KBRA Assigns Rating to MSD Investment Corp.'s $265 Million Senior Unsecured Notes

KBRA assigns a rating of BBB to MSD Investment Corp.'s ("MSD" or "the company" or "the BDC") $265 million senior unsecured notes that are comprised of three tranches. The three tranches include a $50 million SOFR +3.00% floating rate note due May 20, 2028, a $165 million 7.11% fixed rate note due May 20, 2030, and a $50 million SOFR + 3.35% floating rate note due May 20, 2030. The rating Outlook is Stable. The proceeds will be used to make new investments and to pay down existing debt.

Key Credit Considerations

The rating and Outlook are supported by MSD's diversified $4.0 billion investment portfolio with a high percentage of senior secured first lien loans (94%) to 82 portfolio companies in 26 sectors. MSD Partners L.P. ("Adviser"), a Delaware limited partnership, is MSD's adviser. The Adviser is an affiliate of BDT & MSD Partners ("BDT & MSD"), a merchant bank with an advisory and investment platform servicing the distinct needs of business owners. The company maintains SEC exemptive relief to co-invest with other funds managed by the Adviser and its affiliates, and BDT & MSD's $14+ billion credit platform, which includes private corporate, liquid, private real estate, and opportunistic credit as well as the BDC. The company's management team has a long track record of working within the private debt markets, with the company's senior management team having an average of 27 years of experience investing across credit cycles, reinforced by strong alignment with employees and affiliates, and DFO Management, LLC (the family office of Michael Dell).

The diversified investment portfolio's top three sectors include Business Services (16.5%), Consumer Services (11.3%), and Hotel, Gaming, and Leisure (9.7%). The weighted average EBITDA was $209.2 million with 82.9% of its investments sponsored backed as of 3Q24. As the portfolio remains unseasoned, the company had only one portfolio company on non-accrual status, comprising 0.3% and 0.1% of total investments on a cost and FV, respectively.

The company's funding sources have been enhanced with this second senior unsecured note issuance since 2Q24-end. With the two unsecured note offerings ($600 million in total), KBRA considers MSD's funding mix largely diversified and unsecured debt to total debt outstanding increases to 25.1% on a pro-forma basis from 15.8%, respectively as of 3Q24, providing increased financial flexibility in more volatile economic environments as well as increase the amount of unencumbered assets for the benefit of the unsecured noteholders. Also, funding sources include two SPV asset facilities and a CLO. Further, the company maintains a $200 million subscription facility and $252.0 million of repurchase agreements. At 3Q24, leverage was adequate at 1.10x, within company's target leverage range (0.90x to 1.25x), and liquidity was comfortable with $ 337.9 million of cash/cash equivalents and $365.8 million of undrawn capital commitments set against unfunded investment commitments of $505.5 million.

Counterbalancing these strengths are MSD Investment Corp.'s limited operating history, which is somewhat offset by the long tenure of its management in private credit, and the company's requirement to distribute 90% of net investment income, negating the ability to retain earnings, illiquid assets and the potential for increased non-accruals with a more uncertain economic environment with high base rates, inflation, and geopolitical risk.

MSD Investment Corp. is an externally managed, private business development company operating under the Investment Company Act of 1940 and has elected to be treated as a regulated investment company ("RIC") for federal tax purposes. Formed in February 2021 as a Delaware limited liability company, MSD converted to a Maryland limited liability company, MSD Investment, LLC (January 1, 2022), and then converted to a Maryland corporation, at which time it changed to its current name, MSD Investment Corp.

Rating Sensitivities

A rating upgrade is not expected in the medium term. A rating downgrade and/or an Outlook change to Negative could be considered if there is a significant downturn in the U.S. economy with negative impact on MSD's earnings performance, asset quality, and/or leverage. A significant change in senior management and/or risk management policies could also lead to negative rating action.

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