Morgan Stanley Direct Lending Fund Q4 2025 Earnings Report

Morgan Stanley Direct Lending Fund EPS Results

• Actual EPS: $0.49
• Consensus EPS: $0.49
• Beat/Miss: Met Expectations
• One Year Ago EPS: N/A

Morgan Stanley Direct Lending Fund Revenue Results

• Actual Revenue: $49.57 million
• Expected Revenue: $97.30 million
• Beat/Miss: Missed by -$47.73 million
• YoY Revenue Growth: N/A

Morgan Stanley Direct Lending Fund Announcement Details

• Quarter: Q4 2025
• Date: 2/26/2026
• Time: After Market Closes
• Conference Call Date: Friday, February 27, 2026
• Conference Call Time: 10:00AM ET

Morgan Stanley Direct Lending Fund (NYSE:MSDL) (NYSE: MSDL) is a closed-end management investment company that seeks to provide investors with attractive current income and the potential for capital appreciation. The fund primarily invests in senior secured loans and other debt instruments issued by middle-market companies. By focusing on floating-rate structures, it aims to offer a measure of protection against rising interest rates while generating regular cash distributions.

The fund’s investment strategy centers on building a diversified portfolio of direct lending opportunities across a broad range of industries, including healthcare, business services, and industrials. These direct loans are typically negotiated bilaterally between the fund and the borrower, allowing for tailored covenants and structuring features designed to mitigate credit risk. In addition to senior debt, the fund may selectively allocate to second-lien loans, mezzanine debt, and structured credit instruments to enhance yield potential.

Since commencing operations in early 2021, Morgan Stanley Direct Lending Fund has leveraged the global research and credit analysis capabilities of Morgan Stanley Investment Management. The fund’s portfolio management team draws on decades of experience in direct lending and private credit to identify issuers with stable cash flows and strong collateral coverage. While the bulk of investments are focused on U.S.-based borrowers, the fund may also pursue opportunities in select developed markets where credit fundamentals align with its risk-return objectives.

The fund is managed by Morgan Stanley Investment Management’s Credit Investing group, which oversees underwriting, ongoing portfolio monitoring, and risk management. Through a combination of rigorous due diligence and active engagement with portfolio companies, the team seeks to preserve capital and support favorable downside protection. Investors in MSDL gain access to a segment of the credit markets that has traditionally been available only to large institutional lenders.

Morgan Stanley Direct Lending Fund Q4 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Management closed a joint venture (MSDL committed $200M) that is already ~47% called and nearly 50% ramped, which management expects to be accretive to net investment income and to scale toward ~$700M in assets.
• Negative Sentiment: The board reduced the quarterly distribution to $0.45 (a $0.05 cut) to align payouts with lower short-term rates, which could weigh on investor sentiment despite a reported spillover of ~$0.85.
• Positive Sentiment: The portfolio remains predominantly first‑lien (≈96%), diversified across 227 companies with a weighted average loan‑to‑value of ~40% and nonaccruals at ~1.6%, indicating limited systemic credit stress.
• Negative Sentiment: Net investment income declined to $0.49 per share from $0.50 as yields fell ~40 bps q/q due to Fed rate cuts, and management flagged that further cuts could reduce NII by a few cents.
• Positive Sentiment: Management is diversifying and lowering cost of capital through actions including refinancing legacy unsecured debt, executing an inaugural CLO, repricing its asset‑based facility, and renewing a $100M repurchase program (repurchased ~$9M below NAV), supporting NAV and capital efficiency.

Presentation

[Operator]

Welcome to the Morgan Stanley Direct Lending Fund's fourth quarter and full year 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 is being recorded. At this time, I'd like to turn the call over to Sanna Johnson, Head of Investor Relations. Please go ahead.

[Sanna Johnson, Head of Investor Relations at Morgan Stanley Direct Lending Fund]

Good morning, and welcome to Morgan Stanley Direct Lending Fund's fourth quarter and full year 2025 earnings call. I am joined this morning by Michael Occi, Chief Executive Officer, Jeff Day, Co-President, David Pessah, Chief Financial Officer, and Rebecca Shaoul, Head of Portfolio Management. Morgan Stanley Direct Lending Fund's fourth quarter and full year 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 events that will be accessible from the Morgan Stanley Direct Lending Fund website. 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.

