Nuveen Churchill Direct Lending Corp 2026 Q2 Earnings Call

Robert, please go ahead. Good morning and welcome to Nuveen Churchill Direct Lending Corp's second quarter 2026 earnings call.

Today I'm joined by NCDL's Chairman, President, and CEO, Ken Kencel, and Chief Financial Officer and Treasurer, 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, 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, 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-Q, and supplemental earnings presentation are available on the News & Investors sections of our website at ncdl.com. I would like to turn the call over to Ken.

Thank you, Robert. Good morning, everyone, thank you for joining us today. During my prepared remarks, I will start with a discussion of our second quarter results, followed by some comments and thoughts on the current market environment, our portfolio positioning, and a strategic initiative that occurred post quarter end. First, I'd like to start by reviewing our financial results for the quarter. Overall, we continue to be pleased with the operating performance of NCDL and our investment portfolio, despite a challenging market environment. This morning, we reported second quarter net investment income of $0.41 per share, fully covering our $0.36 per share base quarterly distribution. Based on the results, the board has declared a total third quarter distribution of $0.38 per share, consisting of a regular quarterly distribution of $0.36 per share and a supplemental distribution of $0.02 per share.

During the quarter, gross originations totaled approximately $12 million, compared to $83 million in the first quarter of this year. The decline in gross originations quarter-over-quarter was driven by two factors: our desire to manage our leverage ratio towards the upper end of our target leverage range and timing of certain transactions which were underwritten in the second quarter, but ultimately closed in July. As I'll discuss later in my prepared remarks, the Churchill platform continues to see strong asset growth and new originations. Net asset value at June 30th was $17.19 per share, compared to $17.50 per share at March 31. Driven by unrealized markdowns and unrealized losses on two amendments that Shai will touch on in his remarks.

In terms of the current market conditions and economic environment, the first half of 2026 has been one of the most closely watched periods in private credit's history, unfolding against a backdrop of elevated public market volatility, geopolitical tensions, and negative headlines. These headlines have been driven by concerns around AI disruption, software exposure, and increased redemption activity in private BDCs. We continue to believe there is a significant disconnect between the narrative in the media and the underlying fundamentals in private credit, particularly with our investment portfolio and the continued strength of our credit metrics. Dispersion amongst private credit managers has started to emerge. In our view, we think it will continue to be a focus area with investors.

Amid these market conditions, private equity M&A activity was highly selective in the second quarter as financial sponsor deal activity slowed compared to the first quarter, despite overall global M&A recording new highs. Private equity volumes were relatively light compared to prior periods, driven by continued market volatility as buyers navigated geopolitical uncertainties and AI-driven disruptions. The gap between strategic acquirers and private equity sponsors widened as financial sponsors faced disciplined underwriting and tighter credit constraints. However, in June and July, we experienced a material increase in deals reviewed over prior months as transaction activity across our platform has returned to a more normalized level. We attribute this to our focus on the core traditional middle market, as well as our relationships with high-quality private equity sponsors.

In terms of spreads, we started to see a widening of direct lending spreads early in the second quarter, driven by the recent market concerns, volatility, and disruption. Today, spreads have stabilized around a more normalized level of between 475 and 500 over for traditional first lien loans. As far as the interest rate environment is concerned, given that inflation remains above the Fed's targets, expectations for rate cuts for the remainder of the year have diminished, with the forward SOFR curve now showing potential rate hikes. This shift from earlier in the year is largely driven by persistent inflation, a resilient labor market, as well as geopolitical tensions, which have created economic uncertainty. Despite all of these factors, we continue to view private credit and direct lending as an attractive asset class with a compelling risk-return profile. Turning to our investment activity.

The first half of 2026 brought a more measured environment for new LBO volume, reflecting the broader macroeconomic backdrop. U.S. private equity deal volume and direct lending volume for private equity-backed borrowers declined materially quarter-over-quarter. Despite that, the Churchill platform delivered strong investment activity, outpacing the market by a meaningful margin while maintaining our underwriting standards and high level of selectivity. During the second quarter at the platform level, Churchill closed or committed to over 80 transactions totaling approximately $4.3 billion, with the majority of that volume concentrated in senior lending. As I mentioned earlier, gross originations at NCDL were muted in the quarter, which was intentional, given that we were operating slightly above our target leverage range at the end of the first quarter, and as a result of timing to close transactions underwritten in June.

We remain focused on actively reinvesting cash received from repayments and sales into high-quality assets while optimizing our use of leverage. During the second quarter, investment fundings totaled approximately $24.8 million, and repayments and sales totaled approximately $67.5 million. It is also important to remind everyone that at Churchill, we focus on the traditional core middle market, benefiting from our differentiated sourcing and long-term track record. We continue to target companies with $10 million-$100 million of EBITDA, which we believe helps insulate us from the more aggressive structures and loosening terms prevalent in the upper middle market and broadly syndicated loan space. We believe that risk-adjusted returns in this segment of the market remain among the most compelling in private credit, particularly for scaled, highly selective managers with deep private equity relationships.

We see the core middle market as a durable opportunity to generate long-term value and enhance portfolio diversification for our investors. As far as our investment portfolio and credit quality is concerned, overall company performance across our portfolio remains healthy, which we believe reflects the quality of the deal flow we have experienced over the last several years. While we did experience a few company-specific credit challenges in the quarter, which is not overly surprising to us given the current market environment, our high-quality, well-diversified investment portfolio continues to perform well and in line with our expectations. During these periods of market volatility and economic uncertainty, it is important to remain focused on our core values and pillars that have benefited Churchill over the past two decades. We have deep expertise, substantial experience, strong relationships, relevant size and scale, and a differentiated approach to sourcing and originating high-quality deal flow.

Our ability to navigate these market conditions and environment stems from our experienced investment, operating, and management teams. Our weighted average internal risk rating was 4.3 at the end of the second quarter, consistent with the prior quarter, and versus an original rating of 4.0 for all of our investments at the time of origination. Our internal watchlist ticked up to approximately 10.8% of fair value, compared to 8.4% at the end of the first quarter. As a reminder, we employ a dynamic internal risk rating system with a 1 through 10 rating scale. Our watchlist starts at a 6 rating, and we ensure that our workout team is involved early on in the process of a potential credit challenge or event. The percentage of watchlist names for NCDL remains consistent with the Churchill platform and our long-term historical averages.

Credit metrics and fundamentals within the NCDL portfolio remain strong, with portfolio company total net leverage of 5.2 times and interest coverage of 2.5 times on traditional middle market first lien loans. Interest coverage increased during the quarter from 2.3 times at the end of the first quarter. These credit metrics are a direct result of our conservative structuring and relatively low attachment points that we target when underwriting new transactions. During the second quarter, we added four new names to non-accrual, with a total cost of $33.3 million and a fair value of $18.7 million. At June 30th, non-accruals represented 2.7% of our total investment portfolio on a cost basis and 1.5% on a fair value basis. Despite the increase in non-accruals this quarter compared to prior quarters, we believe these percentages continue to compare favorably versus current BDC industry averages and the long-term historical BDC average.