NCDL - NYSE

Welcome to Nuveen Churchill Direct Lending Corp.'s Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I'd now like to turn the call over to Robert Paun, Head of Investor Relations for NCDL. Robert, please go ahead.

Good morning, and welcome to Nuveen Churchill Direct Lending Corp.'s Fourth Quarter and Full Year 2025 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, and 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 industries, 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, and 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-K and supplemental earnings presentation are available on the News and Investors sections of our website at ncdl.com. Now I would like to turn the call over to Ken.

Thank you, Robert. Hello, everyone, and thank you all for joining us today. I'd like to start by discussing our results for the fourth quarter and full year, and then I'll provide some thoughts on the current market conditions, economic environment, portfolio positioning and our forward outlook for 2026. I'll then hand the call over to Shai for a more detailed discussion of our financial performance. Before getting into the results for NCDL, I think it's important to reflect on the past year. 2025 was littered with headlines, including a change in administration, tariffs, interest rate reductions, geopolitical tensions and a few large bankruptcies. Private credit also garnered significant media attention, largely, we believe, due to the meaningful growth of the industry over the past decade. All of these headlines led to temporary market fears and a pullback in BDC stock valuations. In our view, the disruption in the sector has created a compelling investment opportunity. We remind investors that direct lending has been around for several decades. It did not appear overnight. And the investments in our portfolio are primarily directly originated and negotiated loans. At Churchill, we remain intensely focused on generating attractive risk-adjusted returns. We believe we are uniquely positioned with our focus on the traditional core middle market and our distinct sourcing advantage. Our conservative underwriting strategy and long-term track record of nearly 20 years have produced strong returns for our investors and stakeholders over time. Overall, NCDL had a successful year in 2025. NCDL generated an ROE of nearly 11% on net investment income. We paid total distributions of $1.90 per share, equating to a 10.7% yield based on our year-end 2025 net asset value. We took an important step to optimize our balance sheet and capital structure by issuing $300 million of unsecured notes in the first quarter of 2025. And finally, NCDL's portfolio performed well as we ended the year with only four portfolio companies on non-accrual status, representing 0.5% of the total portfolio at fair value. Now turning to the results. Despite the noise in the market, we are pleased with NCDL's operating performance and the stability and quality of our investment portfolio. This morning, we reported net investment income of $0.44 per share during the fourth quarter compared to $0.43 per share in the third quarter. Gross originations totaled approximately $59 million in the quarter compared to $29 million in the third quarter. Additionally, the Churchill platform continued to see strong asset growth and new originations during the fourth quarter of 2025, as I will discuss a little later in my prepared remarks. NCDL's investment portfolio remains healthy and resilient, and our portfolio companies continue to perform well, largely due to the strength of our senior loan investments. Net asset value was $17.72 per share at year-end compared to $17.85 per share at September 30, 2025. The modest decline quarter-over-quarter was primarily due to a slight decrease in the fair value of certain underperforming portfolio companies. In terms of the current market environment, the broader U.S. economy proved more resilient in 2025 than originally expected. U.S. GDP increased at an annual rate of 1.4% in the fourth quarter and 2.2% for the full year, reflecting a strong, resilient economy. M&A activity also continued its positive momentum in the fourth quarter of last year, building on the rebound in the third quarter. We believe stabilizing market conditions and renewed private equity sponsor confidence in the macro environment contributed to increased transaction activity. In our view, the ingredients for continued improvement in M&A and LBO activity are still intact. Lower financing costs, improving buyer and seller alignment and pressure on sponsors to transact should create a more constructive environment for increased deal flow and investment activity in 2026. During the fourth quarter, the Federal Reserve continued its interest rate cut cycle with two 25 basis points cuts in October and December. This marked the third consecutive cut. As many expected, the Fed paused in January of this year as they held interest rates steady. However, markets continue to price in two more 25 basis point cuts in 2026. Despite the reduction in interest rates and the potential for further cuts, we continue to see an attractive risk return profile for private credit and direct lending, especially on a relative basis compared to other fixed income asset classes. And it also goes without saying that we will not compromise our conservative underwriting strategy by stretching for returns in a declining interest rate environment. Turning to our investment activity. During the fourth quarter, we continued to see an increase in transaction activity, particularly new deals for high-quality assets that are in resilient business sectors. At the Churchill platform level, the number of deals reviewed in the second half of the year increased 23% from the first half. And for the full year 2025, Churchill closed or committed $16.3 billion of investments across 389 transactions, driven by a record-setting first quarter and a resurgence of activity in the second half of the year. In NCDL, we continue to operate at the upper end of our target leverage range, and we remain focused on actively reinvesting cash received from repayments