Morgan Stanley Direct Lending Fund Q3 FY2024 earnings call

Jeff Levin started by highlighting strong results for the quarter, with portfolio growth and solid operating results supported by strong credit performance. The market backdrop was resilient with strong economic outperformance and a potential soft landing, and the Federal Reserve's rate cut in September spurred optimism. David Pessah provided details on the portfolio, including composition by debt type, industry exposures, strong credit quality (over 98% of the portfolio had an internal risk rating of 2 or better), investment activity with new commitments and fundings, and financial results showing an increase in total investment income and net investment income, along with details on debt-to-NAV and the debt capital stack.

Morgan Stanley Direct Lending Fund's third quarter 2024 had a net asset value per share of $20.83, unchanged from the previous quarter. Net investment income was $0.66 per share, an increase from $0.63 per share in the second quarter. New investment commitments totaled approximately $455 million across 37 portfolio companies during the quarter, with net funded deployment of $124 million. The total portfolio at fair value was $3.6 billion, consisting of 96% first-lien debt, 2% second-lien debt, and the rest in equity and other investments. The two largest industry exposures were software (17.7%) and insurance services (12.6%) in terms of portfolio fair value. The weighted average loan-to-value was approximately 40%, and the weighted average EBITDA of portfolio companies was $145 million.

The Board declared a regular distribution of $0.50 per share for the fourth quarter to shareholders of record on December 31, 2024. The estimated spillover net investment income is $69 million or $0.77 per share. The second $0.10 special dividend from the IPO will be paid in January 2025.

Forward-looking statements are subject to uncertainties and factors such as market conditions, uncertainty surrounding interest rates, changing economic conditions, and other factors identified in SEC filings, which could cause actual results to differ materially from the forward-looking statements.

Q: Regarding the activity outlook, what are your guys’ thoughts towards originations for 2025? Do you think it’s going to be front-end loaded in the first half or a little bit lumpy with, it kind of picking up towards the fourth quarter of 2025?

A: Jeff Levin responded that it's really hard to predict, deal flow can be lumpy in a calendar year, there are tailwinds with rate clarity and private equity needing to invest, but the bid-ask spread needs to narrow for meaningful deal flow pickup.

Q: Regarding the portfolio yield, what's your outlook on refinancing?

A: Jeff Levin said repricing activity has slowed, spreads tightened then subsided, and David Pessah added the yield decreased due to repricing of deals and the 50 basis point rate cut in the quarter.

Q: How has LTV ratios leveraged in new deals?

A: Jeff Levin stated LTVs have been stable, with a flight to quality in the LBO market, LTVs modest, and conservative underwriting.

Q: Near-term outlook for potential originations and sector allocation?

A: Jeff Levin said pipelines are better, pleased with deployment, avoids cyclical sectors like retail, restaurants, energy, etc., uses Morgan Stanley ecosystem for investment, and has flexibility to move up/down the size spectrum based on value.