KBRA Assigns Rating to MSD Investment Corp.'s $335 Million Senior Unsecured Notes

KBRA assigns a rating of BBB to MSD Investment Corp.'s (“MSD” or “the company” or "the BDC") $335 million senior unsecured notes. The notes are comprised of four tranches: $69 million 7.00% Series A Senior Unsecured Notes Due August 7, 2027, $75 million Series B Floating Rate (TSFR3M + 3.05%) Senior Unsecured Notes Due August 7, 2027, $116 million 7.11% Series C Senior Unsecured Notes Due August 7, 2029, and $75 million Series D Floating Rate (TSFR3M + 3.35%) Senior Unsecured Notes Due August 7, 2029. The rating Outlook is Stable. The proceeds will be used to make new investments and pay down existing debt.

Key Credit Considerations

The rating and Outlook are supported by MSD's diversified $2.5 billion investment portfolio of 67 portfolio companies with a high percentage (89.9%) of investments comprised of senior secured first lien loans and the ability to co-invest with other funds managed by MSD Partners L.P. ("Adviser"). The Adviser is an affiliate of BDT & MSD Partners ("BDT & MSD Partners"), a merchant bank with an advisory and investment platform built to serve the distinct needs of business owners and strategic, long-term investors. BDT & MSD's $14+billion credit platform includes private corporate, liquid, private real estate, and opportunistic credit as well as the BDC. The company's 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 (the family office of Michael Dell). As the portfolio remains unseasoned, the company had only one portfolio company on non-accrual status with a FV of $1.95 million and a cost of $11.07 million. While gross leverage of 1.26x is on the high side of the company's target range (0.90 to 1.25x), KBRA believes it is appropriate when considering the company's high proportion of senior secured first lien loans, including liquid credit (34% of total investments at FV), along with significant uncalled capital of $837 million and no off-balance sheet leverage through joint ventures as of 1Q24. In addition, net leverage of 1.15x was more in line with peers at 1Q24.

The company's funding sources are somewhat limited with two SPV asset facilities and a CLO. However, the company will increase its financial flexibility and boost pro-forma unsecured debt to around 28% when including the note offering and its subscription facility as of 1Q24. As of 1Q24, the company had adequate liquidity, with $140 million in cash, $207 million available bank lines, and $837 million of undrawn capital commitments set against $353 million of unfunded investment commitments and no near-term maturities.

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 and illiquid assets. The company's funding profile remains highly secured though improved with this offering.

MSD Investment Corp. is an externally managed, private business development company ("BDC") operating under the Investment Company Act of 1940 and has elected to be treated as a regulated investment company ("RIC") for federal tax purposes. The company's Adviser is a Delaware limited partnership and an affiliate of BDT & MSD Partners, a merchant bank with an advisory and investment platform servicing the distinct needs of business owners and strategic, long-term investors. Formed in February 2021 as a Delaware limited liability company, MSD converted to a Maryland limited liability company, MSD Investment, LLC (Jan. 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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