[Sanna Johnson, Head of Investor Relations at Morgan Stanley Direct Lending Fund]

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, and without limitation, market 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. You should not place undue 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. To obtain copies of SEC-related filings, please visit our website.

[Sanna Johnson, Head of Investor Relations at Morgan Stanley Direct Lending Fund]

With that, I will now turn the call over to Michael Occi.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

Good morning, everyone. Thank you for joining us today. I'll start with some earnings highlights and our outlook before turning it over to Jeff Day to discuss deployment in the portfolio. David will then walk through our results in more detail before we conclude with Q&A. We generated solid performance in the fourth quarter. In terms of operating results, we earned net investment income of $0.49 per share as compared with $0.50 per share for the prior quarter. Earnings quality remained high, characterized by limited contributions from payment in kind and other income. Our underlying portfolio continues to perform well, and we remain confident that MSDL is well positioned from an execution perspective. As we reflect on 2025, I would be remiss not to acknowledge at the outset that the direct lending industry faced a number of obstacles.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

Though these factors have affected sentiment for the asset class, we think that some of these pressures may soon ease. Starting with asset yields, we acknowledge the contraction in MSDL's portfolio yield since the late 2023 peak. However, that contraction has decelerated, and there's evidence that it may be winding down, driven by the spread stability that we witnessed throughout 2025, the repricing trade having largely run its course, and the Fed now potentially in the late innings of its easing cycle. Secondly, investors have been rightfully looking for cues of credit stress across the industry, given still elevated rates, tariff policy, and other shifts in the economy. Despite these economic dynamics, our borrowers have been resilient, and we believe that our book has held up well. Underperformance in MSDL's portfolio has been isolated and has not generally been driven by systemic factors.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

As we have all seen in recent weeks, the market's latest concern has been artificial intelligence as a threat to software. While we recognize that AI will be disruptive, we are confident in our underwriting process that has explicitly taken AI risk into account for a number of years. As part of this, we benefit from being part of the broader Morgan Stanley platform, a global financial services leader in software and technology. As Jeff will review in more detail, this provides us with immense resources that augment our underwriting process as well as our portfolio management efforts. Lastly, on the deal environment, which has been another area of focus for the market. M&A was famously slow to recover from the post-COVID trough, but we started to see a rebound in PE sponsor activity take hold in the second half of 2025.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

We think that this pickup will be a multi-year phenomenon that will continue to be a structural tailwind for lenders like us. Against this evolving backdrop, we remain focused on protecting NAV, preserving balance sheet flexibility, and providing shareholders with a consistent distribution. These are priorities for our leadership as we position MSDL for long-term success through economic cycles. The board declared a distribution of $0.45 per share for the first quarter of 2026, representing a $0.05 reduction from the prior quarter. This adjustment aligns the distribution with the normalization of short-term interest rates and implies a still robust yield on NAV of approximately 9%. We think that this enables MSDL to deliver a distribution that is durable and consistent with our dividend policy framework that remains rooted in our pursuit of generating attractive and transparent risk-adjusted returns to shareholders.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

We will remain focused on optimizing MSDL's return on NAV without deviating from our thoughtful capital management approach and more defensive investment strategy. During the second half of 2025, we made strides to recalibrate the right-hand side of the balance sheet, including through the refinancing of legacy unsecured debt, the execution of our inaugural CLO, and the repricing of our asset-based facility. Aligned with this mission, we also successfully closed a joint venture that will deploy assets consistent with MSDL's selective credit box and that will utilize appropriate leverage. While this only closed one week ago, the JV is already close to 50% ramped, and we believe will be accretive to MSDL's net investment income all else equal. With the broader support of Morgan Stanley, we have remained true to our strategy of providing loans to high-quality sponsor-backed businesses and leveraging the broader integrated firm in those efforts.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

We also believe that our transparent revenue model, efficient and conservative debt profile, relatively low operating expense base, thoughtful fee structure, and repurchase program highlight our strong alignment with shareholders. With that, I will turn the call over to Jeff Day.

