Q1 2025 Morgan Stanley Direct Lending Fund Earnings Call

Welcome to Morgan Stanley's recommending 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.

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.

As a reminder, this conference call is being recorded.

Operator: At this time, I'd like to turn the call over to Ms. Santa Johnson. Please go ahead.

Speaker Change: At this time I'd like to turn the call over to MS. Sandra Johnson. Please go ahead ma'am.

Speaker Change: Good morning, and welcome to Morgan Stanley's direct lending funds first quarter 'twenty 25 earnings call. Joining me. This morning are Jeff <unk>, Chief Executive Officer, Michael <unk>, President, David <unk>, Chief Financial Officer, Rebecca Shaw head of portfolio management Morgan Stanley direct lending funds first quarter 'twenty 25 financial results were released yet.

Santa 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 Osi, President, David Pesce, Chief Financial Officer, and Rebecca Shaul, Head of Portfolio Management. Morgan Stanley Direct Lending Fund's first quarter 2025 financial results were released yesterday after market close 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.

Speaker Change: Your day after market close and can be accessed on the Investor Relations section of our website at Www Dot M. A C. L. Dot com, we have arranged for a replay of today's event that will be accessible from the Morgan Stanley direct lending fund website.

Santa Johnson: 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 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.

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. 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 in that.

Speaker Change: That limitation market conditions uncertainty surrounding interest rates changing economic conditions and other factors, we have identified in our filings with the SEC.

Speaker Change: 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 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 are subject.

Santa Johnson: You should not place under-reliance on these forward-looking statements. 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.

Santa Johnson: To obtain copies of SEC-related filings, please visit our website.

Speaker Change: To obtain copies of FCC related filings. Please visit our website with that I will now turn the call over to Jeff Leiden.

Jeff Levin: With that, I will now turn the call over to Jeff Levin. Thank you, Santa. 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 continued to deploy capital prudently in the face of what has been a more volatile environment for financial markets.

Jeff Leiden: Thank you Sandra.

Jeff Leiden: Thank you for joining us today for Morgan Stanley direct lending first quarter 2025 conference call.

Speaker Change: Generated strong performance in the first quarter.

Speaker Change: We continue to deploy capital prudently in the face of what has been a more volatile environment for financial markets.

Jeff Levin: I will first begin with a summary of our performance in the first quarter before handing it to Michael to discuss the market.

Speaker Change: I will first begin with a summary of our performance in the first quarter before handing it to Michael to discuss the market.

Speaker Change: Dave will then provide updates on our portfolio and comment on the financial results.

Jeff Levin: 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 totaled approximately $233 million, which represented a meaningful increase in gross deployment relative to the prior quarter. Repayments accelerated in the first quarter, amounting to $202 million with seven portfolio companies fully repaid.

Speaker Change: Our team delivered solid operating results for the first quarter supported by strong underlying credit performance.

Speaker Change: We generated net investment income of 52 cents per share.

Speaker Change: This exceeded the 50 cent dividend declared was once again, a high quality with low contribution from payment in kind in other income.

For the first quarter.

Speaker Change: The commitments totaled approximately $233 million, which represented a meaningful increase in gross deployment relative to the prior quarter.

Speaker Change: Payments accelerated in the first quarter amounted to $202 million with seven portfolio companies fully repaid.

Jeff Levin: 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.

Speaker Change: During the quarter and SDL that N. A V increased modestly from 1.08 times to 1.11 times.

Speaker Change: Our deployment activity in the quarter showcased once again, our ability to leverage our unique origination engine to drive quality deal flow even in the slower than anticipated start to the year for M&A.

Speaker Change: Consistent with the trend that we had highlighted for the full year of 2020 for more than 70% of the non refinancing gross deployment in the first quarter was for new borrowers.

Speaker Change: While LBO activity remained subdued.

Robert equity await more clarity on government reform, our unique sourcing platform has produced high quality investing opportunities.

Is that are new to our platform.

Jeff Levin: 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 in 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.

Speaker Change: Our thought leadership and market visibility are also validated by the proportion of new platforms that we are leading.

Speaker Change: In the first quarter, we led or co led all the facilities for new borrowers.

Speaker Change: As we have discussed on previous calls we continued to benefit from the broader Morgan Stanley platform, which we continue to leverage in the current volatile macro backdrop.

