Q4 2024 Morgan Stanley Direct Lending Fund Earnings Call
Speaker Change: Welcome to the Morgan Stanley Direct Lending Q4 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will
We'll follow to prepare remarks.
Speaker Change: As a reminder, this conference call is being recorded. At this time, I'd like to turn the conference over to Ms. Sanna Johnson. Please go ahead, ma'am.
Speaker Change: Good morning, and welcome to Morgan Stanley Direct Lending Fund's full year and fourth quarter 2024 earnings call. Joining me this morning are Jeff Levin, Chief Executive Officer, Michael Osi, President, David Pesa, Chief Financial Officer, and Rebecca Shaul, Head of Portfolio Management.
Speaker Change: Morgan Stanley Direct Lending Fund's fourth quarter and full year 2024 financial results were released yesterday after market closed and can be accessed on the investor relations section of our website at www.msdl.com.
Speaker Change: We have arranged for a replay of today's events that will be accessible from the Morgan Stanley Direct Lending Fund website.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: The forward looking statements contained on this call are made as of the date hereof, and we assume no obligation to update the forward looking statements or subsequent events to obtain copies of our SEC related filings. Please visit our website.
With that I will now turn the call over to Jeff Leiden.
Jeff Leiden: Thank you Savannah.
Speaker Change: Thank you for joining us today for Morgan Stanley direct lending <unk> fourth quarter and full year 2024 conference call.
Jeff Leiden: We are proud of the strong results that we generated.
<unk> was a critical year for us.
Jeff Leiden: In 2024, we successfully executed our IPO in January and continued to deploy capital prudently in our efforts to generate attractive risk adjusted returns for our growing base of shareholders.
Jeff Leiden: I will first begin with a summary of our performance in the fourth quarter beforehand to get to Michael to discuss our market outlook.
Speaker Change: I will then provide updates on our portfolio and comment on the financial results.
Speaker Change: Our team delivered solid operating results for the fourth quarter supported by strong underlying credit performance.
Speaker Change: At $20 81.
Speaker Change: Net asset value per share was stable quarter over quarter.
Speaker Change: We generated net investment income of 57 per share representing a 114% regular dividend coverage during the quarter. We also had a 10 cent special dividend that had been declared by the board of directors around the time of the IPO. It was paid to shareholders of record as of November 4th 2024.
Speaker Change: For the fourth quarter, new investment commitments totaled approximately $188 million, resulting in net funded deployment for the quarter of $144 million, an increase from the $124 million in the third quarter.
Speaker Change: During the quarter M. S CLS debts N. A V increase from <unk> 99 times to 1.08 types.
Speaker Change: Accordingly, we accomplished the objective that we have previously telegraphed of achieving our one to one and a quarter times target leverage range over the few quarters following the IPO without stretching on credit.
Speaker Change: Our underlying deployment activity in the quarter showcased once again, our ability to leverage our unique origination engine to drive quality deal flow over the course of 2020 for more than three quarters of our non refinancing gross deployment was to new borrowers, while we remain focused on supporting existing borrowers through.
Speaker Change: Rental financing.
Speaker Change: Thank the skewed towards new platforms highlights the value of our unique sourcing platform, even amidst in our view a more subdued LBO environment.
Speaker Change: Additionally over the course of 2024, we led or co led over 90% of the new borrowers added to MST Els portfolio.
Speaker Change: We continue to believe that sponsors are drawn to the quality of our team and our ability to be a value added partner given the broader Morgan Stanley platform, we are a part of.
Speaker Change: On previous calls we've highlighted the clear benefits of our ability to leverage the broader Morgan Stanley platform, our breadth and depth of sponsor relationships allows us to see a vast range of deal flow in that deal flow exceeds our capital base, which agreed selectivity.
Speaker Change: Flexibility is also key to our strategy M.
Speaker Change: Sdl's median EBITDA has been steady in the mid $80 million context.
Speaker Change: The credit attributes and this segment of the market.
Speaker Change: We have the ability to move up and down market to optimize risk adjusted returns.
