MSDL

• Portfolio and Credit Performance

  • Overall portfolio health remains solid, with ~95% of the portfolio performing in line with original underwriting assumptions, and 95% of the portfolio rated risk 2 or better, which remained stable quarter-over-quarter.
  • Non-accrual investments rose to 2.9% of the portfolio at cost, driven by three companies that were placed on non-accrual; all three had extended pre-existing company-specific operational challenges, and their performance is not seen as indicative of broad portfolio stress or sector trends.
  • Three non-accrual investments drove the majority of Q2 NAV compression, but the firm successfully completed restructurings for two challenged credits during the quarter, highlighting its active portfolio management capabilities.
  • Key portfolio metrics: weighted average loan-to-value of 39%, 229 diversified portfolio companies across 36 industries, average borrower exposure of $15.5 million, payment-in-kind (PIK) utilization remains at a low mid-single-digit level, well below peer BDC averages.
  • MSDL's current NAV per share remains within 2.5% of its 2019 inception NAV.

• Origination and Deployment Activity

  • Q2 closed 11 first lien senior secured transactions totaling $85 million in new commitments, including 3 new platform investments, 4 refinancings of existing borrowers, and 4 incremental commitments to existing portfolio companies.
  • Total investment fundings were $146 million for the quarter, offset by $240 million in repayments; prepayment activity has remained steady at just above 5% of the portfolio quarter-over-quarter.
  • New deal pricing stabilized in the SOFR + 500 bps range, with weighted average spreads unchanged from Q1, and remain wider than the mid-2025 trough of mid-to-high 400 bps; lender protections (covenants, documentation) remain far more favorable than in 2025.
  • Over 75% of first half 2026 new activity funded LBO and add-on acquisition deals, a healthy shift in deal composition.
  • MSDL closed the $85 million Bridgepoint LBO financing, serving as lead lender and administrative agent, leveraging sector expertise and ability to commit to a sizable stake to win the deal.
  • An additional $10 million of equity was deployed into the capstone JV this quarter, which continues to scale, diversify the portfolio, and add incremental NII accretion.

• Capital Structure and Capital Allocation

  • MSDL completed two proactive liability management initiatives: an amendment and extension of its corporate revolver in April, and a $350 million 5-year unsecured note issuance in June (coupon 6.10%) to pre-fund the upcoming February 2027 $425 million maturity.
  • Gross debt-to-equity was 1.21x at quarter end, down modestly from 1.22x in Q1, within the firm's target operating range; 56% of total funded debt is unsecured.
  • MSDL repurchased $12.5 million of its own shares at prices below NAV during Q2 as part of its $100 million repurchase program, adding $0.05 per share to NAV, bringing first half 2026 buyback accretion to $0.10 per share.
  • The Board declared a third quarter 2026 dividend of 45 cents per share, unchanged from Q2, and NII covered the dividend in Q2; the current dividend is aligned with MSDL's normalized earnings power.

• Strategic Positioning

  • MSDL benefits from deep integration within the Morgan Stanley ecosystem, which provides a meaningful deal sourcing advantage; the firm reviewed more deals year-over-year and closed less than 5% of originated opportunities over the last 12 months, maintaining a high quality bar.
  • Morgan Stanley Investment Management recently hit a $2 trillion AUM milestone, and MSDL as a core component of its credit platform leverages the firm's scale, infrastructure and sponsor relationships.

• Management maintains the current 45 cents per share dividend, aligned with normalized earnings power, and remains confident in the ability to support this dividend level as of the current quarter, even with expected quarter-to-quarter noise from credit items.
• The capstone JV is expected to continue ramping over the coming year, with ongoing accretion to NII, portfolio diversification, and overall returns, and management retains flexibility in the pace of deployment.
• Management expects new deal deployment to accelerate if private equity sponsors gain greater conviction around geopolitical and macroeconomic conditions, as private equity dry powder awaits deployment and exit activity has already rebounded.
• No changes to long-term strategy are anticipated, and the firm remains positioned to deliver consistent risk-adjusted returns for shareholders across different economic scenarios.

