Morgan Stanley Direct Lending Fund Q4 FY2024 earnings call

• 2024 was a critical year with successful IPO in January and prudent capital deployment. - Fourth quarter had solid operating results supported by strong credit performance, net asset value was stable, net investment income covered dividends, and new investment commitments and deployment increased. - Over 2024, non - refinancing gross deployment was skewed towards new borrowers, and MSDL led or co - led over 90% of new borrowers added. - Leveraged the Morgan Stanley platform for broad sponsor relationships and deal flow, with flexibility to move up and down market to optimize risk - adjusted returns. - Portfolio had strong credit quality with over 98% of total portfolio having internal risk rating of two or better, and non - accruals were low.

In the fourth quarter, net asset value per share was $20.81, stable quarter over quarter. Net investment income was $0.57 per share, representing 114% regular dividend coverage. New investment commitments totaled approximately $188 million in the fourth quarter, with net funded deployment of $144 million. For 2024, over three - quarters of non - refinancing gross deployment was to new borrowers, and over 90% of new borrowers added to the portfolio were led or co - led by MSDL. The total portfolio at fair value ended the year at $3.8 billion, a year - over - year increase of approximately 19%. The portfolio was comprised of approximately 97% first lien debt, 2% second lien debt, and the remainder in equity and other debt investments. The two largest industry exposures were software (18.9%) and insurance services (12%) at fair value. Weighted average loan - to - value was approximately 40%, median EBITDA was in the mid - $80 million range, and debt to NAV increased from 0.99 times to 1.08 times in the fourth quarter, achieving the 1 to 1.25 times target leverage range.

• Continue to source and underwrite lending opportunities that offer strong risk - adjusted returns for shareholders over 2025 and beyond. - Anticipate LBO activity to continue to accelerate due to factors like anticipated deregulation, healthy public and private financing markets, significant private equity dry powder, and aging sponsor portfolios, though rebound will be gradual due to policy uncertainty. - Will strategically evaluate debt capital stack opportunities, including upcoming unsecured maturity in September 2025.

• Market conditions, uncertainty surrounding interest rates, changing economic conditions could cause actual results to differ from forward - looking statements. - Potential impacts to existing portfolio from government reform, including tariffs, with uncertainty surrounding specific measures and broader impact, but portfolio is relatively insulated currently. - If repayments spike substantially and deal flow is poor, may not deploy capital for the sake of leverage multiple.

Q: Good morning. So a quick scan of your industry concentrations shows about 6.6% in auto and automobile components alone. What was your review of the portfolio concentrations when it comes to the possibilities around tariffs? And have you guys changed your strategy to be a little bit more defensive in the new outlook for 2025?

A: Yeah, sure. This is Jeff, and thanks for the question. It's not direct auto exposure. Typically, that's service offering into the end market there or software enterprise software specifically into dealerships, etc. And so, again, it's not direct exposure. That being said, as you'd expect, substantial work has been underway on our team with regards to the broader portfolio and potential impact of tariffs, that being somewhat challenging to underwrite for both private equity and private credit given uncertainty and things moving around with everything happening in DC. That being said, the two sectors we're the longest are software enterprise software and insurance brokerage, which we think are somewhat insulated from tariff exposure. That being said, again, it's unknown. So from a primary standpoint, I think we're all protected. But secondary and tertiary impact of how this will play out over the coming months and years is to be determined, frankly. And so we have a full work stream on our side thinking through and analyzing the various businesses and sectors that we're long and the risk profile there. We're not overly concerned, but that's an analysis that's ongoing. And as we deploy new capital, obviously, this is very much front and center in terms of how we're allocating the dry powder that we have within the portfolio.

Q: Good morning. Thanks for taking my questions. I want to touch on NII trends. Obviously, there is a step down sequentially in Q4 with some rate cuts. I think the question is really, you know, we know that there tends to be a lag in changes in base rates and how they flow through BDC income statements. How much of the rate declines do you think flowed through into Q4? Put differently, should we be expecting something similar directionally in the first quarter?

A: Thanks for the question. This is Dave. So about two - thirds of our portfolio did reset within those in Q4. So we do have about a third left in terms of the lag as you mentioned before. What I would say, though, in just thinking about NII in general is that if you look at the core NII from Q3 into Q4, it went from $0.62 to $0.57 as you can see in our materials. That was, yeah, 100% driven by the change in rates, period over period. We did not have any nonrecurring income flow through into Q4, which is what we saw in Q3. So that was about $0.02 of incremental pickup in Q3 as you just try to do the NII bridge period over period.

Q: Yeah. Good morning. Thanks for taking my questions. Interesting to see the just the repayment number so low this quarter. Any idea, you know, in terms of what you think drove that?

A: Yeah. That's a good question. I think, you know, this business reporting quarterly publicly is always interesting because the business in any one quarter or two, you know, we could see huge upticks in deployment or not. You could see repayments spike or not because it can be a lumpy business. So I always encourage people to look analyze these businesses not over a single quarter, but over more like a calendar year or frankly even two given the nature of the asset class in general. Don't think anything in particular drove, you know, fewer repayments in Q4. We'll see what this calendar year looks like. Obviously, the public market is in a really healthy place. But I think, you know, within our asset class, we've been able to maintain the liquidity premium relative to the syndicated loan market that's been very healthy and steady, frankly. You know, in the fourth quarter, the capital that we put out was at roughly so for $500 million. You know, TBD the impact of repayments over the coming quarters. So I don't think there's anything in particular to answer your question directly which drove fewer repayments in the fourth quarter relative to prior quarters.

Q: Thanks. Hoping you could talk about your leverage outlook for the year, kind of given the commentary you've made about the environment?

A: Yeah. I'll go first and then others in the room feel free. You know, with the stated target of 1 to 1.25, when we took the vehicle public, you know, I think we guided you all to that we would be in that range at some point over the few quarters post - IPO. And we executed in line with that strategy as you can tell. I think, you know, we got offers of 1.10 or 1.11. It was a little bit back - ended in terms of quarter, fourth quarter. You know, TBD, it's a totally fair, and it's a great question. I think we have the benefit of having a really best - in - class deal flow engine. Have a headwind of a market right now that presents fewer opportunities that we and our competitor would like to see. And so we are doing our absolute best to find ways to deploy capital into deals that we are really comfortable with and we think a really good risk - adjusted return. It'd be really easy, you know, for us to stay within that range or the high end of the range, for the sake of NII and capital deployment. As I tell the team all the time, making a loan is easy. Getting your money back is the hard part. And so we continue to be focused on quality. You know, that 1 to 1.25 range, we think is absolutely reasonable. It goes without saying, though, if repayments spike substantially and deal flow is really poor, we don't think the market opportunity is attractive, we're not gonna put money in the ground for the sake of a leverage multiple over a very short period of time. That in no means is to guide you that I'm worried about our target leverage range. I'm not. But we think, as I mentioned before, we don't think over the short term within this business. We think medium and long term in terms of how we deploy capital because these assets are grossly illiquid generally. And so we need to be really comfortable when we're deploying capital that we're gonna get our money back. So I think long - winded way of saying, 1 to 1.25 continues to be the range. Where within that range, we reside in every given quarter TBD, and we will be based on a number of factors. But rest assured, we're deploying capital with an eye towards capital preservation and defensiveness, first and foremost.