Morgan Stanley Direct Lending Fund Q1 FY2026 earnings call

• Earnings highlights: Net investment income 47 cents per share, modest decline due to December rate cut, earnings quality high. Dividend modified to 45 cents per share in Feb, coverage 104%.
• Capital allocation: Accelerated share repurchases as shares trading at discount to NAV, accretive. Prioritized seeding joint venture, which delivered ~150 basis points incremental return but for only 5 weeks of quarter. Origination momentum solid with 4 new platform investments added.
• Market outlook: Direct lending market faces challenges like tariffs, AI disruption, geopolitical risks. Expect credit environment to be characterized by differentiation. MSDL well-positioned due to unique sourcing, focus on underwriting, portfolio management. Deal environment seen in early stages of multi-year recovery in sponsor-backed M&A. Credit monitoring ongoing, portfolio performance relatively stable with non-accruals declining, NAV pressure due to public market volatility but borrowers generally not fundamentally underperforming.
• Asset yields: First quarter 2026 marked first quarter in 8 with no yield compression, spreads widening and terms on new investments more lender-friendly.
• Capital formation: Retail flows into private credit variable, but MSDL part of scaled committed capital base in U.S. direct lending, funds capitalized by diversified LP base, long duration fund structures support deployment.

Net investment income was 47 cents per share in Q1, down from 49 cents per share in prior quarter, primarily due to December rate cut impact. Portfolio had $3.7 billion at fair value at quarter end, ~94% first lien debt, 2.5% in joint venture. Weighted average loan-to-value ~39%, median EBITDA ~$91 million. Weighted average yield on debt and income-producing investments was 9.3% at cost (flat q/q) and 9.5% at fair value. Non-accrual rate ticked down from 1.6% to 1.5% in Q1.

• Management expects credit environment to be increasingly characterized by differentiation. Sees deal environment in early stages of multi-year recovery in sponsor-backed M&A. Believes MSDL well-positioned to capitalize on dynamic environment. JV expected to contribute meaningfully to investment income starting in second quarter. Target leverage for JV is between 1.7 to 1.8 times. Dividend policy viewed as appropriate over medium term based on earnings levers in current market environment. Share repurchase program expected to continue with shares trading at discount to NAV being accretive.

• Market conditions: Uncertainties like market conditions, interest rates, economic conditions could cause actual results to differ from forward-looking statements.
• Credit risks: Monitor potential risk factors across portfolio including elevated rates, macro uncertainty, evolving impact of AI, geopolitical risks. Certain companies with field-based operations may face pressure via fuel cost inflation but expected to offset via price increases.

Q: Talk about continued ramp of the JV, clients selling portfolio, portfolio drop down or gradual new origination ramp.

A: Expect more organic deployment into JV, potentially drop downs over time. Initial seeding with ~$100 million of equity from MSDL, balance on-balance sheet expected to outpace JV deployment moving forward.

Q: Interest rate on JV, target leverage, dividend.

A: JV yield ~11.2% (reflecting 5 weeks of activity), target leverage ~1.7 to 1.8 times, dividend $0.45 per share for Q2, with combination of organic deployment and moving up in target leverage range contributing to NII.

Q: Interest income drop, levers to cover dividend, balance between buyback, dividend, and investment opportunities.

A: Normalization phase with 47 cents as new baseline, focus on optimization including JV, share repurchase, improving credit environment. Leverage is a governor, balance between accretion and return opportunity on deployment side.

Q: Levers to cover dividend, other levers besides JV.

A: Focus on optimization, normalization phase, spreads, credit among other things, with 47 cents as new baseline, distribution discussed, focus on improving credit environment and optimization.