Speaker Change: We believe that sponsors are drawn to the quality of our team and our ability to be a value added partner.

Speaker Change: Our enhanced by our position within the broader Morgan Stanley ecosystem.

Speaker Change: We believe that these factors have helped our sponsor backed direct lending business here in North America surpassed $20 billion in committed capital.

Speaker Change: This is an important milestone for us.

Jeff Levin: 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.

Speaker Change: While significant our breadth and depth of sponsor relationships.

Speaker Change: Laos us to see a vast range of deal flow in that deal flow exceeds our capital base, which greenfield activity.

Speaker Change: We believe that the selectivity on the investment side is the engine that will help us to continue to source and underwrite lending opportunities.

Speaker Change: Strong risk adjusted returns for shareholders.

Speaker Change: More are transparent revenue model relatively low operating expense base and thoughtful fee structure.

Speaker Change: 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.

Michael Osi: With that, I would like to hand the call over to Michael, who will provide some commentary on the market. Thank you, Jeff. I will start by addressing deal activity in the market.

Speaker Change: That I would like to hand, the call over to Michael who will provide some commentary on the market.

Michael: Thank you Jeff.

Michael: I will start by addressing deal activity in the market.

Michael Osi: It's 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.

Michael: It's old news by now, but the tariff driven volatility is pushed off what we initially expect it could be a sharp recovery in M&A activity at the beginning of the year.

Michael: 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.

Michael: While uncertainty remains we have continued to see a solid pipeline of attractive opportunities as evidenced by MST else deployment in the quarter.

Michael: The direct lending market has been open for business amidst the elevated volatility since the beginning of April.

Michael Osi: 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.

Michael: While accessing the public sub investment grade credit market has been more window driven.

Michael: This current market may serve as another opportunity for private credit to take share from the leveraged loan market.

Michael: This market dynamic often presents investment opportunities for direct lenders.

Michael: Create better risk adjusted returns and we have recently seen large high quality borrowers step into our market.

Michael: Spreads on new capital deployed in the first quarter were virtually flat versus the second half of 2024.

Michael: 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.

Michael Osi: 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.

Michael: 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 MST out over the last several quarters.

Michael Osi: 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 is overweight these sectors relative to other BDCs.

Michael: The tariff situation remains dynamic.

Michael: 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 MST all portfolio should be relatively insulated given our geographic and industry orientation.

Michael: 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 of parts, such as consumer and capital goods in contrast.

Michael: Software insurance services and business services should be better insulated from the tariffs and retaliatory tariffs and MST I was overweight these sectors relative to other bdcs.

Michael Osi: 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.

Michael: The U S middle market entered 2025 with good momentum on the margins front with interest coverage ratio is on the upswing as well.

Michael: While slower economic growth could challenge this momentum, we expect the middle market to be more insulated from tariffs and larger companies more sales overseas.

Michael: On the cost side, but we still view the middle market is more insulated given the greater domestic focus.

Michael: As uncertainties surrounding specific measures in 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 risks and action plans. The team continues to monitor for real time changes that could impact the portfolio and <unk>.

Michael Osi: 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.

Michael: 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 MST out looking ahead, we believe that we continue to be well positioned to source and underwrite lending opportunities.

Michael Osi: 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.

Michael: That offer strong risk adjusted returns and in turn create value for MST all shareholders I will now hand, the call over to David who will provide details on Morgan Stanley direct lending funds portfolio investment activity and financial results.

David Pesce: 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. Thank you, Michael. Starting with our portfolio, we ended the quarter with a total portfolio. at a 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 fluid and 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.

David: Thank you Michael.

David: And with our portfolio, we ended the quarter with a total portfolio.

David: That's fair value of $3 8 billion.

David: Our portfolio was comprised of approximately 96% first lien debt, 2% in second lien debt and the remainder in equity and other debt investments.

David: We had investments in 210 portfolio companies spanning across 34 industries with nearly 100% of our investments in floating rate debt.

David: 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.

David Pesce: 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.

David: The average position size of our investments was approximately 18 million or approximately 50 basis points of our total portfolio at fair value.

David: Further our top 10 portfolio companies represented approximately 15% at fair value of the total portfolio.

David: Regarding credit metrics of our portfolio companies as of quarter end our.

