NCDL 3Q26 Earnings Call - NUVEEN CHURCHILL DIRECT LENDING CORP

Financial Performance:

• Reported net investment income (NII) of $0.38 per share and adjusted NII of $0.39 per share for Q3 2026, fully covering the regular quarterly distribution of $0.36.
• Board declared Q4 2026 distribution of $0.38 per share ($0.36 regular + $0.02 supplemental), payable January 28, 2027.
• Total investment income declined slightly to $43.7 million from $44.3 million in Q2, driven by a modest portfolio size decrease.
• Net Asset Value (NAV) was $17.13 per share at September 30, a 0.3% decline from Q2's $17.19, impacted by $0.06 per share in net realized and unrealized losses.
• Gross debt-to-equity ratio improved to 1.23x from 1.29x; net debt-to-equity ratio improved to 1.17x from 1.23x, driven by asset sales to the joint venture and debt repayments.
• Weighted average yield on debt and income-producing investments at cost rose to 9.7% from 9.3% in the prior quarter.
• Non-accrual assets represented 2.6% of portfolio cost basis and 1.5% of fair value, down slightly from 2.7% and 1.5% respectively in Q2.
• Executed a $100 million TAP on existing 2030 unsecured notes, bringing total unsecured debt to $400 million; weighted average cost of debt is SOFR + 187 bps.

Guidance and Future Outlook:

• Expect to ramp the joint venture (JV) to a portfolio size of approximately $300 million over the coming quarters, targeting full deployment within a 12-month timeline.
• Project maintaining BDC-level leverage at the upper end of the 1.0x–1.25x debt-to-equity target range.
• Project maintaining JV-level leverage at an optimal 2.25x debt-to-equity ratio.
• Anticipate continued strong activity in Q4 2026 due to typical seasonality and robust deal flow.
• Management remains confident in a higher-for-longer interest rate environment, citing strong interest coverage and flexible capital structures within the portfolio.
• Long-term goal is to sustain a distribution yield and total return profile while navigating market volatility.

Business Segments and Product Lines:

• Gross originations totaled $213.3 million in Q3, a significant rebound from $12.1 million in Q2, driven by JV launch ($93 million commitment) and organic activity.
• Churchill platform closed or committed to over 90 transactions totaling ~$5 billion, with >80% concentrated in senior direct lending.
• NCDL gross investment fundings were $134.8 million, while repayments and sales totaled $192.4 million (including $150 million sale to the JV).
• Portfolio allocation remains heavily weighted toward senior first-lien loans (87.1%), with junior debt (7.6%) and equity (3.1%); JV represents 2.2% of total portfolio.
• Strategic shift toward increased equity co-investments to drive capital appreciation, targeting 20%+ IRR with 2x MoC over 3-4 years.
• JV achieved an annualized return of 13.6% on NCDL's investment, comprising structured equity, debt tranches, and residual returns.

Market and Competitive Landscape:

• Private credit spreads for traditional first-lien loans stabilized between 475 and 500 bps over the base rate.
• Market environment characterized by elevated inflation, geopolitical tensions, and AI-driven disruptions, yet underlying fundamentals remain strong with solid interest coverage.
• Private Equity M&A activity is rebounding modestly but remains selective due to elevated borrowing costs and market volatility.
• NCDL differentiates through a "core middle market" focus, leveraging 20+ years of experience and deep proprietary PE relationships.
• Company views the direct lending market as attractive with a compelling risk-return profile despite headlines suggesting otherwise.

Risks and Challenges:

• Inflationary pressures and geopolitical tensions continue to create upside pressure on inflation and interest rate expectations (potential hikes in 2027).
• Watch list increased to 11.6% of fair value (from 10.8% in Q2) due to two new additions, though consistent with long-term averages.
• Placed one new name on non-accrual status ($3.9 million cost) during the quarter, partially offset by one restructuring exit.
• Market volatility and elevated borrowing costs limit LBO activity, requiring high selectivity in deal underwriting.
• Exposure to redemption activity in other private BDCs remains a headwind for the broader industry, though NCDL fundamentals remain distinct.

Management Commentary and Tone:

• Tone is confident and constructive; management emphasized the disconnect between negative market headlines and the company's strong credit metrics.
• Ken Kinsell highlighted the "high-quality, well-diversified" portfolio and the strategic value of the JV in providing capital deployment capacity.
• Management expressed satisfaction with the stability of NAV and the ability to cover distributions fully.
• Emphasized the "base plus supplemental" distribution model as a mechanism to return excess earnings to shareholders.
• Confidence remains high in the ability to navigate macroeconomic uncertainty through conservative underwriting and experienced teams.

Analyst Questions and Answers:

• JV Returns & Leverage: Shai Vickness confirmed the 13.6% JV return is sustainable due to optimal 2.25x leverage; borrowing costs in the JV are competitive and aligned with BDC-level financing.
• Equity Realizations: Ken Kinsell and Shai Vickness discussed the equity gain, noting the target is 2x MoC over 3-4 years (20%+ IRR) and that such returns are expected to become more frequent as the co-invest book matures.
• Platform Activity: Aryan Taganovich asked about the $5B platform deployment; management clarified >80% is senior direct lending, with the rest in MEI, equity, and capital solutions.
• Share Repurchases: Regarding the $50M buyback program, management noted it is triggered by discounts to NAV and that deployment into the pipeline remains attractive; ~$3M purchased to date, leaving $47M available.
• JV Ramp-up: Melissa Whittle asked about the timeline; management reaffirmed the 12-month ramp-up goal, noting deployment will be non-linear and influenced by seasonality.

Other Key Points:

• Joint Venture Details: NCDL owns 87.5% of the JV with an institutional partner; at closing, NCDL sold ~$150M of first-lien loans to the JV and contributed $40.7M equity (partner contributed $5.8M).
• Portfolio Diversification: Portfolio contains 258 companies; top 10 holdings represent only 12.4% of fair value; largest single exposure is 1.6%.
• Risk Metrics: Portfolio weighted average leverage is 5.2x with 2.3x interest coverage on traditional middle-market first-lien loans.
• Share Repurchase Program: Executed ~278,000 share buybacks post-quarter at ~$10.76/share average price.
• Credit Quality: Weighted average internal risk rating remained stable at 4.4 (on a 1-10 scale) for the quarter.