and sales into high-quality assets. We also continue to benefit from attractive opportunities and activity at the Churchill platform level, particularly in senior lending, which represents approximately 90% of the fair value of the overall portfolio. During the fourth quarter, investment fundings totaled $80 million and repayments and sales totaled approximately $84 million. We think it's 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 to $100 million in 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 enhanced portfolio diversification for our investors. Now turning to our investment portfolio and credit quality. The continued strength of our portfolio reflects healthy overall performance from our borrowers as well as the quality of deal flow we've experienced over the past several years. In addition, our rigorous underwriting, high selectivity and focus on diversification have been critical to minimizing losses and generating strong returns across multiple market cycles. That same discipline extends to today's shifting macro landscape. At December 31, 2025, our weighted average internal risk rating was 4.2, in line 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 remains at a manageable level. It's approximately 8% of fair value. Credit fundamentals within the NCDL portfolio remains strong with portfolio company total net leverage of 5x and interest coverage of 2.3x on traditional middle market first lien loans. These metrics are a direct result of conservative structuring and relatively low attachment points that we target when underwriting new transactions. NCDL added one new non-accrual during the fourth quarter with a cost of $5.7 million and fair value of $2.7 million at year-end. As of December 31, non-accruals represented just 0.5% of our total investment portfolio on a fair value basis and 1.2% on a cost basis. We believe these percentages continue to compare extremely well versus current BDC averages and the long-term historical BDC average. We continue to believe the strength of our platform, including our experienced workout and portfolio management teams will continue to drive favorable results. At year-end, we had 227 companies in our portfolio, and our top 10 portfolio companies represented approximately 13% of total fair value. This diversification remains a key focus of ours and is critical as we seek to maintain exceptional credit quality and originate additional attractive investment opportunities. We've achieved this diversification with a continued high level of selectivity, facilitated by the significant proprietary deal flow, our sourcing engine is able to generate from the breadth and depth of our PE relationships. Before I conclude my remarks, I'd like to take a moment to talk about our software exposure and investment strategy in this sector. Recent market concerns around AI's potential disruption of software businesses have raised a lot of questions around private credit portfolios software exposure. Churchill's platform does not have meaningful exposure to the types of software companies in the headlines, susceptible to displacement from AI and has limited exposure to software in general. NCDL's high-tech industry sector, where software businesses fall, accounts for only 4% of the total portfolio. Within this industry categorization, the exposure is largely weighted towards specialized managed service providers, systems integrators and cybersecurity consultants. NCDL's portfolio exposure to true Software-as-a-Service or SaaS businesses is around 2% of the total portfolio. Additionally, it is important to note that we have avoided annual recurring revenue or ARR loans, which have been common in the technology sector. The software platforms that we have invested in, these are cash flow generating mature businesses with high customer retention. These businesses are also typically modestly levered, ingrained within the operations of the customers they serve and non-discretionary. Churchill has been monitoring AI as a potential positive and negative catalyst across the portfolio long before these headlines emerged. We maintain an active dialogue with the senior management teams of all of our borrowers as well as the private equity firms that own them so that we have an informed and real-time view of this and any other risks our borrowers may face. As we look forward, there are many reasons to be excited about the future of our business and the tailwinds of the private credit market. We are encouraged by the steady growth in our pipeline and the quality of businesses seeking financing solutions. During the second half of 2025, we experienced a resurgence of M&A activity, leading to a buildup in our traditional middle market pipeline. Additionally, we believe corporate management teams are now more focused on long-term strategic initiatives and investing in their businesses for sustained growth. This, coupled with an interest rate cut cycle, will lead to increasing deal flow and financing opportunities in 2026 in our view. At the same time, we also acknowledge the impact on our earnings and the return profile of NCDL from recent interest rate cuts, projections for further cuts as well as the competitive market environment in which spreads have remained below 500 basis points on average. Given these market dynamics, we have declared a $0.40 per share quarterly distribution in the first quarter of 2026, which consists of a base distribution of $0.36 per share and a supplemental distribution of $0.04 per share. Our total first quarter distribution of $0.40 per share equates to an annualized yield of 9%, which we believe is competitive in today's market environment. Shai will discuss our distribution policy in more detail during his remarks. Finally, although 2025 was a challenging year for BDC's stock prices, we continue to believe our portfolio remains healthy and resilient, and we believe the current share price offers a compelling investment opportunity. As a result, today, we announced that the Board authorized a new $50 million share repurchase program. And now I'll turn the call over to Shai to discuss our financial results in more detail.