Speaker Change: We had flex up market during the peak of the inflation led dislocation a couple of years ago.
Speaker Change: We think that the deal flow to capital imbalance and our nimble approach to financing the middle market will continue to serve as a key competitive advantage for us.
Speaker Change: With that I would like to hand, the call over to Michael who will provide some commentary on a broader market outlook. Michael was appointed president of the BDC at the end of 2024, and we are excited to see us roll expand as we continue to optimize our business for the benefit of our shareholders.
Speaker Change: Thank you, Jeff I look forward to continuing to work with this outstanding team and all of our partners and investors in the years to come.
Michael Osi: I will start by making some observations on the macro and direct lending backdrop.
Michael Osi: The punch line is that we are pleased about the performance of <unk> portfolio and as we look ahead and are optimistic that the market will continue to generate attractive risk adjusted investing opportunities for us.
Michael Osi: We believe that generally resilient economy, the outcome of the U S presidential election, and the federal reserves of 100 basis points of rate cuts in late 2024, all helped to compounds market optimism in the fourth quarter, while the health of the public debt markets has driven increased competition in the private credit market credit performance has continued to.
Michael Osi: Solid vis vis MST Els portfolio.
Michael Osi: As observed through strong borrower fundamentals as well as healthy fund level credit statistics. We believe this is a reflection of the continued strength of the middle market economy, as well as our defensively minded investment strategy.
Michael Osi: Spreads for new loans compressed in 2024, although that compression generally stabilized in the second half and our view gross asset yields are likely to continue to remain elevated offering attractive opportunities for us.
Michael Osi: We think that the market pricing is even more compelling risk adjusted when you consider the stability over the last several quarters in the loan to values and leverage ratios for the capital we have deployed in MST L.
Michael Osi: Shifting of deal volumes. It was constructed to see a modest pickup in LBO activity during 2024 and private credit remains the funding source of choice for all the OS.
Michael Osi: Prospectively, we believe that activity will continue to accelerate due to the combination of anticipated deregulation healthy public and private financing markets significant private equity dry powder and aging sponsor portfolios and our assessment, though the rebound will be gradual as it is tough for sponsors to underwrite to answer.
Michael Osi: T in Washington's legislative agenda, particularly in certain sectors.
Michael Osi: That said, we believe that we are well positioned to capitalize on that potential M&A pick up over the course of the year as the market gets more policy visibility.
Michael Osi: On a related topic, we are closely monitoring for any potential impacts to our existing portfolio from government reform, including tariffs.
Michael Osi: We believe that the portfolio should be relatively insulated however, as uncertainty surrounding specific measures and the broader impact remains we will remain vigilant in monitoring developments and remain in close contact with management teams and private equity sponsors to assess potential risk and action plans.
Jeff: Over the course of 2025 and beyond as Jeff alluded to.
Jeff: We look forward to continuing to source and underwrite lending opportunities that offer strong risk adjusted returns and in turn create value for MSC all shareholders.
Jeff: I'll now hand, the call over to David who will provide details on mortgage daily direct lending funds portfolio investment activity and financial results.
David Pesa: Thank you Michael starting with our portfolio. We ended the year with a total portfolio at fair value of $3 8 billion, which represented a year over year increase of approximately 19%.
David Pesa: Our portfolio was comprised of approximately 97% first lien debt, 2% second lien debt and the remainder in equity and other debt investments.
David Pesa: We had investments in 208 portfolio companies spanning across 33 industries with nearly 100% of our investments in floating rate debt.
David Pesa: Our two largest industry exposures remain in software and insurance services, which accounted for 18, 9% and 12% of the portfolio at fair value respectively.
David Pesa: The average position size of our investments was approximately $18 2 million or approximately 50 basis points of our total portfolio on a fair value basis.
David Pesa: Further our top 10 portfolio companies represented approximately 16% at fair value of the total portfolio.
David Pesa: Guarding our credit metrics as of year end, our weighted average loan to value was approximately 40%.
