Release Date: August 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Morgan Stanley Direct Lending Fund (MSDL, Financial) reported a strong second quarter with net asset value per share increasing by $0.16 to $20.83.
- The fund generated net investment income of $0.63 per share, exceeding the regular dividend of $0.50 per share.
- New investment commitments totaled approximately $673.9 million across 46 portfolio companies, showcasing robust portfolio growth.
- MSDL's debt to NAV increased to 0.9 times, with expectations to reach target leverage of 1 to 1.25 in the second half of the year.
- The fund's portfolio is diversified across 34 industries, with nearly 100% of investments in floating rate debt, providing resilience against interest rate fluctuations.
Negative Points
- The fund's debt-to-equity ratio increased from 0.81 times to 0.9 times, indicating higher leverage.
- Total expenses for the second quarter rose to $48.1 million from $44.5 million in the prior quarter.
- The market outlook remains uncertain with potential volatility affecting private credit and LBO activity.
- Repayments and repricings are unpredictable, which could impact future capital deployment strategies.
- There is a high level of portfolio overlap with other large BDCs, which may limit differentiation in investment opportunities.
Q & A Highlights
Q: You currently have a high level of portfolio overlap with a number of large BDCs in the space. How long do you think it will take to rotate into more unique, non-overlapping positions?
A: Jeffrey Levin, President and CEO, explained that the overlap is due to their strategy of focusing on high-quality opportunities. They leverage Morgan Stanley's unique origination platform and work closely with the investment banking division to lead or co-lead deals. The focus remains on expanding their origination footprint and investing in the best opportunities.
Q: What are your expectations for repayments in the second half of the year? Should we expect a lot of refinancing activity?
A: Jeffrey Levin noted that predicting repayments is challenging, but there has been an increase in repricing and repayments. The focus remains on deploying capital in high-quality deals and monitoring the portfolio closely. While repayments are less controllable, they offer opportunities to exit certain situations.
Q: Could you discuss the relative attractiveness of the upper middle market versus the middle market for potential originations?
A: Jeffrey Levin stated that their deal flow spans the size spectrum, with a focus on companies with EBITDA above $25 million to $30 million. The opportunity set varies, and they invest based on the quality of cash flows, management, and equity support. The market is expected to see increased LBO activity, which will drive deal flow.
Q: What percentage of originations are in the BDC across the overall Morgan Stanley Direct Lending platform?
A: Jeffrey Levin explained that they have a robust allocation policy for deals across their capital pools. The allocation is based on available capital and investment objectives, ensuring that all deals are distributed across funds, including the BDC.
Q: Are you getting call protection on new investments, and what level of call protection is typical?
A: Jeffrey Levin mentioned that call protection varies by deal, typically offering around one year at 101. The focus is on investing at the top of the capital structure with low loan-to-value ratios. Call protection is considered additional benefit, but not a primary factor in underwriting returns.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