David: 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.

David: As mentioned on our fourth quarter 2024 earnings call the decline in asset yields in part was attributable to the residual impact from the earlier decline in silver.

David: 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 kw or acquisition or more commonly known as alacrity removed from non accrual status due to a restructuring event during the quarter.

David Pesce: Turning to credit quality, over 98% of our total portfolio remained at an internal risk rating of 2 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 31st, our non-accruals remain just 20 basis points of the portfolio at cost.

David: 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.

David: For our investment activity in the first quarter, we made new investment commitments of approximately $233 million across nine portfolio companies and nine existing portfolio companies.

David Pesce: 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 funding totals approximately $206 million, offset by $202 million in repayments, which were more elevated during the quarter.

David: <unk> fundings totaled approximately 206 million offset by $202 million in repayments, which were more elevated during the quarter.

David: 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 pick.

David Pesce: 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. That 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 24th, 2025, with a balance attributable to the aforementioned impact from the change of portfolio yields.

David: Pik income continues to remain relatively low amounted to only 4% of total investment income.

David: Total net expenses for the first quarter was $55 2 million compared to $52 3 million in the prior quarter net.

David: Net investment income for the first quarter was $46 2 million or <unk> 52 per share compared to $50 7 million or <unk> 57 per share from the prior quarter the.

David: The majority of the decline in our NII was driven by our IPO related fee waivers that expired on January 24th 2025, with the balance attributable to the aforementioned impact from the change in portfolio yields.

David: 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.

David Pesce: 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.

David Pesce: Turning to our balance sheet, as of March 31st, 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 out of 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, increasing our total commitment by $150 million to $1.45 billion.

David: Turning to our balance sheet as of March 31, total assets were $3 9 billion and total net assets was $1 8 billion.

David: Our ending NAV per share for the first quarter was $20 65, as compared to $20 81 in the prior period.

David: Our debt to equity ratio increased to one <unk>.

David: 11 times as compared to 1.08 times in the prior quarter.

David: Approximately 52% of our funded debt was in the form of unsecured notes with well latter maturities through 2030.

David: During the quarter, we successfully executed an extension of our secured revolving credit facility by extending our maturity to February 2030, lower than our drawn spread by 10 basis points and undrawn spread by two five basis points and lastly, increasing our total commitment by $150 million to $1 45 billion.

David: 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.

David Pesce: 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.

David: Focusing now on our distributions in the current quarter, we paid a 50 regular distribution in.

David Pesce: Focusing now on our distributions, in the current quarter we paid a 50 cent regular distribution. In addition, our Board of Directors applied a regular distribution for the second quarter of 50 cents per share to shareholders of record on June 30, 2025. As of March 31, 2025, our estimated spillover net investment income was $71,080,000 per share.

David: In addition, our board of directors declared a regular distribution for the second quarter of <unk> 50 per share to shareholders of record on June 32025.

David: As of March 31, 2025, our estimated spillover net investment income was $71 million or <unk> 80 per share.

David: 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 supported market conditions.

David Pesce: 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 supported market conditions.

Operator: With that, operator, please open the line for questions. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is Star 1 if you would like to ask a question.

David: 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.

Melissa Whittell: And we'll take our first question from Melissa Whittell with JPMorgan. Good morning. Thanks for taking my questions today. First, I 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 one queue? I know that there's a lag that tends to happen.

Speaker Change: We will take our first question from Melissa Wedel with JP Morgan.

Melissa Wedel: Good morning, Thanks for taking my questions today.

Speaker Change: 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 one queue.

Melissa Wedel: I know that Theres, a lag that tends to happen.

Michael Osi: Yeah, and thanks for the question. Yeah, 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, 4 cents 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 penny per share of residual impact to be expected in Q2 as a result of those waivers fully rolling off. Got it. I appreciate that color.

Speaker Change: Yes. Thank.

Melissa Wedel: Thanks for the question.

Melissa Wedel: Yes for the most part all the silver related activity from Q4 has been flushed through in the Q1 results.

Melissa Wedel: The main change that you would see quarter over quarter as you compare.

Melissa Wedel: NII for sense of the change was attributable to the IPO related waivers that rolled off in January of this year.