[Jeff Day, Co-President at Morgan Stanley Direct Lending Fund]

Thank you, Michael. Turning to the market environment, we continue to see a constructive opportunity set across the direct lending landscape, supported by improving sponsor engagement and a steady flow of actionable opportunities across a broad range of sectors. Importantly, our origination activity continues to benefit from our differentiated sourcing model. Given our integration within a full-service investment bank, our private equity clients increasingly view us not just as a capital provider, but as a long-term strategic financing partner. As a result, we are seeing consistent access to high-quality transactions sourced through our dedicated origination team as well as other parts of the Morgan Stanley platform. During the quarter, MSDL committed $146 million to new investments, the majority of which were for new LBO transactions, underscoring our continued ability to originate and execute on unique, well-structured opportunities. Overall, fundings were largely offset by repayments.

[Jeff Day, Co-President at Morgan Stanley Direct Lending Fund]

That being said, we have seen a slowdown in repricing activity and believe nearly all loans that stood to benefit from a repricing event have already done so over the last two years. Looking at the non-refinancing volume in the quarter, nearly 70% was driven by new platforms, and we led or co-led all of these transactions. Rounding things out, the existing portfolio also continued to provide a healthy contribution to overall funding activity. From a borrower segmentation perspective, we continue to believe that MSDL's core middle market focus is positioned in the sweet spot of the market, while our origination funnel and capital base afford us the flexibility to take advantage of attractive credit opportunities across the size spectrum.

[Jeff Day, Co-President at Morgan Stanley Direct Lending Fund]

Our median EBITDA for deals closed over the course of the year was approximately $94 million, which was in line with the overall median of our entire portfolio of $90 million. The market remains competitive for the highest quality borrowers with durable cash flow profiles. Encouragingly, though, spreads have demonstrated stability for the fourth consecutive quarter, with weighted average spreads on capital deployed in the mid to high 400 basis point range, evidence of disciplined market conditions despite increased capital availability. We believe our defensive orientation remains a key differentiator with a conservative weighted average loan-to-value of just below 40% as of the fourth quarter. In addition, we have continued to see positive trends in key portfolio metrics. Revenue and EBITDA growth rates remained healthy.

[Jeff Day, Co-President at Morgan Stanley Direct Lending Fund]

We saw an increase in the weighted average interest coverage ratio for our borrowers year-over-year, while PIK income as a percentage of total income declined quarter-over-quarter. Non-accruals for the quarter ticked up modestly, we are pleased that the portfolio remains in very good shape, and the mark-to-market activity that took place during the fourth quarter was a result of a small number of credits that have been underperformers in prior quarters. Digging a bit deeper into our portfolio construction, we continue to believe that MSDL's portfolio remains relatively insulated from direct tariff exposure and broader cycle volatility, with our software investments continuing to demonstrate strong resilience. We remain overweight in professional services businesses and underweight in more trade and consumer-oriented verticals, as well as healthcare borrowers with potential reimbursement risk relative to other BDCs in the market.

[Jeff Day, Co-President at Morgan Stanley Direct Lending Fund]

Looking specifically at our software portfolio, our focus remains squarely on mission-critical system of record platforms, including ERP systems. These businesses sit at the core of their customers' operations, often in complex or regulated environments, and frequently house proprietary data. As a result, they benefit from long sales cycles, high switching costs, strong renewal dynamics, and durable recurring cash flows. In our view, these are typically the last systems a company would consider replacing, even in periods of economic stress. The burden of accuracy for these solutions is remarkably high, and while AI has already or will inevitably be integrated into each of these investments to increase efficiency or improve the user experience, we believe it will be challenging for AI solutions to completely replace these critical software solutions.

[Jeff Day, Co-President at Morgan Stanley Direct Lending Fund]

AI is a disruptive technology by nature, but it is not new to our evaluations of an investment or assessment of our existing portfolio. When we look at new investments, we take a disciplined and analytical approach, leveraging Morgan Stanley's best-in-class software advisory insights as part of our due diligence process to validate competitive positioning, assess moats, evaluate enterprise value, and identify potential risks that threaten terminal value well in advance. Since our inception, our robust underwriting approach has included an assessment of potential risks and opportunities associated with AI adoption, competitive dynamics, and long-term enterprise value. We believe this approach enhances our ability to underwrite technology risk thoughtfully rather than react to headlines.