Thank you, Ken, and good morning, everyone. I will now review our fourth quarter financial results in more detail. As Ken outlined, NCDL reported net investment income of $0.44 per share for the fourth quarter compared to $0.43 per share in the third quarter of 2025. Total investment income declined slightly to $50 million compared to $51.1 million in the third quarter of 2025. This was primarily driven by the decline in portfolio yields as a result of underlying loan contracts resetting to lower base rates. At year-end, our gross debt-to-equity ratio was 1.27x compared to 1.25x at September 30, while our net debt-to-equity ratio, net of cash was 1.2x, in line with the end of the third quarter. In January, we paid our Q4 dividend of $0.45 per share. And as Ken mentioned earlier, for the first quarter of 2026, we have declared a $0.40 per share dividend which consists of a regular dividend of $0.36 per share and a supplemental dividend of $0.04 per share. Both distributions will be paid on April 28 to shareholders of record as of March 31. Consistent with our communication to the market on our dividend policy since we IPO-ed in January of 2024, we intend to operate with a supplemental dividend program that sees us paying out a portion of the excess earnings over and above our regular dividend. This should allow us to deliver the benefits of higher returns to shareholders when market returns are higher as well as provide stability to NAV while allowing us to reinvest earnings for growth. We have assessed various scenarios related to interest rates, asset spreads, financing costs and credit performance, and we've concluded that a regular quarterly distribution of $0.36 per share is an appropriate level that we feel our earnings will comfortably cover for the medium to long term. On an annualized basis, our first quarter 2026 total dividend of $0.40 per share equates to an approximately 9% yield on our December 31, 2025, NAV. Our total GAAP net income for the fourth quarter was $0.32 per share compared to $0.38 per share in the third quarter of this year. Our fourth quarter net income included $0.12 per share of net realized and unrealized losses primarily due to a decrease in the fair value of certain underperforming portfolio companies. Our net asset value was $17.72 per share at the end of the fourth quarter compared to $17.85 per share at September 30. At year-end, NCDL's investment portfolio had a fair value of $2 billion, consistent with the third quarter. Gross originations totaled $59.4 million and gross investment fundings totaled $80.4 million, compared to $29.2 million and $36.3 million of gross origination and gross investment fundings, respectively, in the third quarter of 2025. During the fourth quarter, repayments sold $84.3 million a rate of approximately 4%, slightly lower than our long-range assumption of 5% per quarter, but also slightly up from the prior quarter of roughly 3%. We had full repayments on six deals totaling $73 million and partial repayments for another $9 million. As we mentioned on our prior call, we expect to continue to redeploy capital received from repayments with a view towards maintaining leverage at the upper end of our target range. We also remain focused on redeploying capital into traditional middle market transactions across the capital structure with the vast majority of new investments into senior loans. At December 31, 2025, our total investment portfolio consisted of 227 names compared to 213 names at the end of the third quarter. We continue to remain highly focused on diversification within our portfolio with the top 10 portfolio companies representing only 13.1% of the fair value of the portfolio down from 13.6% at September 30. Our largest exposure is only 1.6% of the total portfolio, and our average position size is 0.4%, down from 0.5% in the prior quarter. As far as deployment and asset selection goes, our new originations