to see a wide range of attractive investment opportunities while remaining highly selective. From an overall market perspective, credit quality remains strong as we continue to see solid resilient performance from our portfolio companies. While we believe interest rates will remain at elevated levels throughout 2025, the much anticipated rate cuts of 75 basis points in the second half of last year did provide some relief for borrowers.

While we also continue to observe an increase in the competitive dynamics in the private credit market, which drove spread compression in 2024, we have seen spreads fall off in the fourth quarter. Against this backdrop, we believe that our focus on the core middle market enables us to remain largely insulated from the pricing pressure, increased volatility and generally weaker terms that we see in the upper middle and BSL markets. This past year, we witnessed the resurgence of the BSL market. Despite this resurgence, the Churchill platform experienced a record year of origination volume, which reflects the unique and attractive opportunity set we see in the traditional middle market where Churchill is focused. While BSL volume reached a record $1.6 trillion in 2024, the market was driven largely by refinancing within the large corporate and upper middle markets, while direct lending still comprised approximately 90% of middle market new LBO volume.

In our view, given the size and scope of the middle market, there is significant opportunity for both the BSL and direct lending markets to coexist given their focus on different issuer profiles. As far as the economic environment, our belief remains that a healthy and resilient U.S. economy will continue in the near term. One year ago, there was a lot less certainty in the overall macroeconomic environment as daily headlines were filled with cautionary macro and market signals. As the market gained more clarity on inflation and interest rates, the U.S. economy ended 2024 on strong footing after a year of surprisingly robust growth, and many of the concerns from a year ago have now subsided. While our portfolio remains healthy and continues to perform well, we are monitoring and proactively managing any potential impact of policy changes from the new administration.

Based on our focus on noncyclical and services-oriented businesses as well as the diversification of our portfolio, we continue — we currently do not expect a material impact from new policies. With that said, we remain focused on actively managing our portfolio and being mindful of any potential changes that could have an impact on future company performance. Now turning to our investment activity. Despite lower M&A industry activity in 2024, scaled and relationship-driven managers remained quite busy throughout the past year with help from robust portfolio activity, such as refinancings and add-on acquisitions. Across the Churchill platform, the firm had a record year of investment activity, investing over $13 billion across approximately 400 transactions.

This robust activity from the Churchill platform also benefited NCDL as our investment team originated $163 million of new investment commitments during the fourth quarter. In line with our current portfolio allocation, our new commitments were focused on senior lending, which represented 98% of NCDL’s origination activity. First lien debt remained steady as a percentage of the NCDL portfolio, representing over 90% of the fair value of the overall portfolio. We will continue to prioritize opportunities to deploy capital in core middle market senior loan investments as we pursue portfolio growth and diversification as a public company. One of the benefits of the Churchill platform is the size and scale of our incumbent portfolio, which we believe drives differentiated access to high-quality investment opportunities for our existing portfolio of companies.

We also believe that continuing to invest in these companies that we know well leads to better long-term credit performance and reduces underwriting risk. In 2024, over 70% of our new commitments were to existing borrowers or long-term Churchill relationships. Looking at our portfolio and credit quality. Company performance across our overall portfolio continued to remain strong and healthy, reflecting the quality of the deal flow we have experienced over the last several years. Our weighted average internal risk rating remains at 4.1 versus an original rating of 4.0 for all of our investments at the time of origination, and our watch list remains at a very manageable level of 5.9% of fair value. Additionally, we are pleased with the credit fundamentals within the NCDL portfolio with portfolio company total net leverage of 4.9x and interest coverage of 2.2x on traditional middle market first lien loans.

These metrics are a direct result of conservative structuring and relatively low attachment points that we target when underwriting new transactions. This conservative approach has served us well in the elevated rate environment. And we would expect these metrics to improve given the recent rate cuts in the second half of 2024. During the fourth quarter, we did not add any new nonaccruals, and we had 2 companies removed from nonaccrual status following the successful restructuring of their outstanding debt. In one case, the portfolio company received incremental support from its sponsor and NCDL received a partial paydown of our prerestructuring debt at par. Our workout team was instrumental in driving these successful restructurings and we look forward to continuing to actively manage both situations in hopes of maximizing value for NCDL’s shareholders.