[Jeff Day, Co-President at Morgan Stanley Direct Lending Fund]

In addition, we have been utilizing a proprietary AI scorecard, which we apply to every new investment and is updated on a quarterly basis as part of our ongoing portfolio review process, aiding us in continually monitoring and proactively assessing potential competitive threats or business model disruption. In summary, we're confident about the quality of our existing book and our unique capabilities as a leader in this marketplace. Our sourcing engine is unearthing attractive opportunities and an improving M&A backdrop, and our underwriting discipline equips us well to continue to navigate an evolving market environment for the benefit of shareholders. I will now hand the call over to David Pessah.

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

Thank you, Jeff. At quarter end, our portfolio totaled $3.8 billion at fair value, maintaining our strong first lien focus comprising of 96% first lien debt, 2% second lien debt, and the remainder in equity and other investments. The portfolio remains well-diversified with 227 portfolio companies across 35 industries and an average borrower exposure of approximately 40 basis points. Regarding credit metrics at quarter end, the weighted average loan-to-value of our portfolio companies was approximately 40%, with the median EBITDA finishing the quarter virtually unchanged at $90 million. The weighted average yield on debt and income-producing investments was 9.3% at cost and 9.5% at fair value, marking a decline of roughly 40 basis points quarter-over-quarter, primarily due to the decline in base rates.

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

In terms of credit quality, we removed Atlas Purchaser from non-accrual and placed DCA Investment Holdings on non-accrual. Our non-accrual rate stood at 160 basis points of the total portfolio at cost. Underneath the $146 million of new investment commitments that Jeff highlighted were loans to 17 new portfolio companies and 15 existing ones. Investment fundings, including those for existing commitments, amounted to about $164 million, offset by $163 million in repayments. Moving on to our financial results for the fourth quarter. Total investment income was $96.6 million, down from $99.7 million in the previous quarter, largely attributable to the recent Fed rate cuts. PIK income remained relatively low, which declined by 20 basis points to 3.9% of total income for the quarter.

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

Total expenses decreased to $54.2 million from $56 million in the prior quarter, largely due to a reduction in incentive fees earned from our incentive fee cap. Net investment income for the fourth quarter was $42.4 million or $0.49 per share. The net change in unrealized and realized losses for the fourth quarter was $13.7 million, driven by underperformance in a small number of portfolio companies. Net realized losses for the period were primarily due to the restructuring of and sale of Atlas Purchaser. As of December 31st, our total assets were $3.9 billion and total net assets was $1.75 billion. Our ending NAV per share for the fourth quarter was $20.26 compared to $20.41 in the prior period.

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

The debt-to-equity ratio increased to 1.20x from 1.17x in the previous quarter, with our unsecured debt comprising 54% of total funded debt at the end of the quarter. As Michael noted, a key focus throughout 2025 has been diversifying our funding sources and lowering our overall cost of capital. During the quarter, we repurchased about $9 million worth of our shares at prices below NAV through a 10b5-1 program administered by a third party. We also renewed our repurchase program and maintained the overall size of the program by $100 million, which is sizable as a percentage of market cap and reflects our commitment to delivering long-term shareholder value. In February, we began investment operations for the joint venture referenced earlier.

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

The vehicle has total equity commitment of up to $250 million, of which $200 million is committed from MSDL. To date, approximately 47% of the total equity commitment has been called, and the joint venture has made $372.8 million investment commitments across 51 portfolio companies. Our objective is to scale this vehicle over time to approximately $700 million in assets. Regarding distributions, we paid a $0.50 regular distribution in the fourth quarter. Additionally, our Board of Directors declared a regular distribution of $0.45 per share for the first quarter to shareholders of record on March 31st, 2026. As of December 31st, 2025, our spillover is approximately $0.85. With that, operator, please open the line for questions.

