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Operator: Welcome to Morgan Stanley Direct Lending First Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. As a reminder, this conference call is being recorded. At this time, I’d like to turn the call over to Ms. Sanna Johnson. Please go ahead, ma’am.

Sanna Johnson: Good morning, and welcome to Morgan Stanley Direct Lending Fund’s first quarter 2025 earnings call. Joining me this morning are Jeff Levin, Chief Executive Officer; Michael Occi, President; David Pessah, Chief Financial Officer; and Rebecca Shaoul, Head of Portfolio Management. Morgan Stanley Direct Lending Fund’s first quarter 2025 financial results were released yesterday after market closed and can be accessed on the Investor Relations section of our website at www.msdl.com. We have arranged for a replay of today’s event that will be accessible from the Morgan Stanley Direct Lending Fund website. During this call, I want to remind you that we may make forward-looking statements based on current expectations.

The statements on this call that are not purely historical are forward-looking statements. These forward-looking statements are not a guarantee of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including and without limitation, market conditions, uncertainty surrounding interest rates, changing economic conditions, and other factors we have identified in our filings with the SEC. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions can prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions can be incorrect.

You should not place undue reliance on these forward-looking statements. The forward-looking statements contained on this call are made of as of the date hereof and we assume no obligation to update the forward-looking statements or subsequent events. To obtain copies of SEC related filings, please visit our website. With that, I will now turn the call over to Jeff Levin.

Jeff Levin: Thank you, Sanna. Thank you for joining us today for Morgan Stanley Direct Lending’s first quarter 2025 conference call. We generated strong performance in the first quarter as we continue to deploy capital prudently in the face of what has been a more volatile environment for financial markets. I will first begin with a summary of our performance in the first quarter before handing it to Michael to discuss the market. Dave will then provide updates on our portfolio and comment on the financial results. Our team delivered solid operating results for the first quarter supported by strong underlying credit performance. 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.

For the first quarter, new investment commitments told approximately $233 million, which represented a meaningful increase in gross deployment relative to the prior quarter. Repayments accelerated in the first quarter amounted to $202 million with seven portfolio companies fully repaid. During the quarter, MSDL’s debt to NAV increased modestly from 1.08 times to 1.11 times. Our deployment activity in the quarter showcased once again our ability to leverage our unique origination engine to drive quality deal flow even amidst a slower than anticipated start to the year for M&A, consistent with the trend that we had highlighted for the full year of 2024, more than 70% of the non-refinancing gross deployment in the first quarter was to new borrowers.

While LBO activity remains subdued as private equity awaits more clarity on government reform, our unique sourcing platform has produced high quality investing opportunities with businesses that are new to our platform. Our thought leadership and market visibility are also validated by the proportion of new platforms that we are leading. In the first quarter, we led or co-led all the facilities for new borrowers. As we have discussed on previous calls, we continue to benefit from the broader Morgan Stanley platform, which we continue to leverage in the current volatile macro backdrop. We believe that sponsors are drawn to the quality of our team and our ability to be a value add partner, which are enhanced by our position within the broader Morgan Stanley ecosystem.

We believe that these factors have helped our sponsor backed direct lending business here in North America surpass $20 billion in committed capital, which is an important milestone for us. While significant, our breadth and depth of sponsor relationships allows us to see a vast range of deal flow and that deal flow exceeds our capital base, which breeds selectivity. We believe that this selectivity on the investment side is the engine that will help us to continue to source and underwrite lending opportunities that produce strong risk adjusted returns for shareholders. Furthermore, our transparent revenue model, relatively low operating expense base and thoughtful fee structure also serves to demonstrate strong alignment with shareholders and our continued focus on executing our defensive investment strategy to optimize performance and drive shareholder value.

With that, I would like to hand the call over to Michael who will provide some commentary on the market.