David Pesa: The median EBITDA was approximately $86 million and our weighted average yield on debt and income producing investments was 10, 4% at cost and 10, 5% at fair value.
David Pesa: We did see further compression in yields over the last quarter, which were primarily attributable to the decrease in base rates and to a lesser extent repricing dynamics, which were more concentrated in the second and third quarter of this year.
David Pesa: While our portfolio yield may be impacted further by the most recent rate cut we also stand to benefit on our cost on our floating debt.
David Pesa: Turning to credit quality over 98% of our total portfolio had an internal risk rating of two or better which is relatively unchanged throughout 2024.
David Pesa: As of December 31, our non accruals remained unchanged from the prior quarter with just 20 basis points of the portfolio at cost.
David Pesa: Or investment activity in the fourth quarter, we made new investment commitments of approximately 188 million across 10, new portfolio companies and 17 existing portfolio companies.
David Pesa: Investment fundings totaled approximately $187 million with $44 million in repayments for net funded investment activity of approximately $144 million.
David Pesa: For the full fiscal year 2024, we made new investment commitments of approximately $1 5 billion across 60, new portfolio companies.
David Pesa: Investment fundings totaled $1 2 billion with 657 million in repayments in 'twenty four portfolio companies for net funded investment activity of approximately $574 million.
David Pesa: Moving to our fourth quarter and year end results are.
David Pesa: Our total investment income was $103 million for the fourth quarter as compared to $110 million in the prior quarter. The decline in our core earnings was driven by the aforementioned an impact from the change in portfolio yield and the limited nonrecurring income from repayment activity.
David Pesa: Pik income continues to remain relatively low amounted to only 3% of total investment income.
David Pesa: Total net expenses for the fourth quarter were $52 3 million compared to $51 million in the prior quarter.
David Pesa: As a reminder, our management fee and incentive fee waiver, which is put into place following our IPO expired recently on January 24th 2025.
David Pesa: Net investment income for the fourth quarter was $57 million or 57.
David Pesa: Per share compared to $58 7 million or <unk> 66 per share from the prior quarter.
David Pesa: As of December 31, total assets were $3 9 billion and total net assets were $1 8 billion, our ending NAV per share for the fourth quarter was $20 81.
David Pesa: As compared to $20 83 in the prior period.
David Pesa: As Jeff covered earlier, we successfully achieved our target leverage range in the fourth quarter.
Our debt to equity ratio increased to 1.08 times as compared to <unk> 99 times in the prior quarter with much of the increase being back end loaded.
David Pesa: Approximately 53% of our funded debt was in the form of unsecured notes with worldwide in maturities through 2029.
David Pesa: Sequent to quarter end, we successfully executed an extension of our secured revolving credit facility by extending our maturity to February 2030, lower than our drug spread by 10 basis points and our undrawn spread by two five basis points, and lastly, increasing our total commitment by $150 million to $1.
David Pesa: Four 5 billion.
David Pesa: We continue to remain pleased with our debt capital stack and we will continue to strategically evaluate opportunities, including with our upcoming unsecured maturity in September of this year.
David Pesa: Focusing now on our distributions in the current quarter, we paid a 50 regular distributions as well as our second Tencent special distribution for the year.
David Pesa: In addition, our board of directors declared a regular distribution for the first quarter of <unk> 50 per share to shareholders of record on March 31 2025.
David Pesa: As of December 31, 2024, our estimated spillover net investment income was 68 million or <unk> 78 per share.
David Pesa: After year end the board authorized an amended and restated share repurchase program to repurchase up to $100 million in the aggregate of the company's shares at prices below its net asset value per share.
Speaker Change: With that operator, please open the line for questions.
Speaker Change: And if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Speaker Change: Once again that is star one if you would like to ask a question.
Speaker Change: And we'll take our first question from Sean Paul Adams with Raymond James.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: So a quick scan of your industry concentrations show about six 6%.
Speaker Change: And auto and automobile components alone.
What was your review of the portfolio concentrations when it comes to the possibilities around tariffs and have you guys changed your strategy to be a little bit more defensive and the new outlook for 2025. Thank you.
