Executive Summary / Key Takeaways

• Nuveen Churchill Direct Lending Corp. ($NCDL) is a Business Development Company (BDC) primarily focused on senior secured loans to private equity-backed U.S. middle market companies, leveraging the extensive network and scale of the Churchill platform for differentiated deal flow.
• The company has demonstrated solid financial performance, with recent net investment income covering its regular and special dividends, supported by strong deployment activity and strategic capital structure optimization efforts, including a recent unsecured note issuance and CLO reset.
• NCDL maintains a highly diversified portfolio with conservative underwriting metrics (sub-5x net leverage, 2.4x interest coverage on core senior loans) and a low non-accrual rate (0.4% of fair value as of Q1 2025), reflecting a rigorous credit quality focus.
• A key strategic priority is the rotation out of lower-spread upper middle market assets into the higher-yielding traditional middle market, aiming to enhance portfolio yield and terms, supported by a robust pipeline of new opportunities.
• Despite market volatility and competitive pressures, NCDL's specialized focus, relationship-driven sourcing, and opportunistic share repurchase program position it to potentially deliver attractive risk-adjusted returns and shareholder value, particularly as it moves towards a supplemental dividend program.

Setting the Scene: A Focused Approach to Middle Market Lending

Nuveen Churchill Direct Lending Corp. ($NCDL) operates within the dynamic landscape of U.S. middle market direct lending. Established in 2018 and transitioning to a publicly traded Business Development Company (BDC) via an Initial Public Offering (IPO) in January 2024, NCDL's core mandate is to generate attractive risk-adjusted returns primarily through current income. This is achieved by investing predominantly in senior secured loans to private equity-owned U.S. middle market companies, specifically targeting those with EBITDA between $10 million and $100 million, which it terms the "core middle market." While senior secured first-lien debt and unitranche loans form the bedrock of its portfolio, NCDL also opportunistically engages in junior capital investments, including second-lien loans, subordinated debt, and equity co-investments.

The company's strategy is deeply intertwined with the capabilities of its external manager, Churchill DLC Advisor LLC, and its sub-adviser, Churchill Asset Management LLC (Churchill), both affiliates of Nuveen, LLC. This relationship provides NCDL with access to a scaled platform and an extensive network of private equity relationships, which management highlights as a critical differentiator in sourcing and executing investment opportunities. This relationship-driven approach is central to NCDL's ability to maintain selectivity and underwriting discipline in a competitive market.

Competitive Landscape and Strategic Positioning

The U.S. middle market direct lending space is populated by a diverse set of participants, including other BDCs, private credit funds, and, to a lesser extent, traditional banks and fintech lenders. Key direct competitors operating at scale in similar segments include Blue Owl Capital Corporation (OBDC), Ares Capital Corporation (ARCC), and Blackstone Secured Lending Fund (BXSL).

NCDL positions itself as a specialized, relationship-driven lender within the core middle market. While it may not possess the sheer scale or technological integration of some larger competitors like OBDC (which leverages AI-driven analytics for potentially faster processing), NCDL's competitive advantage stems significantly from the Churchill platform's deep ties with over 310 leading U.S. middle-market private equity funds and seats on over 245 advisory boards. This network provides a consistent source of proprietary deal flow, enabling NCDL to get early looks at transactions and maintain a high degree of selectivity. Approximately 75% of NCDL's senior lending activity is with firms where Churchill has an LP relationship, and the company actively adds 7 to 10 new private equity LP relationships annually, continuously expanding its sourcing aperture.

Compared to broader players like ARCC, NCDL's focused approach on private equity-backed targets in the core middle market allows it to potentially capture more deals in this specific segment. While ARCC may benefit from greater operational efficiency due to its larger scale, NCDL's targeted expertise and relationship-based sourcing aim to yield attractive risk-adjusted returns and potentially better terms in its niche. Against BXSL, which benefits from access to Blackstone's vast network and global reach, NCDL's strength lies in its specific U.S. middle-market focus and the depth of its relationships within that ecosystem.

Management believes this focus on the core middle market insulates NCDL from some of the pricing pressure, increased volatility, and weaker terms observed in the upper middle market and broadly syndicated loan (BSL) markets. While spreads have seen some modest compression across the market, NCDL has maintained spreads on new floating rate loans in the traditional middle market around 500 basis points over SOFR, a premium compared to the tighter spreads seen in the BSL market (potentially 200 basis points wider for traditional middle market relative to BSL). This strategic focus on higher-yielding, better-structured core middle market deals is a key element of NCDL's value proposition.

Financial Performance and Portfolio Strength

NCDL has demonstrated solid financial performance since its IPO. For the first quarter of 2025, the company reported total investment income of $53.6 million, an increase from $51.6 million in the same period of 2024. This growth was primarily driven by increased investment activity, although partially offset by a decrease in the weighted average yield on debt investments, influenced by lower base interest rates and tightening spreads in new investments. Net investment income for Q1 2025 was $27.5 million, or $0.53 per share ($0.56 per share excluding non-recurring interest and debt financing expenses). This compares to $29.7 million, or $0.56 per share, in Q1 2024.

The company's portfolio has seen significant growth, with total investments at cost increasing to $2.11 billion at March 31, 2025, from $1.80 billion at March 31, 2024. This growth is a direct result of robust deployment activity, including $166 million in new originations in Q1 2025, $163 million in Q4 2024, $226 million in Q3 2024, and a record $360 million in Q2 2024. This deployment has been strategically focused, with a significant portion of new commitments directed towards existing borrowers or long-term Churchill relationships (approximately 44% in Q1 2025 and over 70% in 2024), leveraging the power of incumbency.

