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Morgan Stanley Direct Lending Fund (MSDL)·Q1 2025 Earnings Summary

Executive Summary

  • Q1 2025 was steady operationally: total investment income (TII) was $101.5M (vs. $103.0M in Q4), net investment income (NII) per share was $0.52 covering the $0.50 dividend, and NAV/share ticked down modestly to $20.65 (from $20.81) .
  • Result drivers: lower base rates reduced asset yields while net expenses rose as IPO-related fee waivers expired; management quantified ~$0.04/share headwind in Q1 with a residual ~$0.01/share in Q2 from waiver roll-off .
  • Versus S&P Global consensus, MSDL beat on “Revenue” (SPGI revenue proxy) by ~$2.7M and was roughly in line on Primary EPS (SPGI’s measure that tracks NII/share) *.
  • Capital and liquidity position strengthened: leverage rose to 1.11x (target 1.0x–1.25x), the Truist facility was extended to 2030 with lower spreads, and a $300M ATM was established (no Q1 issuance) .
  • Potential stock catalysts: sustained dividend coverage and improved deployment pace could support sentiment; offsetting factors include the fee waiver roll-off, tariff uncertainty, and the overhang risk from the newly established ATM (to be used opportunistically) .

What Went Well and What Went Wrong

  • What Went Well

    • Continued dividend coverage with high-quality earnings mix (low PIK): “We generated net investment income of $0.52 per share. This exceeded the $0.50 dividend declared and was once again of high quality with low contributions from payment-in-kind and other income.” .
    • Deployment held up despite muted LBO environment: $233M of new commitments; led or co-led all facilities for new borrowers; >70% of non-refi gross deployment to new borrowers .
    • Portfolio credit quality remained robust: ~98% internal risk rating 2 or better; non-accruals ~0.2% at cost; weighted average LTV ~40% .

  • What Went Wrong

    • Lower base rates pressured asset yields; TII declined sequentially to $101.5M (from $103.0M) .
    • Net expenses increased as IPO-related fee waivers expired, compressing NII (to $46.2M/$0.52 from $50.7M/$0.57) .
    • NAV/share dipped to $20.65 (from $20.81) driven by ~$17.1M net unrealized losses partially tied to secondary market spread widening .

Financial Results

MetricQ3 2024 (Sep)Q4 2024 (Dec)Q1 2025 (Mar)
Total Investment Income ($M)$109.8 $103.0 $101.5
Net Investment Income ($M)$58.7 $50.7 $46.2
NII per Share ($)$0.66 $0.57 $0.52
EPS (GAAP) ($)$0.60 $0.58 $0.34
Net Realized & Unrealized Gains (Losses) per Share ($)(0.06) 0.01 (0.18)
NAV per Share ($)$20.83 $20.81 $20.65
Debt-to-Equity (x)0.99x 1.08x 1.11x
NII Margin (% of TII)53.5% (58.729/109.752) 49.2% (50.7/103.0) 45.6% (46.228/101.458)

Segment/Asset Mix

Investment Type (% of FV)Dec 31, 2024Mar 31, 2025
First Lien Debt96.5% 96.3%
Second Lien Debt1.8% 1.9%
Other Debt0.2% 0.3%
Equity1.5% 1.5%
Total Investments (FV, $B)$3.79B $3.79B

Key KPIs

KPIQ4 2024Q1 2025
Floating Rate % of Portfolio (FV)99.6% 99.6%
Weighted Avg Yield (Cost / FV)10.4% / 10.5% 10.2% / 10.3%
Non-Accruals (% of cost)~0.2% ~0.2%
New Commitments ($M)$188.3 $233.4
Fundings ($M)$187.3 $205.6
Sales & Repayments ($M)$43.6 $201.8
Net Funded Deployment ($M)$143.7 $3.8
Portfolio Companies208 210
Industries33 34
Top Industry ExposuresSoftware 18.9%; Insurance 12% Software 19.5%; Insurance 12%
Weighted Avg LTV~40% ~40%
Median EBITDA~$86M ~$87M
Wtd Avg Interest Rate on Debt6.19% 6.11%
Credit Facility Availability ($M)$964.8 $1,084.1
Unrestricted Cash ($M)$70.4 $65.6
Shares Repurchased (Q)494,943 @ $20.20 491,332 @ $20.38
ATM Program—$300M established; no issuances in Q1
Regular Dividend per Share$0.50 declared for Q1’25 $0.50 declared for Q2’25
Spillover NII$0.78/share (Dec 31) $0.80/share (Mar 31)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Regular Dividend per ShareQ2 2025$0.50 (Q1’25 declared level) $0.50 declared for Q2 2025 Maintained
Target Leverage (Debt/Equity)Ongoing1.0x–1.25x target reiterated (Q4 call) Maintain within 1.0x–1.25x; prefer 1.15x–1.20x range commentary Maintained
Credit Facility EconomicsTruist RevolverPrior spread higher; maturity earlier Maturity extended to Feb 2030; drawn spread cut to 1.775%; undrawn -2.5 bps Improved
Equity Capital Plan2025+No ATM$300M ATM program established; no Q1 issuance New tool