Michael Occi: Thank you, Jeff. I will start by addressing deal activity in the market. Its old news by now, but the tariff driven volatility has pushed off what we initially expected could be a sharp recovery in M&A activity at the beginning of the year. However, private equity firms still have significant amounts of capital to deploy and we expect the high level of client dialogue may translate into increased deal flow as the market gains more clarity on tariffs. While uncertainty remains, we have continued to see a solid pipeline of attractive opportunities as evidenced by MSDL’s deployment in the quarter. The direct lending market has been open for business amidst the elevated volatility since the beginning of April, while access in the public sub investment grade credit market has been more window-driven.

This current market may serve as another opportunity for private credit to take share from the leveraged loan market. This market dynamic often presents investment opportunities for direct lenders that create better risk adjusted returns and we have recently seen large high quality borrowers step into our market. Spreads on new capital deployed in the first quarter were virtually flat versus the second half of 2024. Over time, we expect that pricing will be responsive to evolving market conditions. Even if we see more Fed cuts this calendar year, gross asset yields are likely to continue to remain elevated offering attractive opportunities for us. We continue to find the market’s pricing compelling on a risk adjusted basis when you consider the stability of loan to value and leverage ratios for the capital we have deployed in MSDL over the last several quarters.

The tariff situation remains dynamic. Should the tariffs be widespread and more durable, there could be secondary and tertiary impacts on the portfolio. However, from a direct impact perspective, we believe that the MSDL portfolio should be relatively insulated given our geographic and industry orientation. From a sector point of view, we have a bias towards professional services businesses and away from more trade sensitive verticals like manufacturing and consumer goods oriented companies. We think that the sectors that will be hardest hit by tariffs will be those that rely on offshore assembly or parts such as consumer and capital goods. In contrast, software, insurance services and business services should be better insulated from the tariffs and retaliatory tariffs and MSDL has overweight these sectors relative to other BDCs. The U.S. middle market entered 2025 with good momentum on the margins front with interest coverage ratios on the upswing as well.

While slower economic growth could challenge this momentum, we expect the middle market to be more insulated from tariffs than larger companies who derive more sales overseas. It’s a variable on the cost side, but we still view the middle market as more insulated given the greater domestic focus. As uncertainty surrounding specific measures and the broader impact remains, we will continue to be vigilant in monitoring developments and are in close contact with management teams and private equity sponsors to assess potential risk and action plans. The team continues to monitor for real time changes that could impact the portfolio. And as we deploy new capital, tariff policy is obviously very much front and center in terms of how we’re allocating dry powder.

We think that plays into our defensively minded investment strategy, the evidence of which has been observable through solid credit performance of MSDL. Looking ahead, we believe that we continue to be well positioned to source and underwrite lending opportunities that offer strong risk adjusted returns and in turn create value for MSDL shareholders. I will now hand the call over to David, who will provide details on Morgan Stanley Direct Lending Fund’s portfolio, investment activity and financial results.

David Pessah: Thank you, Michael. Starting with our portfolio, we ended the quarter with a total portfolio net fair value of $3.8 billion. Our portfolio was comprised of approximately 96% first lien debt, 2% second lien debt and the remainder in equity and other debt investments. We had investments in 210 portfolio companies spanning across 34 industries with nearly 100% of our investments in floating rate debt. Our two largest industry exposures remain in software and insurance services, which accounted for 19.5% and 12% of the portfolio at fair value respectively. The average position size of our investments was approximately $18 million, or approximately 50 basis points of our total portfolio at fair value. Further, our top 10 portfolio companies represented approximately 15% at fair value of the total portfolio.

Regarding credit metrics of our portfolio companies as of quarter end, our weighted average loan to value was approximately 40%, the median EBITDA was approximately $87 million, and our weighted average yield on debt and income producing investments was 10.2% at cost and 10.3% at fair value. As mentioned on our fourth quarter 2024 earnings call, the decline in asset yield in part was attributable to the residual impact from the earlier decline in SOFR. Turning to credit quality, over 98% of our total portfolio remained at an internal risk rating of two or better. We had one portfolio company, KWOR Acquisition or more commonly known as Alacrity, removed from non-accrual status due to a restructuring event during the quarter. We did place one portfolio company on non-accrual status, that being Continental Battery.