[Operator]

Certainly. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment and tell everyone the opportunity to signal. We'll take our first question from Rick Shane with JPMorgan.

[Rick Shane, Analyst at JPMorgan]

Hey, guys. Thanks for taking my question this morning. Look, you know, you guys are demonstrating the ability to do more than one thing at a time, in terms of deploying capital, repurchasing shares. I am curious when you sort of weigh those investment opportunities and the potential returns, what you think is most compelling, and also when you think about the use of leverage in this environment on your own balance sheet to lean into one or both of those tactics?

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

Yeah, Rick, it's great to have you on the line. Good question. I'll start, and then Dave can give you a little bit more nuance on the buyback program. You know, we've got multiple capital allocations at our disposal, and we think they can all at times be value generative. It is a balance, as you suggest. Leverage is an input into that. Regular way deal deployment and the economics of that evolve, day by day, quarter by quarter. We continue to find compelling opportunities in the marketplace to go and deploy capital and re-refinance legacy investments. We think that that can actually be even more attractive in a, in a volatile environment. It's really about optimization of these different tools, but we can give you a little bit more color on the buyback activity.

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

Yeah. Our buyback plan, as kind of Michael alluded to, our capital allocation remains prudent. In the fourth quarter alone, we repurchased $9 million, which is up meaningfully from the third quarter. We're very committed to our buyback program. We understand the accretion benefits associated with that. Most recently, our board, as of yesterday, just authorized a fresh renewal of the program for up to $100 million in size, which we think is relatively sizable in the context of our current market cap.

[Rick Shane, Analyst at JPMorgan]

Got it. Thank you. It's great to be able to join the call. I do feel like I'm jumping back into the deep end a little bit at the moment, though.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

I can imagine. Thank you.

[Operator]

We'll go next to Heli Sheth with Raymond James.

[Heli Sheth, Analyst at Raymond James]

Good morning. Thanks for the question. As you begin launching this new JV, any further insight into the pace or trajectory of ramping the JV? How should we think about capital deployment and earnings contribution over the next few quarters?

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

Yeah, no, good question. I'll just give you a quick background on the JV and kind of how we're thinking about the utilization of it. As, as mentioned some in the, in the prepared remarks, we put incremental capital to work through that newly formed JV. We committed $200 million in total size. As mentioned, we nearly called half of that already. Total investments, it's about $373 million across 51 portfolio cap companies. There's a credit facility down there of a total debt commitment about $500 million in size. The idea behind it, I think it just provides capital efficiencies across our portfolio. Then how we're thinking about terms of just overall structural and size.

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

You know, the goal is to get it north of $700 million in funded assets. It can take anywhere from, you know, four to six quarters is our projection in terms of getting there. We'll be prudent in terms of what we're actually thinking about and scaling that. In terms of the actual investments that are in there, it's honoring our same narrow credit box that's similar to how we've been deploying capital up at MSDL. I'm thinking about our investment strategy as one and the same between, you know, the normal way, of course, at MSDL as well as within the joint venture itself.

[Heli Sheth, Analyst at Raymond James]

Got it. Thanks for the color. A quick follow-up here, switching gears to non-accruals. This quarter across the BDC space, we've seen three different non-accruals in the dental space, including DCA, which is in your portfolio. Are you seeing anything concerning about the dental space specifically or are there any specific sectors within the broader healthcare industry that seem concerning?

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

Yeah, Heli, it's a great question. I think, as we said at the beginning, the portfolio continues to exhibit very good health. Credit generally across the book has exhibited pretty good trends across a bunch of different dimensions. You look at growth, both top line and EBITDA, as we talked about the stability and leverage and LTV, the kind of grind higher and interest coverage. On a non-accrual front, we had the one-off, one on. You know, you ask about dental roll-ups. There's probably a pattern there in terms of, you know, some weakness we've seen there as we've talked previously about some weakness in logistics. In both of those categories, which is really the extent of kind of industry related themes that we would highlight as underperforming. We have limited exposure to both of those.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

More broadly, away from that, underperformance truly is idiosyncratic.

[Heli Sheth, Analyst at Raymond James]

Got it. Thanks for the color. Appreciate it.