As a result of these 2 completed restructurings, our total nonaccrual percentage declined to just over 0.1% of fair value and 0.4% of cost as of year-end. With a highly diversified portfolio of over 200 companies and only 1 name on nonaccrual status, we believe that this metric compares favorably versus BDC industry averages. We remain focused on diversification as a key risk mitigation tool in our investment portfolio. This has been achieved with a continued high level of selectivity, facilitated by the significant, proprietary deal flow, our sourcing engine is able to generate from the breadth and depth of our PD relationships. As of December 31, we had 210 companies in our portfolio, and our top 10 investments represented only 13.2% of the total portfolio showing further diversification from the 14.1% we reported for this metric as of September 30.

This diversification is critical as we seek to maintain exceptional credit quality and originate additional attractive opportunities. As we look ahead to the start of 2025, we continue to see significant growth opportunities within the private credit market, and we are optimistic about the prospects of increased M&A activity, which we have started to see in our investment pipeline despite a slow start to the year in January. We have been and continue to be a trusted and established investor in the core middle market with deep, long-term relationships, which provides NCDL with a strong information and sourcing advantage. Furthermore, we continue to believe that traditional middle market companies with EBITDA of between $15 million and $75 million tend to be lower levered, better structured, less cyclical and more focused on growth industries, such as business and health care services.

When backed by the operating expertise and capital support of leading private equity sponsors, we believe that all the elements are there to generate a strong value proposition for investors. Therefore, we believe that the risk-adjusted returns available to scaled, highly selective managers like Churchill with deep, long-standing private equity relationships in the core middle market are among the most attractive in the private credit market today. In summary, we feel good heading into 2025 with respect to quality deal flow generation, the health of our underlying portfolio companies and our ability to generate attractive risk-adjusted returns for our investors. And now I’ll turn the call over to Shai to discuss our financial results in more detail.

Shai Vichness: Thank you, Ken, and thank you all for joining us to review our fourth quarter results. We reported net investment income of $0.56 per share in the fourth quarter compared to $0.58 per share in the third quarter of 2024. Net investment income in the quarter was negatively impacted by approximately $0.01 per share of excise taxes and approximately $0.01 per share of nonrecurring interest and debt financing expenses related to the acceleration of deferred financing costs associated with paying off and terminating our asset-based credit facility with SMBC. Our total investment income increased by $8.1 million in the fourth quarter or nearly 17% year-over-year, driven by higher interest income as a result of continued strong deployment and increased leverage utilization, which helped to offset the tightening in spreads that we saw during the year as well as a decline in base rates.

Quarter-over-quarter, our total investment income declined modestly, primarily due to the decline in base rates. In January of this year, we paid a total dividend of $0.55 per share, consisting of a regular dividend of $0.45 per share and a special dividend of $0.10 per share. In aggregate, this $0.55 dividend equates to an annualized yield of approximately 12% based on our quarter end net asset value. The $0.10 per share special dividend that we paid in January of this year was our third of 4 special dividends we declared at the time of our IPO. The final $0.10 per share special dividend will be paid on April 28 to shareholders of record as of February 12 of this year. As discussed previously, following this final special dividend payment, we intend to operate with a supplemental dividend program that sees us paying out a portion of the excess earnings over and above our regular dividend, allowing us to deliver the benefits of higher returns in the current environment to shareholders as well as grow our NAV.

In the fourth quarter, our total GAAP net income was $0.54 per share compared to $0.67 per share in the third quarter. Our fourth quarter net income was negatively impacted by $0.02 per share of net realized and unrealized losses, largely as a result of the restructuring of 2 portfolio investments. Our debt-to-equity ratio at the end of the quarter was 1.15x compared to 1.11x at the end of the third quarter. This is consistent with the guidance we previously provided within our target leverage range of 1.0x to 1.25x and reflects a continued increase in leverage towards the upper end of our target range. During the quarter, our net asset value per share increased to $18.18 from $18.15 at September 30. As of December 31, our investment portfolio had a fair value of $2.08 billion compared to a fair value of $2.05 billion as of the end of the third quarter.

