Morgan Stanley Direct Lending Fund NYSE: MSDL reported lower first-quarter net investment income as recent Federal Reserve rate cuts flowed through its floating-rate portfolio, but management said credit performance remained stable and lender economics are beginning to improve.
The business development company earned net investment income of $40.5 million, or $0.47 per share, for the first quarter of 2026, down from $0.49 per share in the prior quarter. Chief Executive Officer Michael Occi said the decline was “primarily driven by the impact of the December rate cut,” while adding that earnings quality remained high.
MSDL paid a $0.45 per-share regular distribution during the quarter, producing dividend coverage of 104%. The board also declared a $0.45 per-share regular distribution for the second quarter of 2026, payable to shareholders of record as of June 30, 2026.
Occi said the dividend level, which was modified in February, is intended to align payouts with forward earnings power in a more normalized rate environment. “We view the dividend policy as appropriate over the medium term based on MSDL's earnings levers in the context of the current market environment,” he said.
Portfolio Remains Focused on First-Lien Lending
Chief Financial Officer David Pessah said MSDL’s portfolio totaled $3.7 billion at fair value at quarter-end. The portfolio was approximately 94% first-lien debt, 2.5% in a joint venture, with the remainder in second-lien, equity and other investments.
The portfolio included 227 companies across 36 industries, with average borrower exposure of about 40 basis points. Pessah said the weighted average loan-to-value across the portfolio was approximately 39%, while median EBITDA remained relatively unchanged at $91 million.
The weighted average yield on debt and income-producing investments was flat quarter-over-quarter at 9.3% at cost and 9.5% at fair value, which Pessah said reflected a relatively stable SOFR curve over the past two quarters.
Total investment income declined to $89.1 million from $96.6 million in the prior quarter, primarily due to Fed rate cuts. Total expenses also declined, to $48.6 million from $54.2 million, helped by MSDL’s predominantly floating-rate liability structure and lower incentive fees tied to realized losses from the 48forty restructuring.
Credit Metrics Stable, Non-Accruals Edge Lower
Management said credit performance remained generally stable during the quarter. Non-accruals decreased modestly to 1.5% of the total portfolio at cost, compared with 1.6% in the prior quarter.
Pessah said two investments were removed from non-accrual, including 48forty, while three new investments were added: Abercorn Group Holdings, Vardiman Black Holdings, also known as Specialty Dental Brands, and KWOR Acquisition, related to a preferred equity position.
The fund recorded a $45 million net change in unrealized depreciation and realized losses during the quarter. Pessah said unrealized losses were driven by underperformance in a small number of portfolio companies and broader spread widening, particularly in software. The weighted average portfolio mark declined 70 basis points quarter-over-quarter.
Rebecca Shaoul, head of portfolio management, said during the question-and-answer session that some movement in lower internal risk-rating categories was “driven by a small number of companies and company-specific issues rather than more broad-based issues.” She said 95% of the portfolio remained risk-rated 2 or better.
Joint Venture Expected to Add to Income
MSDL commenced investment operations at Capstone Lending, its joint venture, in February. The vehicle has up to $250 million in total equity commitments, including $200 million from MSDL. As of quarter-end, about 47% of total equity commitments had been called, supporting approximately $383 million of investment commitments across 52 portfolio companies in 23 industries.
Pessah said the weighted average yield on the joint venture’s debt and income-producing investments was 8.7% at cost, and management expects to scale the vehicle over time to approximately $700 million in assets. He said the company expects “a meaningful contribution” to total investment income beginning in the second quarter, reflecting a full quarter of operations.
In response to a question from Wells Fargo Securities analyst Finian O’Shea, Occi said the joint venture is expected to ramp mainly through organic deployment over the next four to six quarters, rather than through another large portfolio dropdown. Occi said the joint venture contributed about $0.01 to first-quarter net investment income and could add $0.02 to $0.03 per quarter at full ramp.
Origination Activity Selective as Spreads Improve
Co-President Jeff Day said the private credit market remains constructive despite headline volatility, with stable fundamentals and improving lender economics. He said spreads on new deployments widened by approximately 25 basis points in the first quarter, accompanied by higher original issue discounts. Through the second quarter to date, economics had moved another 25 basis points or more, while documentation continued to shift in lenders’ favor.
Day said new investments are generally including tighter EBITDA definitions, greater use of financial covenants and stronger call protection. He also said higher-for-longer rate dynamics and refinancing needs are creating a favorable supply-demand imbalance for capital providers.
During the quarter, MSDL closed 13 first-lien senior secured transactions totaling $50 million in new commitments. These included four loans to new borrowers, two complete refinancings of existing borrowers and seven incremental commitments. Day said MSDL closed on just 5% of the deals it originated over the 12 months ended March 31, underscoring its selective approach.
Investment fundings, including existing commitments, totaled about $174 million, offset by $240 million in repayments. Occi said in the Q&A that repayments were driven by several factors, including public market takeouts, refinancings MSDL chose not to participate in and sales to strategic buyers.
Buybacks Continue as Shares Trade Below NAV
MSDL ended the quarter with total assets of $3.8 billion and net assets of $1.69 billion. Net asset value per share was $19.81, down from $20.26 in the prior period. The debt-to-equity ratio rose to 1.22 times from 1.20 times, and unsecured debt accounted for 55% of total funded debt.
The company repurchased approximately $15 million of shares during the quarter at prices below net asset value, generating about $0.05 of NAV accretion. MSDL had renewed its share repurchase program at $100 million.
Occi said management is balancing buybacks with leverage, dividend commitments and deployment opportunities. “Leverage is a governor, and we're going to continue to balance the accretion and the return opportunity on the deployment side as well,” he said.
Looking ahead, Occi said the company views the $0.47 per-share quarterly net investment income figure as “directionally” a new baseline, while noting that future results will depend on factors including spreads and credit performance. He said MSDL is seeing a credit repricing in the market and believes it is positioned to take advantage of the changing environment.
About Morgan Stanley Direct Lending Fund NYSE: MSDL
Morgan Stanley Direct Lending Fund 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.
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