Portfolio composition remains heavily weighted towards senior secured debt, representing 90.5% of the portfolio's fair value at March 31, 2025. Junior debt and equity comprised 7.8% and 1.7%, respectively, aligning with the company's target allocations of 85%-90% senior loans and the balance in junior capital.

Credit quality is a cornerstone of NCDL's strategy, supported by conservative underwriting. As of March 31, 2025, the portfolio exhibited a weighted average net leverage of under 5x (4.9x) and an interest coverage ratio of 2.4x on traditional middle market first-lien loans. Approximately 85% of debt investments include financial covenants, providing important protective mechanisms. The weighted average internal risk rating stood at 4.14 at March 31, 2025, relatively stable from 4.13 at December 31, 2024, and 4.2 at September 30, 2024, indicating overall portfolio health. The watch list (investments rated 6 or worse) was 6.7% of fair value in Q1 2025, an increase from 5.9% in Q4 2024 and 5.6% in Q3 2024, but still considered manageable by management. Non-accruals remained low, with only two portfolio companies on non-accrual status at March 31, 2025, representing 0.35% of total investments at fair value. Management views these as idiosyncratic and is actively working towards resolution.

Liquidity and Capital Structure Optimization

NCDL maintains a focus on robust liquidity and an optimized capital structure to support its investment activities and operational needs. Liquidity is generated from investment income, principal repayments, and capital markets activities. The company has actively managed its debt profile, utilizing a Revolving Credit Facility (with $172.8 million available at March 31, 2025), debt securitizations (CLOs), and unsecured notes.

Recent strategic moves have aimed to enhance flexibility and reduce borrowing costs. In January 2025, NCDL issued $300 million in aggregate principal amount of 6.65% Notes due 2030, diversifying its funding sources with unsecured debt. This issuance, which yielded approximately $296 million in net proceeds, ranks pari passu with other unsubordinated unsecured debt but is effectively subordinated to secured debt. Concurrently, the Wells Fargo Financing Facility was terminated. In March 2025, the CLO-I 2022 Debt Securitization was refinanced, reducing borrowing costs on certain tranches and securing a five-year reinvestment period. The SMBC Financing Facility was also terminated in November 2024 and replaced with borrowings on the corporate revolver at a lower spread. These actions collectively aim to reduce the overall weighted average cost of debt and enhance the capital structure's efficiency.

The company operates within regulatory requirements, maintaining an asset coverage ratio of 176.52% at March 31, 2025, well above the 150% minimum. Management expects to continue deploying capital efficiently and operating leverage towards the upper end of its target range of 1 to 1.25 times debt-to-equity.

Furthermore, NCDL has implemented a share repurchase plan, authorizing purchases up to $99.275 million when the stock trades below NAV. This plan was extended for an additional 12 months in March 2025 and is structured to increase purchase volume as the discount to NAV widens, serving as an opportunistic tool to enhance shareholder value. As of May 6, 2025, approximately $85 million had been utilized under this program.

Outlook and Risks

Management expresses optimism regarding the outlook for NCDL, citing the strength of its platform, the quality of its portfolio, and the opportunities available in the core middle market. They anticipate continued market volatility, particularly influenced by factors like trade policies, but believe NCDL's focus on resilient, domestically-oriented, service-based businesses provides insulation from direct negative impacts.

The strategic focus on rotating into traditional middle market deals is expected to continue, supported by a robust pipeline and the redeployment of cash from repayments and asset sales (like the $65 million in upper middle market investments sold in Q1 2025). Management anticipates a potential pickup in M&A activity, which could further drive deployment opportunities. While significant spread widening in the core middle market has not yet materialized, management is hopeful this could occur if volatility persists, offering potential for incremental yield.

Regarding shareholder returns, NCDL has consistently covered its regular quarterly dividend of $0.45 per share and the special dividends declared at the time of the IPO. The final $0.10 special dividend was paid in April 2025. Moving forward, the company intends to implement a supplemental dividend program, distributing a portion of excess earnings over the regular dividend while retaining capital for reinvestment and NAV growth.

Key risks include interest rate risk, which affects net investment income as borrowing costs and portfolio yields fluctuate. While NCDL's portfolio is predominantly floating-rate, its liabilities also have floating-rate components, and the recent interest rate swap on the unsecured notes aims to hedge a portion of this exposure. Valuation risk is also inherent, as the illiquid nature of middle market investments requires subjective fair value determinations. Broader macroeconomic conditions, including potential recessionary dynamics or the impact of changing trade policies, could negatively affect portfolio company performance, although NCDL's diversification and focus on defensive industries are intended mitigation factors. Increased competition could also pressure spreads and terms, potentially impacting future yields, though NCDL's differentiated sourcing model aims to counter this.

Conclusion

Nuveen Churchill Direct Lending Corp. is a BDC with a clear strategic focus on the core U.S. middle market, leveraging the Churchill platform's deep relationships and scale to source and underwrite senior secured loans. Its recent financial performance demonstrates solid earnings power, supported by active deployment and strategic capital structure management. The portfolio is characterized by strong credit fundamentals, diversification, and a conservative underwriting approach, which management believes positions it defensively against potential economic headwinds and market volatility.

While challenges such as competitive pressures and macroeconomic uncertainty persist, NCDL's commitment to portfolio optimization through rotation, disciplined underwriting, and proactive risk management provides a compelling investment thesis. The transition to a supplemental dividend program, coupled with opportunistic share repurchases, signals a focus on delivering value to shareholders while continuing to build NAV. For investors seeking exposure to the U.S. middle market credit space, NCDL's differentiated sourcing model, focus on credit quality, and strategic capital management warrant close consideration.