Jeff: Yeah sure. This is Jeff and thanks for the question.
Jeff: The it's not direct auto exposure.
Jeff: Typically that's service offering into the end market, there or software enterprise software specifically.
Jeff: Into dealerships et cetera, and so again, it's not direct exposure of that being said as you'd expect substantial work has been underway.
Jeff: On our team with regards to the broader portfolio and potential impact of tariffs that being somewhat challenging to underwrite for both private equity and private credit given uncertainty and things moving around.
Jeff: With everything happening in D C.
Jeff: That being said the two sectors were the longest.
Jeff: Our software enterprise software and insurance brokerage, which we think are somewhat insulated.
Jeff: Tariff exposure that being said again, it's unknown. So from a primary standpoint, I think we're well protected but secondary and tertiary impact.
Jeff: How this will play out over the coming months and years is to be determined frankly, and so we have a full work stream on our side picking through in analyzing.
Jeff: The various businesses and sectors that were long.
Jeff: And the risk profile there, we're not overly concerned again, given the two sectors were the longest.
Jeff: But that's an analysis that is ongoing and as we deploy new capital.
Jeff: Obviously this is very much front and center.
Jeff: Of how we're allocating.
Jeff: The dry powder that we have within the portfolio.
Jeff: Got it thank you.
Jeff: A quick follow up.
Speaker Change: Are your just general thoughts on where you think M&A activity is going to go over the next three quarters.
Speaker Change: Yeah, that's a great question and highly topical these days I think.
Speaker Change: At certain points last year.
Speaker Change:
Speaker Change: There was a really bullish sentiment in terms of the backdrop.
Speaker Change: Of private equity dry powder being pent up Lps, a buyout firms really wanting their capital back.
Speaker Change: And I think.
Speaker Change: And then obviously the the natural tailwind of potential deregulation.
Speaker Change: With the new administration.
Speaker Change: I think the uncertainty around tariffs.
Speaker Change: Has slowed.
Speaker Change: As well as other factors.
Speaker Change: Deportation et cetera impacting cost of labor among other issues and so I think right now.
Speaker Change: We're watching the market closely with regards to deal activity I'd say I think.
Speaker Change: The backdrop and the tailwind of private equity dry powder continues to be the case.
Speaker Change: And so with every passing quarter that shot clock on their capital to invested in return it continues to pass and so with every passing quarter I think the conviction around LBO volume coming back increases that being said I think given the uncertainty right now it will be more back ended in this calendar year than I.
Speaker Change: In the first quarter or two based on what we're seeing.
Speaker Change: All that being said if you look at 2024 LBO volume was extremely modest and I think we have somewhere between 50 and 60 new platforms.
Speaker Change: In our portfolio over the course of last year. So again, even in light of a market where I think some of our competitors may have struggled to deploy capital into new platforms, we really didn't have that experience.
Speaker Change: As we noted the fourth quarter was in line with the broader 2024 calendar year, So and I think that speaks to two things we have.
Speaker Change: But really robust.
Speaker Change: Investment team here dedicated to the strategy and then as you've heard from US before we have the benefit of being part of this institution, which has a best in class cell side investment bank with.
Speaker Change: Hundreds if not thousands of bankers interfacing with users of private credit daily that being corporates and private equity firms. So I think our deal flow arguably really should be best in class given the combination of what's a great private credit manager and in investment banking House.
Speaker Change: And then the <unk>.
Speaker Change: As we mentioned earlier in the prepared remarks I think this imbalance.
Speaker Change: Of deal flow to capital is really helpful to us. So we can be really selective as we invest.
Speaker Change: So I continue to be bullish on deal flow over the coming vintage years, it's hard to pick off in what quarter and calendar 'twenty five we're going to see a real uptick in LBO volume I don't think its Q1 I'd be surprised frankly, if it's Q2.
Speaker Change: But we'll see.
Speaker Change: Really appreciate the color. Thank you.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: And I apologize we will now take our next question from Melissa Wedel with JP Morgan.
