Nuveen Churchill Direct Lending: A Low-Cost BDC with a Limited Track Record

Nuveen Churchill Direct Lending Corp. (NYSE:NCDL) is a relatively new BDC with a limited track record, keeping some investors away. Despite this, the company offers cheap debt financing, which is not necessarily a bad thing. As a BDC, NCDL is required to maintain a certain level of debt and equity to meet regulatory requirements. Its cheap debt financing is likely a result of this requirement, rather than a reflection of the company's financial health. Investors should consider the BDC's overall financial performance and risk profile before making an investment decision.

Nuveen Churchill Direct Lending Corp. (NYSE:NCDL) is a relatively new Business Development Company (BDC) that has attracted some investor interest despite its limited track record. The company offers cheap debt financing, which has raised eyebrows among investors. This article aims to provide a balanced perspective on whether NCDL's cheap debt financing is an opportunity or a potential red flag.

NCDL, which went public in early 2024, is a BDC, a type of investment company that invests in debt and equity securities of private companies. As a BDC, NCDL is required to maintain a certain level of debt and equity to meet regulatory requirements. Its cheap debt financing is likely a result of this requirement, rather than a reflection of the company's financial health. This is a key point to consider when evaluating NCDL's investment potential.

Despite the concerns around its debt financing, NCDL has shown resilience in its financial performance. In the first quarter of 2025, the company's net investment income per share (NII) declined to $0.53, which is $0.03 per share below the fourth quarter result. However, this decline can be attributed to one-off debt financing and refinancing expenses, which are not expected to recur [1]. When these extraordinary items are excluded, the NII per share lands at $0.56, which is in line with the prior quarter's result.

Moreover, NCDL's portfolio quality is robust. All investments are backed by private equity sponsors, and the average interest coverage and net leverage of the portfolio companies are solid. The non-accruals consume only 0.4% of the total portfolio fair value, which is significantly below the industry average. Additionally, NCDL's debt structure is exclusively tied to floating rates, providing better protection against interest rate changes compared to many of its peers.

The company's dividend coverage is also robust, with a base dividend coverage level of 124% in the first quarter of 2025. This is well above the sector average of 103%. However, it's important to note that the expiration of NCDL's incentive fee waiver in the future could introduce pressure on the NII per share, reducing the dividend coverage to 116%. Nevertheless, the company expects to offset this headwind with the benefits of a larger asset base in the next quarter.

In conclusion, while NCDL's cheap debt financing may raise concerns, its overall financial performance and portfolio quality suggest that it could be a worthwhile investment for high and sustainable income seekers. However, investors should consider the potential impact of the incentive fee waiver expiration and the company's ability to offset this headwind with a larger asset base. As always, it's essential to conduct thorough research and consider the company's risk profile before making an investment decision.

References:
[1] https://seekingalpha.com/article/4796648-ncdl-cheap-not-for-a-reason