[Operator]

We'll move next to Kenneth Lee with RBC Capital Markets.

[Kenneth Lee, Analyst at RBC Capital Markets]

Hey, good morning. Thanks for taking my question. Just one follow-up on the, on the new JV there. Just by my math, it sounds as if the overall portfolio allocation could be around 15% or so. Just wanna check that. What do you see in terms of just overall longer term allocation to this JV? Thanks.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

Yeah, Ken, thanks for the question. The 200 max equity commitment for MSDL equates to a 5% allocation relative to the total portfolio. When we think about the economic upside potential for MSDL, we would point you to that type of magnitude relative to the whole. The way to think about it, to go back to what Dave alluded to, in being kind of having half of the capital already called, roughly 2.5% of that full allocation from the start.

[Kenneth Lee, Analyst at RBC Capital Markets]

Gotcha. In terms of the share repurchase program, the new one, the $100 million, just to clarify, is this a discretionary program? You know, what sorts of restrictions are there around the repurchases there? Thanks.

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

Yeah, no, it's similar to the plan that we had prior. There are parameters in place. It's programmatic and administered by a third party that does have some governors in terms of, you know, the overall plan in itself. Again, it's all being facilitated by the third party.

[Kenneth Lee, Analyst at RBC Capital Markets]

Gotcha.

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

For instance, yeah, the various parameters such as price and other capital structural considerations that go into it.

[Kenneth Lee, Analyst at RBC Capital Markets]

Gotcha. Very helpful there. Thanks again.

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

Thanks Ken.

[Operator]

We'll go next to Ethan Kaye with Lucid Capital Markets.

[Ethan Kaye, Analyst at Lucid Capital Markets]

Hey, guys. Thanks for taking the questions. On the JV, the 47% that's, you know, currently invested sounds like may have been a kind of one-time asset purchase. Firstly, is that the case? Secondly, did that, you know, were assets sold down from kind of MSDL's balance sheet? More generally, you know, is that the strategy where, you know, MSDL will be selling assets down to the JV or are these kind of, you know, what will the overlap look like, I guess, is the question.

[David Pessah, CFO at Morgan Stanley Direct Lending Fund]

Yeah. I'll start and let Michael or Jeff add anything. It wasn't any assets that were dropped down from MSDL into the JV. It was actually an acquired portfolio of directly originated senior secured loans across our book.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

Yeah. The logic of having warehoused these assets in advance of the formal closing of the joint venture was designed to accelerate the potential impact on MSDL for the benefit of shareholders, so we weren't starting that ramp from zero day one. As far as overlap is concerned, Ethan, it's a good question. It is the same mandate. There will inevitably be overlap as we think about specific allocations at the borrower level, industry level. Importantly, we're gonna be laser focused as far as our portfolio management activities are concerned to monitor for single borrower exposures, industry exposures on a look-through basis, taking into account the JV.

[Ethan Kaye, Analyst at Lucid Capital Markets]

Great. Appreciate that. One or two more just on the dividend. You know, you guys comfortably covered the new dividend by about $0.04 per share this quarter. With that being said, there are still, you know, some NII headwinds out there. I guess the question is, you know, how confident are you that, you know, you can earn this NII level or this dividend level through the rate cycle? Is this kind of something you see continuing to have to be reassessed, you know, 6-12 months down the road?

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

Yeah, Ethan, I'll try to break it down, maybe starting from the bridge for the $0.49 relative to the $0.50 in the prior quarter. The $0.01 effectively was largely driven by the September cut impact, part of the October Fed cut impact. Relative to the $0.49 baseline moving forward and focused on the potential impact of SOFR, this quarter, the first quarter of 2026, is really the first quarter where we're going to see the impact of all of the Fed cuts that have happened previously, including the December cut. Probably a couple of pennies directionally impact relative to the $0.49 as we think about all else equal, the impact of the Fed cuts that we've seen.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

As you allude to, as we talked about in the earlier remarks, there are a couple of additional cuts expected from the Fed over the course of the year and into 2027. That obviously ebbs and flows. That can introduce additional drag in NII. Importantly, the joint venture which was obviously relevant for the prior questions, can provide incremental ROE and NII to MSDL. It's going to ramp gradually, but as we talked about, it's kind of 50% there out of the gate. We wouldn't expect meaningful impact in the first quarter given the timing of that closing, but we would stand for this to potentially be a contributor beginning with the second quarter and ramping from there. A lot of these variables we're taking into account as we think about the dividend decision with the board.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

There's no way to fully bulletproof any level, including the one that we decided on at the $0.45, as we don't control monetary policy spreads and other variables. We feel pretty good about the size of the distribution over the medium term based on what we know today.

