Morgan Stanley Direct Lending Fund Q2 Earnings Call Highlights

Second-quarter earnings covered the dividend: Net investment income fell to $0.45 per share from $0.47, while the board maintained the $0.45 third-quarter distribution. Management said the payout remains consistent with normalized earnings power. Credit marks reduced NAV but portfolio fundamentals remained broadly stable: NAV declined to $19.50 per share, and non-accruals increased to 2.9% of investments at cost after three companies were added. However, about 95% of the portfolio was risk-rated 2 or better, with improving revenue, EBITDA and interest-coverage metrics. MSDL expanded financing capacity and its joint venture: The fund issued $350 million of five-year unsecured notes at a 6.10% coupon, repurchased $12.5 million of shares below NAV, and invested an additional $10 million in the Capstone JV, which supported approximately $426 million of commitments across 58 companies.

Morgan Stanley Direct Lending Fund NYSE: MSDL reported second-quarter net investment income of $38.2 million, or $0.45 per share, down from $0.47 per share in the prior quarter, as higher contributions from its Capstone joint venture were offset by new non-accruals and increased financing costs. The company’s board declared an unchanged regular third-quarter distribution of $0.45 per share, payable to shareholders of record as of Sept. 30, 2026. Chief Executive Officer Michael Occi said second-quarter net investment income covered the dividend and that management believes the current payout is aligned with the fund’s normalized earnings power.

Net asset value per share ended the quarter at $19.50, compared with $19.81 in the first quarter. Chief Financial Officer David Pessah said the company recorded $30.2 million in net unrealized depreciation and realized losses during the period. Unrealized losses reflected underperformance at a handful of portfolio companies, including investments placed on non-accrual, while realized losses were associated with two completed restructurings. Non-accruals rose to 2.9% of the portfolio at cost as of June 30, following the placement of US Infra Services, Spectrio and BPG Holdings on non-accrual status. Co-President Jeff Day said these companies had faced operational challenges over an extended period and that their performance did not indicate broader portfolio stress or sector-specific trends. Management said approximately 95% of the portfolio remained risk-rated 2 or better, generally performing in line with the original underwriting case. Day also said revenue growth, EBITDA growth and interest-coverage ratios improved from the prior quarter, while payment-in-kind income increased only slightly and the number of borrowers using PIK remained relatively stable. The company completed restructurings involving DCA Buyer and Abracon during the second quarter. Day said management remains active in working with sponsors, company management teams and other stakeholders to preserve principal and pursue recoveries on non-accrual investments.

MSDL’s portfolio totaled $3.6 billion at fair value at quarter-end and included 229 portfolio companies spanning 36 industries. About 93% of investments were first-lien debt, while 3% represented the company’s investment in its joint venture. Average borrower exposure was approximately $15.5 million, and the weighted-average loan-to-value ratio was about 39%. During the quarter, the fund made approximately $146 million of investment fundings, including new commi...