Gross originations totaled $163 million and gross investment fundings totaled approximately $151 million. As Ken mentioned earlier, across the Churchill platform, the firm had a record year of investment activity in 2024, investing over $13 billion across approximately 400 transactions and NCDL benefited from this robust activity. The increase in fair value of NCDL’s assets was largely attributable to new originations, which accounted for 16 of the transactions done during the quarter, totaling approximately $91 million. We continue to benefit from add-on financing opportunities, which allows us to generate 13 deals in the form of incremental transactions for existing portfolio companies, totaling approximately $30 million. And lastly, we saw drawdowns of roughly $30 million on our delayed draw term loans as our portfolio companies continue to be active in growing the acquisitions.

Repayments in the fourth quarter totaled 4.6% compared to 4.8% in the third quarter and remained in line with our long-range assumption of 5% per quarter. We had full repayments on 6 deals, totaling $78 million and partial repayments for another $35 million. We also sold out of $6.5 million worth of upper middle market investments. On a net basis, we deployed approximately $32 million during the quarter. As Ken discussed earlier in the call, the deployment that we saw in the fourth quarter was consistent with our strategy of optimizing NCDL’s portfolio. As compared to prior years, we saw a flurry of transaction activity in the fourth quarter, we saw a meaningful number of transaction closings slip into the first quarter, and as a result, have seen deployment for 2025 off to a strong start.

As we look ahead, we expect to continue to deploy primarily into traditional middle-market transactions, rotate the portfolio away from more liquid upper middle market assets, redeploy cash received from repayments and modestly increase our leverage utilization. Our total portfolio consisted of 210 names as of quarter end compared to 202 names at the end of the third quarter and remains highly diversified with the top 10 positions representing only 13.2% of the fair value of the portfolio, down from 14.1% in the prior quarter. Our largest exposure is only 1.5% of the total portfolio and our average position size is 0.5%. We continue to do this high level of diversification by position size as a key risk mitigation tool. In terms of asset selection, our new originations during the quarter were again weighted towards traditional middle-market senior loans, representing more than 70% of the dollars deployed during the quarter with the balance deployed into the upper middle market as well as into junior debt investments.

This focus on the traditional middle market segment, we believe will benefit NCDL shareholders as we see meaningfully higher spreads and tighter documentation terms in the traditional middle market versus the upper middle and BSL markets. During the fourth quarter, we saw a stabilization of spreads in the traditional middle market following the tightening across markets that we saw during the first 3 quarters of 2024, with spreads on new transactions in the 475 to 500 over range. Our weighted average yield on debt and income-producing investments at cost declined to 10.3% at the end of the fourth quarter from 10.9% at the end of the third quarter, driven primarily by the decline in SOFR together with a handful of repricing transactions during the quarter.

Additionally, we continue to remain focused on the top of the capital structure with first lien loans representing 90.6% of the portfolio at the end of the fourth quarter, a slight increase from what we reported at the end of the third quarter. We also continue to opportunistically invest in junior debt and equity, which comprised 7.7% and 1.8% of the portfolio overall as of the end of the fourth quarter. As a reminder, we remain committed to the target allocations that we communicated at the time of our IPO with a target of 85% to 90% senior loans and the balance in junior debt and equity co-investments with equity staying in the low single-digit percentage range. Now turning to credit quality. Our investment portfolio remains in very good shape as our weighted average internal risk rating remained relatively steady quarter-over-quarter at 4.1 as compared to 4.2 at the end of the third quarter.

We had no new nonaccruals and 2 investments were removed from nonaccrual status in the fourth quarter, as Ken discussed earlier. We are pleased with the successful outcomes of the 2 restructurings of the nonaccrual investments, highlighting the importance of our workout team during these processes. At year-end, we had only 1 name on nonaccrual status, representing just 0.1% of the fair value of the portfolio and only 0.4% at cost. This compares to 0.6% and 1.4% at fair value and cost, respectively, at the end of the third quarter. Our watch list consisting of names with internal risk ratings of 6 or worse, remained stable quarter-over-quarter, with 2 positions added to the watch list and 2 removed. As a percentage of NCDL’s overall portfolio fair value, our watch list remains at a relatively low level of 5.9%.