Melissa Wedel: Good morning, Thanks for taking my questions.
Melissa Wedel: I wanted to touch on NII trends, obviously, there is a step down sequentially in <unk> with some rate, but I think the question is really you know.
Melissa Wedel: We know that there tends to be a lag.
Melissa Wedel: And it changes in base rates and how they flow through BDC income statements how much.
Melissa Wedel: The rate declines do you think flowed through into for Q.
Melissa Wedel: Put differently should we be expecting.
Melissa Wedel: Something similar there.
Melissa Wedel: Directionally in the first quarter.
Melissa Wedel: Thanks for the question. This is Dave so about two thirds of our portfolio did reset within the in Q4 so.
Melissa Wedel: So we do have about a third left in terms of the lag is as you mentioned before.
Melissa Wedel: I would say, though and just thinking about NII in general is that if you look at the core NII from Q3 into Q4. It went from 62 to <unk> 57 cents as you can see in our materials that was.
Melissa Wedel: 100% driven by the change in rates period over period, we did not have any nonrecurring income flow through into Q4, which is what we saw in Q3. So that was about two cents of incremental pickup in Q3 as you just try to do the NII bridge period over period.
Speaker Change: Okay. That's helpful. Thank you.
Speaker Change: When you think about you touched on the liability structure as well just wanted to refresh on how you're thinking about the split.
Speaker Change: Ideally between secured and unsecured thank you.
Speaker Change: Yes, no. So right now you kind of saw that at 12 31, we're at 53% in the unsecured I think youll see us probably be in that 50% mix between secured and unsecured it's not.
Speaker Change: It may dip down below that but.
Speaker Change: We'll try to stay within that kind of framework I will note and I kind of said that in the prepared remarks as well we do have that September 2025, no debt is coming due that does have a fixed cost right now of 755, So we'll look opportunistically to refinance that.
Speaker Change: Upcoming here.
Speaker Change: Thank you.
Speaker Change: We will now take our next question from Paul Johnson with K B W.
Paul Johnson: Good morning, Thanks for taking my questions.
Speaker Change: Interesting to see that just the repayment number so low this quarter.
Speaker Change: Any idea in terms of what you think drove that.
Speaker Change: Yes, that's a good question I think.
Speaker Change: The <unk> business.
Speaker Change: Reporting quarterly publicly is always interesting because the the business in any one quarter or two.
See huge upticks in deployment or not you could see repayment spike or not.
Speaker Change: It can be a lumpy business. So I always encourage people to look and analyze these businesses not over a single quarter, but over more like a calendar year or frankly, even two given the nature of the asset class in general I don't think anything in particular drove.
Speaker Change: Fewer repayments in Q4, we will see what this calendar year it looks like obviously the public market.
Speaker Change: Is it a really healthy place.
Speaker Change: But I think you know within our asset class, we have been able to.
Speaker Change: We maintain the liquidity premium.
Speaker Change: Relative to the syndicated loan market, that's been very healthy and steady frankly.
Speaker Change: During the fourth quarter the capital that we put out was it roughly so for 500.
Speaker Change: <unk>.
Speaker Change: TBD the impact of repayments over the coming quarters, but I don't think theres anything in particular to answer your question directly which drove fewer repayments in the fourth quarter relative.
Speaker Change: To prior quarters.
Speaker Change: Got you thanks for that and then just in terms of amendments.
Speaker Change: Within the book.
Speaker Change: Just wondering was there any.
Speaker Change: No trends there any change quarter over quarter in terms of the sort of credit related amendments in the portfolio.
Speaker Change: Yeah, So I think the.
Speaker Change: Just had a couple of things so as relates to amendment. So repricing was really more of a.
Speaker Change: Earlier in 2000 and for dynamic we saw that subside over the course of the rest of the year in terms of credit you know we.
Speaker Change: We're really proud of the health of this portfolio.
Speaker Change: And.
Speaker Change: We've executed really in line with what we articulated to both our pre IPO investors as well as you all.
Speaker Change: And the public markets. When we took this vehicle public about a year ago.