As of Q2 2026 end, the total portfolio fair value was $3.6 billion: 93% of investments were first lien debt, 3% were held in the capstone joint venture (JV), and the remaining 4% were second lien, equity and other investments. Net investment income (NII) for the quarter was $38.2 million, or 45 cents per share, down from 47 cents per share in Q1 2026. Total investment income remained flat quarter-over-quarter at $89 million. Earnings contribution from the JV increased meaningfully, but this was offset by income lost from newly added non-accrual investments and higher financing costs. Total expenses rose to $50.6 million from $48.6 million in Q1, driven by higher debt costs and increased incentive fees. The net change in unrealized depreciation and realized losses was $30.2 million, driven by mark downs on a small number of underperforming/non-accrual investments and realized losses from two completed restructurings. Ending net asset value (NAV) per share was $19.50, down from $19.81 in Q1. The capstone JV has total equity commitments of up to $250 million, with $200 million committed by MSDL, 52% of total commitments drawn to date. The JV supports $426 million of investment commitments across 58 portfolio companies in 25 industries, with a weighted average yield of 8.8% at cost on debt/income-producing investments, equal to a 13% levered dividend yield for MSDL's stake.

• Macroeconomic: Persistent elevated interest rates continue to pressure borrower cash flows, and broader economic uncertainty may impact credit performance across the portfolio, with varied impacts across different sectors and companies.
• Geopolitical: Ongoing tensions in the Middle East have driven renewed energy price volatility, though MSDL's analysis shows limited direct portfolio exposure, with most exposed borrowers able to pass higher fuel costs through to customers.
• Credit: Isolated credit softness persists, and a small number of extended underperforming credits have driven non-accrual increases and NAV compression; resolution timelines for non-accrual restructurings are uncertain, and future credit performance may vary as macro headwinds continue to impact borrowers.
• AI disruption: AI impact is company-specific, and while management has identified only a low single-digit percentage of the portfolio as high risk, unforeseen disruption could impact software and other portfolio companies.
• Market sentiment: Industry-wide direct lending outflows have weighed on retail investor sentiment, though retail outflows decelerated in Q2 and institutional demand for the asset class remains strong globally.
• Competitive: Competition for high-quality non-software assets has increased, leading to modest spread tightening in this segment of the market.

Q: How common is MSDL taking lead and administrative agent roles like the Bridgepoint deal, how competitive was that transaction, and how did MSDL win the mandate? / A: Approximately 15-20% of MSDL's current portfolio is agented business, and 100% of MSDL's investments are lead positions, as the firm does not participate on a non-lead basis. MSDL won the Bridgepoint mandate by leveraging its existing deep sector expertise, conducting strong due diligence to build conviction, and having the capacity to commit to a sizable stake in the transaction that allowed it to take on the administrative agent role.

Q: The current 45 cent per share dividend covered Q2 NII, but there was quarter-to-quarter NII pressure from non-accruals. How comfortable is the board with maintaining the current dividend level amid potential near-term credit noise? / A: The board remains comfortable supporting the current 45 cent dividend based on the current baseline NII foundation. The capstone JV is only 50% ramped, so its accretion benefits will continue to grow over coming quarters. While resolution timelines for the new non-accruals are uncertain, successful restructurings could add back income over time, and management continues to view the current dividend as aligned with long-term normalized earnings.

Q: With elevated repayments, how does MSDL balance redeploying capital into new investments versus repurchasing discounted shares, and what are the trends for new deal terms currently? / A: Leverage stability is the top priority, and available excess capital is allocated based on optimizing returns, balancing balance sheet new investments, JV deployment, and share repurchases. The JV will continue to be ramped over the next year to improve portfolio diversification and returns. Currently, there is modest spread tightening for high-quality non-software assets (to ~SOFR + 475 bps) as many providers reduce software exposure, but loan-to-values remain stable near 40% consistent with historical underwriting.

Q: What are the biggest constraints to faster ramping of the capstone JV? / A: Sourcing of high-quality deal flow is not a constraint. The primary constraint is managing the impact of JV deployment on overall fund leverage, single borrower and industry exposure limits. Management retains significant flexibility on the pace of JV ramping, and optimizes deployment based on these portfolio and balance sheet considerations.