In terms of leverage utilization, our debt-to-equity ratio increased to 1.5x as of December 31 compared to 1.11x as of September 30. We are pleased with this incremental leverage utilization, which was directly in line with our expectations at the time of our IPO. We expect to continue to be able to deploy capital efficiently and operate towards the upper end of our target range of 1 to 1.25x debt to equity. As we mentioned on our prior call, we paid off and terminated our asset-based credit facility with SMBC, replacing it with borrowings on our corporate revolver, which we repriced down to SOFR plus 200 basis points in October of 2024. This eliminated our most expensive facility, which was priced at SOFR plus 65 and allow us to further reduce our borrowing costs going forward.

Furthermore, we took an additional step towards optimizing our capital structure. In January this year, we issued $300 million of unsecured notes due in 2030 at a fixed coupon of 6.65%, which we swapped to a floating rate of SOFR plus 230 basis points. We were pleased with the execution of our inaugural bond offering and the reception that we received from the capital markets. This issuance further diversifies and strengthens our capital structure and balance sheet. In connection with our unsecured bond issuance, we received 2 investment grade ratings from Fitch and Moody’s. In January of this year, we also terminated in full our Wells Fargo financing facility using a portion of the proceeds from the unsecured note issuance to repay the outstanding borrowings on the facility.

In addition, earlier this week, we priced a reset of the NCDL CLO-I transaction, reducing borrowing costs on the financing through the AA tranche from SOFR plus 166 basis points to SOFR plus 143. In addition, we were able to secure a 5-year reinvestment period, up from 4 years previously. With this reset, we are issuing notes down to AA, replacing approximately $59 million of CLO debt with borrowings on our corporate revolver. In aggregate, we expect this transaction to reduce the overall weighted average cost of debt for NCDL from SOFR plus 214 basis points to SOFR plus 202 basis points. With $250 million of available liquidity as of the end of the fourth quarter and no near-term debt maturities, we remain incredibly well positioned to take advantage of attractive investment opportunities and to fund our unfunded commitments and share repurchase program.

As discussed, our focus for the near term is on optimizing the asset mix within the portfolio and actively reinvesting cash received from repayments, while modestly increasing our leverage utilization. Our share repurchase program continues to operate effectively and represents a modest use of our available liquidity. Through February 24, we’ve utilized approximately $57 million under the program, leaving approximately $42 million remaining. The program increased its level of activity in December of last year and early in 2025 based on the increased trading volume in the shares of NCDL. Lastly, our final lockup release occurred on the 1-year anniversary of our IPO on January 24 of this year, which saw the remaining affiliated pre-IPO shares released from lockup, bringing the total number of shares that are available for trading to over 50 million.

As a reminder, at the time of our IPO, we put in place a staggered lockup release schedule for our pre-IPO shareholders, coupled with the special dividends payable over 4 quarters that I mentioned earlier. Affiliated shareholders were locked up for a full year and non-affiliated pre-IPO shareholders were locked up for 90, 180 and 270 days. I’ll now turn it back to Ken for closing remarks.

Ken Kencel: Thank you, Shai. In closing, I would like to thank our entire team for the many accomplishments we achieved during the past year. Our strong results are evidence of their hard work and dedication. We believe NCDL is uniquely positioned for long-term success and remain optimistic about the company’s outlook. And we believe NCDL is well positioned to benefit from increased transaction activity that we expect in ’25. We are excited about the prospects ahead and our ability to continue to reward shareholders with an attractive distribution yield. I will now turn the call over to the operator for Q&A.

Operator: Thank you. And at this time, we’ll be conducting our question-and-answer session. [Operator Instructions] Our first question comes from Doug Harter with UBS.

Douglas Harter: You mentioned it in your prepared remarks, but hoping you could give a little more detail as to how you’ll be thinking about the supplemental dividends after the last of the $0.10 dividend is paid.

