KBRA Assigns Rating to Morgan Stanley Direct Lending Fund's $350 Million Senior Unsecured Notes

KBRA assigns a rating of BBB to Morgan Stanley Direct Lending Fund's (NYSE: MSDL or "the company") $350 million, 6.10% senior unsecured notes due July 15, 2031. The rating Outlook is Stable.

Key Credit Considerations

The rating and Outlook are supported by MSDL's strong ties to the ~$1.9 trillion assets under management and/or supervision of Morgan Stanley Asset Management. The company benefits from investment banking, global capital markets, investment management, and wealth management within the Morgan Stanely (NYSE: MS) ecosystem in addition to MS' robust sponsor and banking relationships. As part of the MS ecosystem, MSDL leverages the broad MS private credit platform (“MSPC”), which includes $23 billion of committed capital in direct lending along with SEC exemptive relief to co-invest with certain other affiliated investment vehicles managed by the company's adviser, MS Capital Partners Inc. ("Adviser") or its affiliates. Furthermore, as of 1Q26, MSDL's $3.7 billion diversified investment portfolio at fair value (FV) comprises approximately 93.8% senior secured first lien loans spread across 227 companies in 36 industries, primarily in less cyclical sectors. The investment portfolio's median EBITDA is $91.1 million, and the top three sectors are Software (20.7%), Insurance Services (10.1%), and IT Services (9.9%). Asset quality remains solid with six portfolio companies on non-accrual, comprising only 1.0% and 1.5% of total investments at FV and cost, respectively at 1Q26. While the portfolio remains somewhat unseasoned due to its short operating history, 94.5% of the investment portfolio maintained an internal rating of 2 or higher, indicating performance at or above underwriting expectations.

At 1Q26, MSDL maintained gross leverage of 1.22x, in line with its target leverage range of 1.0x to 1.25x and well within the regulatory minimum asset coverage ratio of 150%. MSDL's funding mix is solid and includes a corporate revolver, SPV asset-based facilities, and senior unsecured notes. As of 1Q26, ~54% of the company’s total debt outstanding is senior unsecured, providing greater financial flexibility and low asset encumbrance for the benefit of unsecured noteholders. The proceeds from the issuance will used to repay a portion of its secured debt, increasing the percentage of unsecured debt and further increasing financial flexibility. Liquidity remained solid as of 1Q26, with sufficient bank credit availability of ~$1.4 billion and $96.7 million of unrestricted cash and cash equivalents set against $425 million of notes due within the next two years and total unfunded commitments of $449 million, a portion of which is not expected to be drawn.

Counterbalancing MSDL’s credit strengths are the company’s limited operating history offset by the long tenure of its management in private credit, the relatively illiquid investments, retained earnings constraints as a regulated investment company ("RIC"), and an uncertain economic environment with high base rates, inflation, and geopolitical risk that could increase non-accruals.

MSDL is a New York-based, externally managed, non-diversified, publicly traded closed-end investment management company regulated as a business development company ("BDC") under the Investment Company Act of 1940. For tax purposes, MSDL has elected to be treated as a RIC. The company commenced operations in January 2020 and closed its initial public offering on January 26, 2024. MSDL's Adviser is a wholly owned subsidiary of Morgan Stanley, a leading global investment bank. MSDL is neither a subsidiary nor is it consolidated with MS. Morgan Stanley has no obligation, contractual or otherwise, to financially support MSDL. MSDL’s obligations are neither MS’ obligations nor are they guaranteed by MS, and MS has no history of financially supporting any MS BDC even during periods of financial distress.

Rating Sensitivities

Given the Stable Outlook, a rating upgrade is not expected in the medium term. A rating downgrade and/or Outlook change to Negative could be considered if management alters its stated company strategy by increasing its focus on riskier investments coupled with higher leverage metrics. A prolonged downturn in the U.S. economy with negative impact on MSDL’s earnings performance, asset quality, and leverage or a significant change in senior management and/or risk management policies could also lead to negative rating action.

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