Release Date: November 08, 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 stable net asset value (NAV) per share of $20.83, unchanged from the previous quarter.
- The fund generated a net investment income of $0.66 per share, exceeding the regular dividend of $0.50 per share and a special dividend of $0.10.
- MSDL's deployment activity showcased strong origination capabilities, with new investment commitments of approximately $455 million in 37 portfolio companies.
- The fund's portfolio is diversified across 33 industries, with nearly 100% of investments in floating rate debt, providing resilience against interest rate fluctuations.
- MSDL maintained a strong credit quality, with over 98% of the portfolio having an internal risk rating of two or better, and only two portfolio companies on non-accrual status.
Negative Points
- MSDL's debt to NAV ratio increased from 0.9 times to 0.99 times, approaching the low end of their target leverage range.
- The weighted average yield on debt and income-producing investments decreased by 60 basis points quarter over quarter.
- The fund experienced net realized losses of $11 million during the quarter.
- Investment funding totaled $377 million, with $253 million in repayments, resulting in a net funded investment activity of only $124 million.
- The logistics sector within the portfolio showed increased softness, prompting a more cautious investment approach.
Q & A Highlights
Q: Regarding the activity outlook, what are your thoughts towards originations for 2025? Will it be front-end loaded or pick up towards the fourth quarter?
A: Jeffrey Levin, CEO: It's hard to predict as deal flow can be lumpy. However, with more clarity on the rate environment and the election behind us, we expect 2025 to be a better year. Private equity firms are likely to invest their capital, creating a tailwind for us. Our pipelines are better than earlier in 2024, and we have a strong origination team to leverage opportunities.
Q: The portfolio yield seems to have moved lower. Are you seeing elevated refinancing, and what's your outlook on the refinancing landscape?
A: Jeffrey Levin, CEO: Repricing activity has slowed, and spreads have stabilized. David Pessah, CFO: Our yield decreased by 60 basis points due to repricing and a 50 basis point rate cut. We expect less pressure on new deal spreads and repricing.
Q: How are you thinking about excess earnings and dividend policy given the interest rate environment?
A: David Pessah, CFO: Our base dividends are well covered, with 132% coverage this quarter. We maintain a spillover of about one quarter's worth of income, providing cushion against rate changes. We'll assess the need for supplemental dividends as we head into 2025.
Q: How have LTV ratios and leverage trended in new deals?
A: Jeffrey Levin, CEO: LTVs and leverage ratios have been stable, with LTVs around 40%. There's a focus on conservatism in structuring deals due to the high interest rate environment. We continue to be selective and conservative in our underwriting.
Q: What is your near-term outlook for potential originations, and are there any attractive sectors you're focusing on?
A: Jeffrey Levin, CEO: Pipelines are stronger now than earlier in the year. We focus on sectors like software and insurance brokerage, avoiding cyclical sectors like retail and energy. We remain selective and diversified in our investments.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