Melissa Wedel: Just just for full transparency, that's there's approximately about a penny per share of residual impact to be expected in Q2 as a result of those waivers fully rolling off.

Speaker Change: Got it I appreciate that.

Melissa Whittell: I also wanted to touch on the repurchase plan. You certainly talked about that last quarter. I wanted to understand how you're thinking about the point, making use of that, particularly since there seemed to be some decent usage of that plan in 1Q at levels that were not a huge discount to NAV. And certainly you're trading, shares are a bit broader of a discount now compared to what you saw in 1Q.

Melissa Wedel: Color.

Melissa Wedel: I also wanted to touch on the repurchase plan.

Melissa Wedel: You certainly talked about that a lot.

Melissa Wedel: Last quarter I wanted to.

Melissa Wedel: Understand how youre thinking about deploying making use of that.

Melissa Wedel: Particularly since there seem to be some decent usage of that plan and <unk> at levels that were not of a huge discount to NAV and certainly are trading shares are trading a bit lower or a bit broader ever discount now compared to what you saw in Q. How are you thinking about using that plan going forward.

Michael Osi: How are you thinking about using that plan going forward? Thank you.

Melissa Wedel: Yes.

Michael: Yeah, Let's say, it's Michael good question its a tool we obviously refreshed.

Michael Osi: Yeah, Melissa, it's Michael. Good question. It's a tool we obviously refreshed last quarter with 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 10b51. So it's kind of set it and forget it. But we think, you know, it's a logical, logical tool to have in place to, you know, help support stock to a certain extent.

Michael: Last quarter with with earnings we repurchased as you alluded to about $10 million over the course of the quarter, obviously accretive activity.

Michael: It's formulaic thru attendee five one so.

Michael: Set it and forget it but we think you know it.

Michael: It's a logical logical tool to have in place to help support stock to a certain extent.

Speaker Change: We will now take our next question from Kelly <unk> with Raymond James.

Kelly Sheth: We'll now take our next question from Kelly Sheth with Raymond. 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.

Speaker Change: Alright, thanks for the question.

Speaker Change: Just a quick one on terrorists with all the recent tariff implications I know you guys have touched on.

Speaker Change: Youre going to shift the strategy in terms of allocating to top it all off.

Jeff Levin: Would you say there has been a shift with your new deployments this past quarter in terms of targeting certain industries or de-emphasizing exposure and other sectors? Yeah, sure, Jeff. It's a great question. I think taking a 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 percent. 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 percent.

Speaker Change: Would you say there has been a shift with your new.

Speaker Change: New deployments this past quarter in terms of targeting certain industries are deemphasizing exposure in other sectors.

Speaker Change: Yes, sure Jeff Good it's a great question.

Speaker Change: I would say, taking a taking a step back our strategy.

Speaker Change: Has been and continues to be.

Speaker Change: To invest in.

Speaker Change: The highest quality private credit transactions.

Speaker Change: Can originate.

Speaker Change: And stick to the top of the capital structure in a first lien position.

Speaker Change: Loan to values this past quarter for the capital we deployed was less than 35%.

Speaker Change:

Speaker Change: 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.

Speaker Change: Brokers predominantly.

Speaker Change: Comprises a very substantial portion of the portfolio over 50%.

Speaker Change: So the portfolio not only has it been performing really well and thats evidenced by non accrual rate being exceptionally low the pic as a percentage of our total income best in class.

Jeff Levin: So, the portfolio, not only has it been performing really well, and that's evidenced by the nonaccrual rate being exceptionally low, the PIC 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 management teams with regards to companies and sectors that are exposed to tariffs.

Speaker Change: But avoiding a deeply cyclical as well and so we entered this period of market.

Speaker Change: Uncertainty and.

Speaker Change: And tariff uncertainty from I think a real position of strength given the sectors that we are the longest.

Speaker Change: We have very very little exposure to the more deeply cyclical sectors. As you would expect we've done an enormous amount of analysis across our portfolio in touch with sponsors and management teams with regards to companies in sectors that are exposed to tariffs.

Jeff Levin: It's an extremely low percentage of the portfolio on a direct basis. I think the $64,000 question will be, you know, 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, you know, 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 a first-line position. Enormous value below us, underwritten by our team at great length.

Speaker Change: It's an extremely low percentage of the portfolio on a direct basis.