As of March 31, our non-accruals remained just 20 basis points of the portfolio at cost. For our investment activity in the first quarter, we made new investment commitments of approximately $233 million across nine new portfolio companies and nine existing portfolio companies. Investment fundings totaled approximately $206 million, offset by $202 million in repayments which were more elevated during the quarter. Moving to our financial results for the first quarter. Our total investment income was $101 million for the first quarter as compared to $103 million in the prior quarter. PIC income continues to remain relatively low amounted to only 4% of total investment income. Total net expenses for the first quarter was $55.2 million compared to $52.3 million in the prior quarter.

Net investment income for the first quarter was $46.2 million or $0.52 per share, compared to $50.7 million or $0.57 per share from the prior quarter. The majority of the decline in our NII was driven by our IPO related fee waivers that expired on January 24, 2025 with the balance attributable to the aforementioned impact from the change of portfolio yields. For the first quarter, the net change in unrealized losses was $17 million, which was driven in part by credit spread widening within the secondary market. Turning to our balance sheet, as of March 31, total assets were $3.9 billion and total net assets was $1.8 billion. Our ending NAV per share for the first quarter was $20.65 as compared to $20.81 in the prior period. Our debt to equity ratio increased to 1.11 times as compared to 1.08 times in the prior quarter.

Approximately 52% of our funded debt was in the form of unsecured notes with well ladder maturities through 2030. During the quarter, we successfully executed an extension of our secured revolving credit facility by extending our maturity to February 2030, lowering our drawn spread by 10 basis points and undrawn spread by 2.5 basis points and lastly increase in our total commitment by $150 million to $1.45 billion. We continue to remain pleased with the composition of our debt mix and will continue to strategically look for ways to optimize it, including with respect to our upcoming unsecured maturity in September of this year. Focusing now on our distributions, in the current quarter, we paid a $0.50 regular distribution. In addition, our Board of Directors declared a regular distribution for the second quarter of $0.50 per share to shareholders of record on June 30, 2025.

As of March 31, 2025, our estimated spillover net investment income was $71 million or $0.80 per share. Lastly, at the end of the quarter, we successfully established a $300 million at the market equity issuance program, which we believe represents a cost efficient way to raise capital in an accretive manner, which we will only look to use under supportive market conditions. With that operator, please open the line for questions.

Operator: [Operator Instructions] And we’ll take our first question from Melissa Wedel with J.P. Morgan.

Melissa Wedel: Good morning. Thanks for taking my questions today. First, wanted to check in about just sort of run rate earnings power of the portfolio. Is it fair to think that all of the changes in the base rate are fully reflected in 1Q? I know that there’s a lag that tends to happen.

David Pessah: Yes. And thank you for the question. Yes, for the most part, all the SOFR-related activity from Q4 has been flushed through in the Q1 results. The main change that you would see quarter-over-quarter as you compare NII $0.04 of the change was attributable to the IPO related waivers that rolled off in January of this year. Just for full transparency, there’s approximately about a $0.01 per share of residual impact to be expected in Q2 as a result of those waivers fully rolling off.

Melissa Wedel: Got it. I appreciate that color. Also wanted to touch on the repurchase plan, you certainly talked about that last quarter. I wanted to understand how you’re thinking about deploying – making use of that, particularly since there seemed some decent usage of that plan in 1Q at levels that were not a huge discount to NAV and certainly are trading – shares are trading a bit lower or a bit broader of a discount now compared to what you saw in 1Q. How are you thinking about using that plan going forward? Thank you.

Michael Occi: Yes. Melissa, it’s Michael. Good question. It’s a tool we obviously refreshed last quarter with earnings. We repurchased, as you alluded to about $10 million over the course of the quarter. Obviously, accretive activity, it’s formulaic through a 10b5-1. So it’s kind of set it and forget it. But we think it’s a logical tool to have in place to help support stock to a certain extent.

Operator: We’ll now take our next question from Heli Sheth with Raymond James.

Heli Sheth: Hi, thanks for the question. So just a quick one on tariffs. With all the recent tariff implications, I know you guys have touched on how you’re going to shift strategy in terms of allocating new capital. Would you say there has been a shift with your new deployments this past quarter in terms of targeting certain industries or deemphasizing exposure in other sectors?