[Ethan Kaye, Analyst at Lucid Capital Markets]

Great. It would be easier if you did control monetary policy, but great. Thanks, guys.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

Sure would.

[Operator]

Once again, ladies and gentlemen, if you had a question, it is star one. We will move next to Doug Harter with UBS.

[Cory Johnson, Analyst at UBS]

Hi, this is Cory Johnson on for Doug. I just had a question, I guess, in regards to the dividend, you know, I guess given where you guys are at in terms of like earnings, and also what spill over that you have, should we expect, I guess, any supplemental or special dividends going forward?

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

Yes, Cory, it's a good question. We spent a lot of time thinking about different permutations. Prior to the IPO, we actually had the supplemental formula that was in a different environment, a rising rate environment. We ultimately concluded to kinda keep it simple and transparent back to kinda some of the principles that we're focused on as it relates to dividend policy. As we just talked about, we feel pretty comfortable about the level, based on the earnings model and kind of the variables that we can account for today. Should there be excess income at year-end, that's something the board can evaluate in terms of a potential for an annual special.

[Cory Johnson, Analyst at UBS]

Got it. Just one other question. You know, it's given all of the noise currently about, you know, AI threats and disruption and such. Are there any areas which you maybe went to historically, which you're staying clear of now, or you know, any areas that, you know, would give you concern or any areas in particular that you are leaning into, or looking to lean into more?

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

Yeah, the short answer is no. We have had a high bar as it relates to capital deployment from the very beginning. It's part and parcel to our more defensive model. That applies to software. It applies to every industry that we invest in. You know, within that we're focused on, of course, the underlying business at the very top of the list, but also structure, leverage, pricing, et cetera. That certainly applies to software where AI has been part of the equation as it relates to the original underwrite for a while now, and certainly, on an ongoing basis. It's not just software. As we evaluate the potential impact, positive or negative from AI, to other businesses away from that industry vertical. In short, the industry allocations are gonna ebb and flow.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

They're gonna ebb and flow based on conscious decisions that we're making on a regular basis to deploy capital. Certainly there's a governor that we have in mind as it relates to, you know, making sure at the portfolio level that there's significant diversification throughout.

[Cory Johnson, Analyst at UBS]

Great. Thank you.

[Operator]

At this time, I would like to turn the call back to Michael Occi for closing remarks.

[Michael Occi, CEO at Morgan Stanley Direct Lending Fund]

Thank you. On behalf of the management team, I greatly appreciate you joining us today along with your support for Morgan Stanley Direct Lending Fund. As I've mentioned before, our platform benefits from Morgan Stanley's global resources and our continued focus on MSDL as our most visible pool of capital. The firm has continued to support the build-out of our team as part of the ongoing scaling of MSIM's credit business. I'm very pleased with our continued execution, particularly in the face of the more eventful backdrop. We're seeing potentially constructive market developments, and our strategy and structure position us to win in the marketplace. We also remain methodical about optimizing the business with the goal of delivering high quality returns to investors. We look forward to providing an update on our first quarter 2026 earnings call in May.

[Operator]

Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.

Participants

Executives

• David Pessah, CFO
• Jeff Day, Co-President
• Michael Occi, CEO
• Sanna Johnson, Head of Investor Relations

Analysts

• Cory Johnson, Analyst at UBS
• Ethan Kaye, Analyst at Lucid Capital Markets
• Heli Sheth, Analyst at Raymond James
• Kenneth Lee, Analyst at RBC Capital Markets
• Rick Shane, Analyst at JPMorgan