Speaker Change: The health of the book remains really strong I think our stats from a non accruals perspective from a pik income perspective.
Speaker Change: Have been and continue to be best in class and again, we're really proud of that and so through our lens, we feel like that we've really executed.
Speaker Change: <unk>, we always keep our eye closely to the entire portfolio with.
Speaker Change: Doubleclick.
Speaker Change: Our names that are underperforming that.
Speaker Change: That list Fortunately.
Speaker Change: <unk> is quite narrow here, so we and I think in terms of what to expect from us in the future.
Speaker Change: Look a lot like the past in terms of staying defensive.
Speaker Change: Focusing on the sectors that we think are resilient.
Speaker Change: And taking into account.
Speaker Change: Everything that continues to be in motion with regards to the economy geopolitical issues tariffs, so and so forth and so it's an interesting time to deploy capital right now we're being highly selective as you would expect us to be.
Speaker Change: And we continue to be hopeful that deal flow and LBO volume comes back really in full force over the course of the year, but as mentioned if you look at last year.
Speaker Change: We didn't have an issue finding good places to invest and so we're hopeful that that that that same continues to be true this year.
Speaker Change: Thank you that's all for me.
Speaker Change: A reminder, that is star one if you would like to ask a question we.
Speaker Change: We will now take our next question from Doug Harter with UBS.
Doug Harter: Oh, Thanks, I was hoping you could talk about your leverage outlook for the year kind of given the commentary you've made about the environment.
Doug Harter: Yeah I'll go first and then others in the room feel free.
Doug Harter:
The stated target of one to one in a quarter when we took the vehicle public.
Doug Harter: I think we guided you all to that we would be in that range at some point over the over the half.
Doug Harter: Few quarters post IPO.
Doug Harter: And we executed in line with that strategy as you can tell.
Doug Harter: I think we got.
Doug Harter: <unk> of 1% or 111, it was little bit back ended in terms of the quarter or fourth quarter.
Doug Harter: You know TBD, it's a totally fair and it's a great question.
Doug Harter: I think we have the benefit of having a really best in class deal flow engine.
Doug Harter: We have a headwind of a market right now that presents fewer opportunities that we in our competitive we'd like to see and so we are doing our absolute best to find ways to deploy capital into deals that we are really comfortable with and we think off of really good risk adjusted returns it would be really easy.
Doug Harter: For us to stay within that range of the high end of the range.
Doug Harter: For the sake of NII.
Doug Harter: And capital deployment as I tell the team all the time, making a loan as easy as getting your money back because the hard part and so.
Doug Harter: We continue to be focused on quality.
Doug Harter: That one to one in a quarter range, we think is absolutely reasonable.
Doug Harter: Those without it goes without saying, though if if repayment spike substantially and deal flow is really poor and we don't think the market opportunity is attractive we're not going to put money in the ground for the sake of a leverage multiple over a very short period of time that in no means is to guide you that I'm worried about our target leverage range I'm not.
Doug Harter: But we think as I mentioned before we don't think over the short term within this business, we think medium and long term in terms of how we deploy capital because these assets are grossly illiquid generally and so we need to be really comfortable we're deploying capital that we're going to get our money back.
Doug Harter: So I think long winded way of saying one to one and a quarter continues to be the range where within that range. We reside in everyday every given quarter TBD and we will be based on a number of factors, but rest assured we're deploying capital with an eye towards capital preservation and defensive this first and foremost.
Doug Harter: Great I appreciate the answer.
Speaker Change: And it appears there are no further telephone questions I'd like to turn the conference back to Mr. <unk> for closing remarks.
Speaker Change: Thank you on behalf of the management team greatly appreciate you joining us today, along with your support of the Morgan Stanley direct lending fund our team remains focused on executing our defensive investment strategy to drive shareholder value and I couldnt be more pleased with our continued execution, we look forward to providing an update on our first quarter two.
Speaker Change: 25 earnings call in May Thank you.
Speaker Change: And that does conclude today's conference. We thank you all for your participation you may now disconnect.
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