Speaker Change: I think the 64000 dollar question will be what happens over the course of this year and next year, where things land with regards to 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.

Speaker Change: Vast majority of this portfolio is in a first lien position enormous value below us underwritten by our team.

Speaker Change: Length.

Jeff Levin: 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 and to 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.

Speaker Change: So we are in terms of change in strategy given the current environment I wouldn't say that there is a change we continue to focus on investing in the sectors that are defensive and to the best opportunities. We can find we think we have a better origination footprint and frankly anyone in the market given our affiliation with Morgan Stanley and the levers that we have to pull to win the best.

Speaker Change: Deals in the market.

Speaker Change: Obviously, though eyes wide open as we deploy capital.

Speaker Change: Continuing to avoid sectors that we think could be negatively impacted by what's happening in D. C.

Speaker Change: As you would expect.

Jeff Levin: And we feel really good about where we are. And I think, you know, 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. So, you know, 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.

Speaker Change: And we feel really good about where we are and I think you know.

Speaker Change: The other night.

Speaker Change: A 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.

Speaker Change: So net net of everything I've 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.

Speaker Change: And not surprisingly leveraging all the resources that we have here within Morgan Stanley's four walls would spans far beyond just our U S direct lending business and really monetizing and leveraging everything that we can here.

Kelly Sheth: direct lending business, and really monetizing and leveraging everything that we can. Thank you for that color.

Speaker Change: Thank you for that color and just as a quick follow up I know you guys touched on.

Kelly Sheth: And just as a quick follow up, I know you guys also touched on M&A recovery being pushed off because of these tariffs.

Speaker Change: M&A recovery being pushed off because of these terrorists what is your sense for M&A recovery in your conversation shrink, but 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.

Kelly Sheth: What is your sense for M&A recovery in your conversations for 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? Yeah, 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. You know, 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.

Speaker Change: Yeah.

Speaker Change: Yes.

Speaker Change: Another great question.

Speaker Change: Look I think in the current environment.

Speaker Change: It's challenging for private equity to underwrite.

Speaker Change: These transactions because there was 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.

Speaker Change: The backdrop again as you know there is enormous dry powder sitting within the private equity ecosystem that money will get invested it's really hard to know when.

Jeff Levin: But that being said, you know, 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, you know, upwards of 80 people dedicated to direct lending in the US every day. And then we have hundreds of additional feet on the street, given our affiliation with with Morgan Stanley's sell side.

Speaker Change:

Speaker Change: 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.

Speaker Change: 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 and that's a really powerful model even in markets where.

Jeff Levin: And 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, two, three, four, 500 million in EBITDA, coming to our market for financing when they would typically go to the syndicated space. So I think that, you know, until and unless there's more clarity around the tariff situation and the economy, I do think that LBO volumes will be relatively low.

Speaker Change: Activity is somewhat muted.

Speaker Change: One tailwind that we have which is also helpful that we 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.

Speaker Change: And so we've seen companies 234 or $500 million EBITDA coming to our market for financing when they would typically go to the syndicated space. So I think that.

Speaker Change: Until and unless there is more clarity around the tariff situation and the economy I do think that LBO volumes will be relatively low.

Jeff Levin: 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 and later in the year, given the volatility. I think last year, everyone was hopeful that 25 would be a big year for LBO volumes, given the pent-up capital base. I think we're going to, you know, 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.

Speaker Change: Don't necessarily think Thats, 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 and later in the year given the volatility I think last year, everyone was hopeful the 25 would be a big year for LBO volumes, given the pent up capital base I think we're going to I would say.

Speaker Change: 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.

Jeff Levin: 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. You know, we're not, we don't have $150 billion of direct lending capital that needs to be invested, you know, every month, every quarter. It's a very, very healthy balance of deal flow and origination relative to capital. All that being said.

Speaker Change: 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.

Speaker Change: Not we don't have $150 billion of direct lending capital that needs to be invested.

Speaker Change: Every month every quarter.

We are a it's a very very healthy balance of deal flow and originations relative to capital all of that being said.

Kelly Sheth: We are really careful with how we're investing right now because risk is heightened in this environment and we're proceeding with caution. Got it. Thank you.

Speaker Change: We are really careful with how we are investing right now because risk is heightened in this environment and.