Jeff Levin: Yes, sure. It’s Jeff. It’s a great question. I say, taking a step back, our strategy has been and continues to be to invest in the highest quality private credit transactions that we can originate and stick to the top of the capital structure in a first lien position. Loan to values this past quarter for the capital we deployed was less than 35%. So – and also importantly, not just creating real diversification among the portfolio, but really avoiding the more deeply cyclical industry sectors and underwriting deals that provide highly predictable and sticky cash flow streams. So for example, enterprise software and insurance services being brokers predominantly comprises a very substantial portion of the portfolio over 50%.

So the portfolio, not only has it been performing really well and that’s evidenced by non-accrual rate being exceptionally low. The pick as a percentage of our total income, best-in-class, but avoiding the deeply cyclicals as well. And so we enter this period of market uncertainty and tariff uncertainty from I think a real position of strength given the sectors that we are the longest. We have very, very little exposure to the more deeply cyclical sectors. As you’d expect, we’ve done an enormous amount of analysis across our portfolio in touch with sponsors and management teams with regards to companies and sectors that are exposed to tariffs. It’s an extremely low percentage of the portfolio on a direct basis. I think the $64,000 question will be, what happens over the course of this year and next year?

Where do things land with regards ultimately with tariffs and does the economy go into a recession? And the tariff impact could be one thing, but the demand side also is something that we’re watching closely. But again the portfolio, as noted in the prepared remarks is in great shape. The vast majority of this portfolio is in our first lien position, enormous value below us underwritten by our team at great length. So we’re – in terms of change in strategy given the current environment, I wouldn’t say that there’s a change, we continue to focus on investing in the sectors that are defensive into the best opportunities we can find. We think we have a better origination footprint than frankly anyone in the market given our affiliation with Morgan Stanley and the levers that we have to pull to win the best deals in the market.

Obviously, though, eyes wide open as we deploy capital and continuing to avoid sectors that we think could be negatively impacted by what’s happening in D.C. as you’d expect. And we feel really good about where we are. And I think the other – the natural tailwind and benefit that we have from the current environment could be, if we – if the markets get more dislocated, spreads could widen, we have access to quite a bit of capital, given we’re not at our target leverage ratio to take advantage of that dislocation. And so net-net of everything I said, I think we feel really good about the money in the ground. We’re watching closely to see what happens over the course of the coming quarters. And not surprisingly, leveraging all the resources that we have here within Morgan Stanley’s four walls, which spans far beyond just our U.S. Direct Lending business, and really monetizing and leveraging everything that we can here.

Heli Sheth: Thank you for that color. And just as a quick follow-up, I know you guys also touched on M&A recovery being pushed off because of these tariffs. What is your sense for M&A recovery in your conversations with private equity just in terms of timeline, do you think it’s later in 2025 or is it being pushed off further than that?

Jeff Levin: Yes, another great question. Look, I think in the current environment, it’s challenging for private equity to underwrite these transactions because there’s uncertainty. So as you well know, during periods of uncertainty, new LBO volume declines, M&A activity declines. That is what it is, it’s out of our control. The backdrop again, as you know, there’s enormous dry powder sitting within the private equity ecosystem. That money will get invested. It’s really hard to know when. But that being said, look at the first quarter, volumes across the market were pretty modest and we found a way to deploy quite a bit of capital into several transactions that we feel great about. And so I think that again, that speaks to the ability for us to deploy capital really well given the sourcing engine that we have here.

So you have upwards of 80 people dedicated to direct lending in the U.S. every day. And then we have hundreds of additional feet on the Street given our affiliation with Morgan Stanley’s sell-side. That’s a really powerful model even in markets where activity is somewhat muted. One tailwind that we have, which is also helpful that we’ve been seeing over the last month or so since there’s been volatility to partially offset a lack of LBO volume is bigger companies coming to the private credit market for financing because the syndicated market, as Michael mentioned, it’s episodic in terms of when it’s been open. And so we’ve seen companies $200 million, $300 million, $400 million, $500 million in EBITDA coming to our market for financing when they would typically go to the syndicated space.

