Nuveen Churchill Direct Lending Corp. Q2 FY2025 earnings call

• The company is pleased with the returns generated in Q2, driven by the strength of the platform and high-quality investment portfolio.
• Gross originations declined intentionally to reduce leverage, affected by global trade policy changes causing market volatility early in the quarter, but deal flow rebounded by June.
• Investment portfolio continues to perform well, with senior loan investments strong. Net asset value saw a slight decline due to valuation changes in watch list names but was partially offset by the share repurchase program.
• Originations in Q2 were weighted towards traditional middle market senior loans, representing over 90% of dollars deployed.
• Credit quality remains good, with few nonaccruals. Nonaccruals represented 0.2% of the total investment portfolio on a fair value basis and 0.4% on a cost basis as of June 30, compared to 0.4% and 1% respectively as of March 31.
• Diversification is a key focus, with a highly diversified portfolio of over 200 companies and top 10 portfolio companies accounting for only 13.6% of total fair value.

NCDL's financial performance was strong in the second quarter. Net investment income was $0.46 per share, exceeding the regular quarterly distribution of $0.45 per share. Gross originations totaled approximately $48 million in Q2, down from $166 million in Q1, as the company intentionally reduced leverage. The investment portfolio fair value was $2 billion at the end of Q2, down slightly from $2.1 billion at the end of Q1. Net asset value was $17.92 per share at June 30, slightly down from $17.96 per share at March 31, due to modest valuation declines in some watch list names but offset by the share repurchase program. The portfolio's senior loan investments performed well, with first lien loans representing 90% of the total portfolio.

• Expect to continue deploying capital received from repayments into traditional middle market transactions.
• Confident in maintaining earnings around the level generated in Q2 assuming favorable market conditions and stable base rates.
• Optimistic about deal activity heading into the fall, with a robust pipeline and high-quality opportunities seen in the core middle market.

• Geopolitical uncertainty that could impact transaction volume and market conditions.
• Market volatility that temporarily slowed transaction volume in April and early May.
• Valuation declines in some watch list names that contributed to the slight decline in net asset value.

Q: So it seems like NII has normalized here in the mid-40s on a per share basis before assuming any changes to base rates. You're at the upper end of the leverage range. So net portfolio growth will be pretty muted in the near term. And then you also bought back quite a bit of stock since the IPO. But I'm curious, I mean, do you have any other levers you can pull to accrete some more NII in the coming quarters?

A: Yes. Brian, thanks for the question. Good to hear from you. It's Shai. A few things. One, as we look ahead here, one of the things that we're very focused on is obviously redeploying cash that we receive from repayments into what we see as a very attractive traditional middle market pipeline across the platform. So as Ken mentioned on the call, we continue to see attractive opportunities, notwithstanding the slowdown that we saw in April. That activity and volume is picking up, as evidenced by the number of books coming in, number of IC meetings that we're having and just the overall general level of activity. So that obviously provides us for the ability to sort of recapture and realize the OID on the outgoing names and then redeploy into attractive assets, while at the same time, maintaining our leverage at sort of the upper end of the range, which we did bring down a bit during the quarter. So we were pleased that we were able to generate the earnings that we did even at a slightly lower leverage ratio than what we had in the first quarter. So those are two areas where I think we'll be able to continue to generate an attractive return and support the dividend that we declared for the third quarter and going forward. The other element that I would highlight, and I know this has been talked about by others on their earnings calls through this cycle is just the spillover income that we've accumulated in the vehicle as well. So that can also provide a bit of a buffer as we move forward. But from an earnings perspective, again, assuming market conditions remain favorable, base rates stay where they are, we feel good about our ability to maintain earnings in and around this level that we generated during the second quarter.

Q: You mentioned basically being able to rotate from the upper middle market into more traditional middle market. I was just wondering like how much of that is sort of left to go. And are you able to sort of size the impact of that rotation on earnings?

A: Yes. Thanks for the question. So a couple of comments. I mean, I think we talked about it on the first quarter earnings call. We just talked about it on this call as well in terms of the magnitude of that rotation. And really, what was driving that rotation trade was the investment that we made into more liquid upper middle market loans using the proceeds from the IPO. And we really spent kind of the better part of the end of last year into this year, sort of completing that rotation. So as I indicated on the call, most of that is essentially done. We did sell $100 million worth of upper middle market loans during the quarter, obviously focusing on the more liquid assets that were trading at or near cost and also with lower spreads. So as you look across the SOI, we've essentially taken out the assets that have the 300 handle spreads, and we've kind of essentially completed that rotation. I would say there's a handful of million dollars worth left to go in that process. But again, I would say that, that is largely complete. And you can see it show up in some of the statistics. If you look at the earnings presentation, so some of the metrics around the portfolio are reflective of that rotation into the more traditional middle market, and that's where we're going to focus. So I would say there's -- short answer is there's not much left to go there. And from an earnings perspective, I think that that's what's really giving us the confidence that we've now got a portfolio with a weighted average spread that we view as attractive in the current rate environment that should allow us to continue to generate this level of earnings on a go-forward basis. So the impact is already in there. I would not assume that there's a ton left to go just given the magnitude of the rotation that we've already completed over the last 2 quarters.

Q: You completed the share repurchase program in July. I guess there was a little bit left after the quarter. What are the plans there? Are you anticipating adding a new share repurchase program to the extent that your stock is trading below NAV?

A: Yes. So thanks for the question. Obviously, we did just complete the program, and we were happy to sort of round that out at what was -- ended up being an attractive discount to NAV in terms of the cumulative purchases, and you could see the benefit in the NAV math. So from that perspective, we're pleased with how it operated. The question of whether or not to implement a new program is something that we are consistently evaluating as with other corporate finance decisions. So it's definitely a discussion that is ongoing. We don't have any plans right now to put one in place, but it is definitely something that we will be thinking about and talking about as we watch the performance of the stock going forward here.