Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Nuveen Churchill Direct Lending Corp (NCDL, Financial) delivered net investment income that exceeded both its regular quarterly distribution of $0.45 per share and its $0.10 per share special distribution.
- Investment activity picked up significantly during the second quarter, with $360 million of new originations, over 95% of which were first lien senior secured loans.
- NCDL delivered an attractive 12.3% annualized dividend yield to shareholders.
- The portfolio remains highly diversified, with the top 10 investments representing only 14.4% of the total portfolio.
- NCDL's weighted average internal risk rating remains strong at 4.1, with a manageable watch list level of 3.8% of fair value.
Negative Points
- Net asset value per share declined modestly quarter over quarter, primarily driven by unrealized losses on two investments placed on nonaccrual.
- Two new nonaccruals were added this quarter, representing 0.49% of the fair value of the portfolio.
- The company experienced modest spread compression during the first half of the year.
- Repayment activity significantly increased during the quarter, which could indicate potential liquidity challenges.
- The number of names on the watch list increased by two, indicating potential future credit quality issues.
Q & A Highlights
Q: It was great to see the strong pickup in origination activity in the quarter, but there's significantly more add-on deals versus new investment. What's the outlook for new investments specifically into the back half of the year? And any early read on the quarter in terms of origination activity or pipeline post Labor Day?
A: We continue to be extremely busy on the origination side, with a very deep backlog and robust pipeline. We expect new deal activity to grow as a percentage of our overall investment activity in Q3 and Q4. Despite the usual summer slowdown, our pipeline remains strong, and we are optimistic about the balance of Q3 and into Q4. (Kenneth Kencel, CEO)
Q: There's a lot of focus on the economic outlook into the back half of the year. What are you seeing across your portfolio at Churchill today in terms of revenue and EBITDA growth? Any new or interesting trends?
A: EBITDA growth across our portfolio remains positive, with the majority of companies reporting growth in EBITDA and revenue. The overall health of the portfolio is good, with a risk rating of 4.1. We continue to see strategic M&A and add-on acquisitions as a way to enhance growth. (Kenneth Kencel, CEO)
Q: You mentioned two new non-accruals. Do you have any possible insight into resolutions for those or any of the non-accruals on your book?
A: It's early in the process, but we are working closely with the sponsors and borrowers to achieve an attractive resolution for our shareholders. Our workout resources are robust and actively involved in these situations. (Shai Vichness, CFO)
Q: Do you have any insight into the timeline or pace of possibly rotating out of the upper middle market loans and into the more traditional middle market loans?
A: We continue to see a robust pipeline of traditional middle market opportunities and are well on our way with respect to our rotation strategy. The yield on new investments made during the quarter was more heavily weighted towards the traditional middle market, and we expect this trend to continue. (Shai Vichness, CFO)
Q: Within the middle market, what are you seeing in terms of spreads on a same-store basis?
A: Over the last six to nine months, we've seen modest spread compression in the core middle market, roughly 25 basis points quarter over quarter. This is much less than the compression seen in the broadly syndicated loan market. We continue to see good quality in new deal activity and feel positive about the spread dynamics in the core middle market. (Shai Vichness, CFO)
Q: How about competition from other direct lenders within the middle market? Is there more capacity out there, more dollars chasing those deals?
A: The market is consolidating, favoring the largest scaled players like us. New entrants are not significantly impacting our world as they are limited to smaller middle market deals. We continue to benefit from deep and long-standing relationships in the sponsor community, enabling us to access quality deal flow. (Shai Vichness, CFO)
Q: Can you provide more detail on the credit quality of the portfolio?
A: Our weighted average internal risk rating remained steady at 4.1 despite the two new non-accruals. The number of names on our watch list increased slightly but remains at a historically low level of 3.8% of the portfolio's fair value. (Shai Vichness, CFO)
Q: What are your thoughts on the overall market and economic environment?
A: The US economic environment remains healthy and resilient. We have yet to see evidence of an imminent recession or pullback in spending and CapEx investments. We believe interest coverage will be a tailwind going into the back half of the year as the Fed moves to reduce interest rates. (Kenneth Kencel, CEO)
Q: How do you view the current market dynamics and your positioning?
A: We believe that our focus on the core middle market enables us to remain largely insulated from pricing pressure and increased volatility. Our deep relationships in the middle market private equity community provide us with strong insights and opportunities. We feel positive heading into the second half of the year. (Kenneth Kencel, CEO)
Q: Can you discuss your leverage strategy and capital structure?
A: Our debt-to-equity ratio at the end of the quarter was 1.04 times. We remain on track to optimize leverage through the balance of the year, with a target range of 1.0 to 1.25 times. We have over $360 million of liquidity available and no near-term maturities. (Shai Vichness, CFO)
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