during the fourth quarter were again weighted towards senior loans with $47.5 million out of the $59.4 million of gross originations deployed into this strategy. The balance was deployed into subordinated debt and equity in the fourth quarter. We strongly believe that our focus on the traditional middle market segment will benefit NCDL shareholders over the long term as we see meaningfully higher spreads and tighter documentation terms in the traditional middle market as compared to the upper middle and BSL markets. Spreads on new investments in the fourth quarter were consistent with the prior quarter with the average spread on first lien loans at approximately 470 basis points. Our weighted average yield on debt and income-producing investments at cost declined to 9.5% at the end of the quarter compared to 9.9% as of the end of the third quarter. This decrease in yield was primarily due to lower base interest rates. As far as portfolio allocation, at year-end, first lien loans represented approximately 90% of the total portfolio, while junior debt and equity comprised approximately 8% and 2%, respectively. Our allocation strategy remains unchanged as we continue to target a portfolio comprised of roughly 90% senior loans with the balance allocated to junior debt and equity. Turning to credit quality. And as Ken mentioned earlier, we continue to be very pleased with the overall health and strength of our investment portfolio as the performance of our portfolio companies remain strong. During the quarter, we placed one investment on non-accrual status. And at year-end, NCDL had only four names on non-accrual, representing just 0.5% on a fair value basis and 1.2% at cost. This compares to 0.4% on a fair value basis and 0.9% at cost at the end of the third quarter. At December 31, our weighted average internal risk rating was 4.2%, consistent with the prior quarter and our watchlist consisting of names with internal risk ratings of 6 or worse remains at a relatively low level of 8% at the end of the fourth quarter, slightly up from the 7.3% in the prior quarter. And finally, our conservative approach to underwriting is highlighted by our weighted average net leverage across the portfolio of 5x and interest coverage of 2.3x as of the end of the quarter. With respect to our debt capitalization. Our debt-to-equity ratio at December 31 was relatively unchanged quarter-over-quarter at 1.27x compared to 1.25x since September 30. On a net basis, our debt-to-equity ratio was 1.2x at December 31, net of our cash position at quarter end. As we spoke about on prior calls, our goal is to redeploy capital received from repayments and maintain leverage towards the upper end of our target range of 1x to 1.25x debt-to-equity. Our focus for the near term is on optimizing the asset mix within the portfolio and actively reinvesting cash received from repayments and sales into high-quality assets. Subsequent to quarter end, in February of this year, we closed the refinancing of the NCDL CLO-II transaction, reducing borrowing costs from SOFR plus 250 basis points to SOFR plus 144. In addition, we were able to secure a 5-year reinvestment period. Pro forma for this transaction, NCDL's weighted average cost of debt declined by 17 basis points to SOFR plus 186. This strong capital markets execution reflects the reputation that NCDL and Churchill have in the debt capital markets and represents a meaningful improvement in borrowing costs for NCDL. We will continue to look for ways to optimize the debt capital structure of NCDL going forward. Finally, as Ken highlighted earlier, our Board has authorized a new $50 million share repurchase program, which is designed to take advantage of discounts in the trading price of our shares relative to NAV. This move reflects our confidence in the overall strength of our portfolio and our cycle-tested investment approach. I'll now turn it back to Ken for closing remarks.