Note: No explicit revenue/EPS/OpEx/tax rate guidance provided; dividend policy and leverage framework reiterated and capital structure enhanced .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2: Q3’24; Q-1: Q4’24)Current Period (Q1’25)Trend
Macro/TariffsQ3: No call, but ops steady. Q4: Monitoring reform; portfolio relatively insulated; rebound gradual .Tariff-driven volatility delaying M&A; portfolio insulated given sector mix (software/insurance) .Cautious, vigilant; insulation emphasized.
M&A/DeploymentQ3: Net deployment $124M . Q4: Net deployment $144M; led/co-led >90% of new platforms in 2024 .New commitments $233M; led/co-led all new borrower facilities; >70% to new borrowers .Healthy sourcing despite muted LBOs.
Rates/YieldsQ4: Asset yield compression from base rate cuts; ~3% PIK .Asset yields lower; PIK ~4%; most SOFR reset impact flowed through Q1 .Moderating yields; manageable PIK.
Credit QualityQ3/Q4: ~0.2% non-accruals; ~98% risk rating 2+ .Non-accruals ~0.2% of cost; >98% risk rating 2+; one name removed, one added .Stable, best-in-class metrics.
Capital StructureQ4: Extended revolver; lower spreads; target 1.0–1.25x .Leverage to 1.11x; Truist spread reduced to 1.775%; $300M ATM (no Q1 usage) .Improved liquidity; prudent leverage.
Shareholder ReturnsQ3/Q4: Regular $0.50 + specials in 2024 .Regular $0.50 (Q2’25); spillover NII $0.80/share .Covered dividend; ample spillover.
RepurchasesQ4: Amended $100M 10b5-1 plan; activity in Q4 .Repurchased ~491k shares at $20.38; plan remains formulaic .Ongoing, accretive usage.

Management Commentary

  • “We generated net investment income of $0.52 per share… once again of high quality with low contributions from payment-in-kind and other income.” — Jeff Levin, CEO .
  • “Spreads on new capital deployed in the first quarter were virtually flat versus the second half of 2024… even if we see more Fed cuts this calendar year, gross asset yields are likely to continue to remain elevated.” — Michael Occi, President .
  • “Over 98% of our total portfolio remained at an internal risk rating of 2 or better… nonaccruals remain just 20 basis points of the portfolio at cost.” — David Pessah, CFO .
  • “Our Board… declared a regular distribution for the second quarter of $0.50 per share… As of March 31, 2025, our estimated spillover net investment income was $71 million or $0.80 per share.” — David Pessah, CFO .

Q&A Highlights

  • NII run-rate and fee waivers: Most SOFR impacts from Q4 are reflected in Q1; ~$0.04/share NII headwind in Q1 from waiver expiration with an additional ~$0.01 residual in Q2 .
  • Share repurchases: ~$10M repurchased in Q1 via 10b5-1; tool to support the stock; plan remains formulaic .
  • Tariffs and sector mix: Strategy unchanged; focus on defensive first-lien lending. Portfolio heavily weighted to enterprise software and insurance services; direct tariff exposure is very low .
  • M&A timeline: Recovery pushed later in 2025 or potentially into 2026; sourcing engine and larger borrowers using private credit provide offset .
  • Leverage framework: Preference to operate ~1.15x–1.20x within the 1.0x–1.25x target range, with credit quality prioritized over near-term leverage positioning .

Estimates Context

Metric (SPGI definitions)Fiscal Period (SPGI)Consensus Mean*Actual*Surprise*
Primary EPS (tracks NII/share)Q3 2025 (period ended Mar 31, 2025)$0.503$0.500(0.003)
Revenue (proxy for TII)Q3 2025 (period ended Mar 31, 2025)$98.787M$101.458M+$2.671M
  • Note: Company-reported NII/share was $0.52; SPGI’s Primary EPS actual of $0.50 appears to reflect an alternative rounding/definition for BDCs. TII (“Total investment income”) per company is $101.5M, above SPGI “Revenue” consensus *.
  • Implication: Modest “revenue” beat and essentially in-line earnings vs SPGI; street models may adjust for the fee waiver roll-off and slightly lower asset yields disclosed by management *.

Values retrieved from S&P Global.

Key Takeaways for Investors

  • Dividend remains well-covered: NII/share $0.52 vs $0.50 dividend; spillover NII of ~$0.80/share supports dividend continuity through potential rate volatility .
  • Near-term NII headwind largely known: Fee waiver roll-off (~$0.04/share in Q1 and ~$0.01 residual in Q2) and lower base rates explain most of the sequential NII step-down; core credit quality remains strong .
  • Deployment resilience: $233M of new commitments with all new borrower facilities led/co-led; >70% of non-refi deployment to new borrowers underscores differentiated sourcing, a positive for medium-term earnings power as M&A returns .
  • Credit metrics best-in-class: >98% risk rating 2+; ~0.2% non-accruals; ~40% LTV; software and insurance services concentration should help insulate tariff risk relative to trade-sensitive sectors .
  • Balance sheet flexibility improving: Leverage at 1.11x (within 1.0x–1.25x target); revolver extended to 2030 with lower spreads; $1.08B of facility availability and $65.6M cash provide capacity to lean into wider spreads if volatility persists .
  • Shareholder capital actions: Continued regular $0.50 dividend; opportunistic repurchases under a refreshed $100M 10b5-1 plan; $300M ATM provides accretive growth option under supportive conditions (no Q1 issuance) .
  • Set-up: With macro uncertainty delaying LBOs, larger issuers tapping private credit and robust sourcing should sustain deployment; catalysts include dividend stability and any acceleration in M&A volumes, while the ATM overhang and rates/yield trajectory are watch items .

Supporting Sources

  • Q1 2025 8-K and press release: results, portfolio, capital, dividend .
  • Q1 2025 earnings call: strategy, portfolio metrics, fee waivers, dividend/spillover, Q&A detail .
  • Q4 2024 8-K and call: prior-quarter comps, facility amendments, leverage framework .
  • Q3 2024 8-K: earlier trend comps .

*Values retrieved from S&P Global.