Q&A Session

Shai Vichness: Yes. Doug, it’s Shai. Thanks for the question. So consistent with the guidance that we gave at the time of the IPO, we sort of guided to roughly 50% of the excess earnings, forming the basis of the supplemental dividend. Our focus really is on distributing obviously, most of our earnings, making sure that we retain some capital to reinvest, build NAV. But I think you can safely assume roughly 50% of excess earnings over and above the base dividend that would be funding the supplemental. And then to the extent that we generate gains from time to time on equity realizations or other things like that, we may make special dividends and/or top-ups as we get to year-end.

Operator: [Operator Instructions] Our next question comes from Mark Hughes with Truist Securities.

Mark Hughes: Yes. Thank you. How much more repricing do you expect in the portfolio to perhaps impact the overall yield?

Shai Vichness: Yes. Mark, thanks for the question. Honestly, I don’t think there’s too much left to go. It’s hard to put an exact number on it, but I would sort of estimate that call it, 2/3, 70%, 75%, something like that has already repriced if it was going to. And you can really see that as you look at the sort of asset level yields in the portfolio having come down as a result of that. So a portion of that is obviously SOFR coming down and base rates resetting on the underlying contracts, but also the repricing activity that we saw a significant amount of last year, and I would say that’s subsided pretty significantly here and there’s really not much left to go. So I think kind of anywhere in that 2/3, 70% range is probably a reasonable estimate.

But again, hard to pinpoint exactly because there’s other activity happening, as you know, the refinancings or incremental transactions that then would necessitate a broader refinancing. But pure repricings, I would say we are definitely way more than half way through and pretty close to all the way through from our view.

Mark Hughes: Understood. And PIK was down a little bit sequentially. Any changes you would anticipate for 2025 in terms of ratio of PIK income.

Shai Vichness: No. I think that kind of 4% or maybe a little bit below is a pretty safe estimate. As you know, most of the PIK in our portfolio, the vast majority is coming from the junior capital positions where there’s contractual PIK upfront in mezzanine transactions, very little from our senior lending portfolio. And obviously, that’s really driven off of a handful of restructurings or sort of stress situations in the portfolio, which again are fairly limited. So I would not expect an uptick in that number. I think very low single-digit percentage range is kind of the — is the safe assumption going forward.

Ken Kencel: Yes, this is Ken, Mark. I would just add that the component of PIK is really function of the characterization of the large-cap syndicated market. We’re not seeing any type of PIK dynamics in the senior lending middle market. And as Shai said, it’s really the junior capital where PIK is built into many of those deals. And that represents a relatively small portion of our portfolio today.

Shai Vichness: Yes. Overall PIK income, as I said, is just 4% or less for the LTM and a little bit less than 4% for the most recent quarter, as you noted, Mark.

Mark Hughes: Yes. Understood. Ken, you mentioned how direct lenders accounted for 90% market share in the middle market for new LBOs. Do you think that’s a — is that a sustained number as we go forward, the direct lenders should be as dominant or do you think that could erode a little bit? Or how do you see that?

Ken Kencel: Certainly, in the core middle market, I think you’ll continue to see direct lenders dominate that space. I just think the mechanics of timing and confidentiality and speed, the fact that, obviously, there are a number of us larger direct lenders that can deliver full financing commitments very quickly. The relationships they are quite deep and go back many, many years. So I think the confidence level, the speed, the certainty, all of that mitigate very favorably for direct lenders. As you get larger and larger, that’s when you start to see the impact of the BSL execution. But we really have not seen a significant impact in our world in the core middle market. So I’d say we’re largely a bit insulated from that. Where you start to see it is really more in refinancings where you have plenty of time, you can run a process, run a road show, rating agencies and all of that.

So in our world, I think you’re going to continue to see direct lenders dominate our space.

Operator: [Operator Instructions] And ladies and gentlemen, it appears there are no requests for additional questions. I’ll now hand it over to Ken Kencel for closing remarks.

Ken Kencel: Great. Well, thank you all again for joining us today. We appreciate your attendance and your support. Obviously, we’ll continue to work hard to deliver for our investors every quarter. We’re very happy with our results and performance for the past quarter and the past year, and we look forward to working with you going forward.

Operator: Thank you. And that concludes today’s conference. All parties may now disconnect. Have a good day.