Thank you, Shai. In summary, while the stock performance of NCDL and the entire BDC industry was underwhelming in 2025 to say the least, we believe NCDL had a successful year from an operational and financial standpoint. We also believe NCDL is well positioned for 2026 with an experienced investment team and our ability to originate high-quality investments in the context of a diversified portfolio and strong capital structure. I would like to thank our entire team for their hard work and dedication during this past year. Thank you all for joining us today and for your interest in NCDL. I will now turn the call over to the operator for Q&A.

[Operator Instructions] Our first question is from Douglas Harter with UBS.

Can you -- with your commentary that you look to stay at the upper end of the leverage target, can you talk about how you would weigh share repurchase versus making new loans and kind of just a little bit on the thought process there?

Yes. Doug, it's Shai. Yes, look, I mean, I think it's the classic sort of capital allocation thought process that we will go through, sort of evaluating the level of the discount and reinvesting in our portfolio that we've obviously conveyed confidence in the health of that portfolio and our ability to buy it at a meaningful discount, obviously, is an attractive opportunity. At the same time, we're also continuing to see attractive investment opportunities in the market. So I think it will be a question of sort of analyzing those two. As we have done in the past with our share repurchase programs, they are essentially programmatic, so designed to take advantage of discounts in the trading price and sort of operating independently. So we'll keep an eye on that activity and do all of that with a view towards maintaining leverage within our target range of 1x to 1.25x and as we've stated, sort of operating towards the upper end of the range given our confidence in the portfolio, the diversification and our ability to run that level of leverage against the type of portfolio that we have. So hopefully, that helps.

[Operator Instructions] Our next question is from Arren Cyganovich with Truist Securities.

The investment activity was really strong in 2025. Maybe you could share your thoughts on what the recent public market volatility has -- how that may have shaped your outlook for activity in 2026? Should we kind of expect it again to be a little bit more back-end weighted given the kind of near-term volatility we're seeing?

Yes. Thanks, Arren. It's Ken. I'd say a few things. One is, as I think we pointed out, across the platform, we had an extraordinarily busy year and actually quarter-over-quarter going into third quarter, fourth quarter and now even into the first quarter, deal activity has been extraordinarily busy and that really hasn't slowed. We entered the year with probably our largest pipeline overall as a firm in January. And we continue to see a very, very significant level of activity and obviously, in the core middle market. That said, I think that some of the dynamics in the public markets probably does shift some of the pricing power back to us. So on a marginal basis, I think it does put lenders like ourselves in a better position to get better structures and potentially even tighter covenants. And certainly, some of the spread tightening we saw developed earlier in 2025 has really subsided. Spreads have, in our view, stabilized around that kind of 450 to 475 level. So we think they've reached a floor. We certainly don't see any material tightening as we go through the first half of 2026. But I do think interest rates overall, as they come down, will continue to drive and unlock sponsor activity, sales of companies, M&A that obviously is a big driver of our efforts. So I would say the broader trend remains very, very good both with respect to deal activity and spreads. A little bit of volatility in the public markets has generally worked in favor of us as a mid-market lender. But overall, the trends have been very good, and we haven't seen any change in that in more recent activity.

And I appreciate the commentary on software. Clearly, you have a very small exposure to there, much smaller than a lot of the peers in the BDCs. Maybe you could share a little bit of why you've avoided that historically and why that's not an area because, obviously, it was a very kind of steady earnings business or industry for a long time.

Sure. So look, I think when you think of us in our underwriting approach from a credit perspective, we are very traditional, right? So we are looking at fundamental cash flow metrics, free cash flows of the business, both gross and net cash flow. We're looking at the fundamentals of the company with respect to the stability of those businesses and the ability to service the leverage profile that we're underwriting. So that traditional approach leads us to a number of conclusions. One is that we have never, in our history, in our 20-year history, ever done an ARR loan. And from our perspective, that's just not -- financing recurring revenue is not, in our view, an appropriate risk profile for our platform. We finance recurring cash flow, right? And so, if you look at the types of businesses that has led us to within the software area, it's been principally specialized managed service providers, systems integrators, cybersecurity consultants, businesses that are more traditional and away from Software-as-a-Service or SaaS businesses, which represent, as I mentioned, only about 2% of our portfolio. So when you think about the fundamentals, cash flow-generating businesses, mature businesses, where we are financing and obviously looking at things like customer retention, these are businesses are typically modestly levered, ingrained within the operations of the customers they serve and generally non-discretionary. So it really comes down to the fundamentals of our underwriting approach. But the reality is, not only are we not an ARR lender, we're also generally not looking at those very, very highly levered are deals that are being done in the upper middle market and the broadly syndicated market. So I think this is yet another situation where our focus on the fundamentals on the core middle market against the backdrop of some of the -- backdrop of some of the noise in the market actually shows very well for us.

[Operator Instructions] There are no further questions at this time. I'd like to hand the floor back over to Ken Kencel for any closing comments.

Great. Well, thank you very much, and thank you all for joining us today. We appreciate your support and look forward to moving forward with hopefully continued great performance and feedback to you all as we continue in the business. Thank you.