So I think that until and unless there’s more clarity around the tariff situation and the economy, I do think that LBO volumes will be relatively low. I don’t necessarily think that’s a horrible thing for our business here given the strength of our platform. When this year things come back, don’t know. It certainly feels like it would be later in the year given the volatility. I think last year everyone was hopeful that 2025 would be a big year for LBO volumes, given the pent-up capital base. I think we’re going to – I would say push that out later into the year and if volatility continues, that could be in 2026, I don’t know. But again, I think we’re – again we noted the $20 billion of capital across our platform. Our capital base relative to the origination footprint that we have here is grossly in our favor from an investing perspective and allows us to be really selective.

We’re not – we don’t have $150 billion [ph] of direct lending capital that needs to be invested, every month – every quarter. We have – it’s a very, very healthy balance of deal flow and origination relative to the capital. All that being said, we are really careful with how we’re investing right now because risk is heightened in this environment and we’re proceeding with caution.

Heli Sheth: Got it. Thank you.

Operator: [Operator Instructions] We’ll now take a question from Doug Harter with UBS.

Marissa Lobo: Good morning. It’s actually Marissa Lobo on for Doug today. Thanks for taking my question. On the increase in commitments we saw this quarter, could you speak a little bit about the kind of demand you’re seeing for loans? Was there anything notable about the size of the loans involved as in fewer bigger deals or more smaller deals?

Jeff Levin: Yes. I think that this quarter was, I’d say generally more of the same. I’m looking here at my colleagues as well to see if they share that view. I think we’re look at the size of the businesses that we financed. If we look at the sectors that we invested in, really no change. And as you know, the first quarter volumes across our market oftentimes includes deals that were heavily worked on in the fourth quarter and didn’t close for one reason or another and they slipped to Q1. But no, I’d say it’s more of the same. There were a fair number of LBOs that we financed. As mentioned, we led or co-led everything that we did in terms of new deal activity, which we’re proud of, really high quality group of private equity firms that were – that we continue to close business with loan to values came down a little bit.

I wouldn’t read into that. I think that was more episodic in nature and it wasn’t that material. But again, the median EBITDAs that we underwrote, the weighted averages were in line with prior quarters sectors as well. So no, I’d say it was really more of the same.

Marissa Lobo: Got it. Thanks for that. And on leverage, it’s now at the midpoint of your range. Where do you see it trending from here?

Michael Occi: Yes, obviously, we would like leverage to get a little bit higher, but still within our target range. I think at 111, somewhere between 115 and 120 is kind of where we would like to keep our leverage levels. But again we’re going to do so in a way that we’re still sticking to our knitting and our credit selection to get there.

Jeff Levin: Yes, that’s the key, I think, which is getting to the – getting to our target leverage matters, of course, and that’s a stated goal. And you may recall over a year ago when we IPOed, we told the market and you all that we were going to get upwards of one-to-one within three or four quarters. We did exactly that. We weren’t in a rush to do it. It’s patient. We are making a loan is easy in short-term, feels great, but getting the money back is what matters most. And so sticking to our knitting on credit will continue to be our primary focus here. And optimizing the origination and diligence footprint that we have here at Morgan Stanley, it’s very differentiating is what we’re going to continue to do.

Marissa Lobo: Appreciate the answers.

Operator: And it appears there are no further telephone questions. At this time, I’d like to turn the call back to Mr. Jeff Levin for closing remarks.

Jeff Levin: Thank you. On behalf of the management team, I greatly appreciate you joining us today along with your support of Morgan Stanley Direct Lending Fund. Our team remains focused on executing our defensive investment strategy to drive shareholder value. And I couldn’t be more pleased with our continued execution. We’re positioned to deliver strong returns for our shareholders and are pleased with how MSDL is positioned in this environment. We look forward to providing an update on our second quarter 2025 earnings call in August. Thank you.

Operator: And once again, that does conclude today’s conference. We thank you all for your participation. You may now disconnect.