Speaker Change: And we're proceeding with caution.

Speaker Change: Got it thank you.

Speaker Change: As a final reminder, that is star one if you would like to ask a question.

Operator: Just a final reminder, that is star one if you would like to ask a question.

Marissa Lobo: We'll now take a question from Doug Harder with. Good morning.

Speaker Change: Now take a question from Doug Harter with UBS.

Speaker Change: Good morning, it's actually in the rest of global on for Doug today. Thanks for taking my question.

Marissa Lobo: 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? Yeah, I, you know, 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, if you look at the size of the businesses that we financed, if we look at the sectors that we've, that we invested in, really no change.

Speaker Change: The increase in commitments.

Speaker Change: This quarter could you speak a little bit about the kind of demand youre seeing for loans was there anything notable about the size of the loans involved.

Speaker Change: You are bigger deals are more smaller deals.

Speaker Change: Yes.

Speaker Change: I think that this quarter was I would say generally more of the same I'm looking here my colleagues as well to see if the share that view I think we're sort of at the size of the businesses that we financed if we look at the sectors that we've that we invested in <unk>.

Speaker Change: Really no change 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 it may slip to Q1, but no I'd say, it's more of the same you know there were a fair number of <unk> that we financed as mentioned, we led or co led everything that we did.

Jeff Levin: And, you know, 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. You know, 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 we continue to close business with. Loan-to-values came down a little bit. I wouldn't read into that.

Speaker Change: 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.

Speaker Change: Loan to values came down a little bit I wouldn't read into that.

Speaker Change: I think that was more episodic in nature and it wasn't that material.

Michael Osi: 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. Got it. Thanks for that. And on leverage, it's now at the midpoint of your range. So where do you see it trending from here? Yeah, obviously, we would like leverage to get a little bit higher, but still within our target range, I think, you know, at 111, somewhere between 115 and 120 is kind of where we would like to, you know, keep our leverage levels.

Speaker Change: But again the median EBITDA is that we underwrote the weighted averages were in line with prior quarters sectors as well so no I would say it was it was really more of the same.

Speaker Change: Got it thanks for that.

Speaker Change: Leverage is now at the midpoint of your range, So where do you see it trending from here.

Speaker Change: Yes.

Speaker Change: Obviously, we would like to leverage to get a little bit higher.

Speaker Change: But still within our target range I think.

Speaker Change: At 111 somewhere between 115 to 120 is kind of where we would like to keep our leverage levels and but again, we're going to do so in a way that we're still sticking to our knitting in our credit selection to get there.

Michael Osi: And but again, we're going to do so in a way that we're still sticking to our knitting in our credit selection to get there. Yeah, I 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 IPO, 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, you know, making a loan is easy, that in short term, feels great, but getting the money back is what matters most.

Speaker Change: The key I think which is getting to getting to our target leverage matters of course, and that's the stated goal and you may recall over a year ago. When we IPO, we told the market and you all that we were getting get upwards of one to one within three or four quarters, we did exactly that.

Speaker Change: We weren't in a rush to do it it's patient we are making a loan is easy.

Speaker Change: In short term feels great, but getting the money back because 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.

Michael Osi: 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, Morgan Stanley, it's very differentiating, is what we're going to continue to Appreciate the answers.

Speaker Change: Appreciate the answers.

Speaker Change: And it appears there are no further telephone questions at this time I'd like to turn the call back to Mr. Jeff <unk> for closing remarks.

Operator: Operator, there are no further telephone questions at this time.

Jeff Levin: I'd like to turn the call back to Mr. Jeff Levin for closing remarks. 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.

Jeff: Thank you.

Speaker Change: The management team 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 couldnt be more pleased with our continued execution where.

Speaker Change: We're positioned to deliver strong returns for our shareholders and are pleased with how <unk> is positioned in this environment. We look forward to providing an update on our second quarter of 2025 earnings call in August. Thank you.

Jeff Levin: We look forward to providing an update on our second quarter 2025 earnings call in August.

And once again that does conclude today's conference. We thank you all for your participation you may now disconnect.

Operator: Once again, that does conclude today's conference. We thank you all for your participation.

Speaker Change: Yes.

Speaker Change: [music].

Speaker Change: Yeah.

Speaker Change: [music].

Speaker Change: Okay.