KBRA Assigns Ratings to Morgan Stanley Direct Lending Fund

Rhea-AI Summary

KBRA has assigned a BBB rating with a Stable outlook to Morgan Stanley Direct Lending Fund (MSDL). The rating reflects MSDL's strong connection to Morgan Stanley Asset Management's $1.5 trillion AUM and its access to MS's ecosystem. As of Q3 2024, MSDL maintains a $3.6 billion investment portfolio, with 96% in senior secured first lien loans across 200 companies in 33 industries. The portfolio shows solid asset quality with only 0.2% of investments on nonaccrual status. MSDL operates with a gross leverage of 0.99x and has $1.1 billion in bank credit availability. The company completed its IPO on January 26, 2024, and operates as a Business Development Company (BDC).

Positive

• Strong portfolio quality with only 0.2% of investments on nonaccrual status
• 96% of portfolio in senior secured first lien loans
• Diversified portfolio across 200 companies and 33 industries
• Conservative leverage at 0.99x, below target range of 1.0x-1.25x
• Strong liquidity with $1.1 billion credit availability and $88.4 million cash

Negative

• operating history since January 2020
• Exposure to high interest rates, inflation, and geopolitical risks
• Retained earnings constraints due to RIC status
• $275 million notes due September 2025 requiring refinancing

Insights

Financial Analyst

The BBB rating assignment with Stable outlook from KBRA represents a significant milestone for Morgan Stanley Direct Lending Fund. The $3.6 billion portfolio shows strong fundamentals with 96% first-lien senior secured loans and minimal non-accruals at 0.2%. The conservative leverage of 0.99x against a target range of 1.0x-1.25x demonstrates prudent management. Key strengths include access to Morgan Stanley's $1.5 trillion AUM platform and robust sponsor relationships. The diversified portfolio across 200 companies with $84.7 million median EBITDA suggests focus on middle-market lending with solid credit quality. However, investors should note MSDL's operating history and potential risks from high interest rates and economic uncertainties.

Credit Risk Analyst

The credit profile exhibits strong fundamentals with multiple layers of protection. The high proportion of senior secured loans provides structural protection, while the diversified portfolio across 33 industries mitigates concentration risk. The focus on defensive sectors like Software (17.7%) and Insurance (12.6%) offers cyclical resilience. The solid funding mix with 57% unsecured debt provides financial flexibility. Liquidity appears robust with $1.1 billion in credit availability plus $88.4 million cash against $275 million notes due in 2025. The high internal ratings with 98.3% of portfolio rated 2 or higher indicates strong underlying credit quality, though the unseasoned nature of the portfolio warrants monitoring.

NEW YORK--(BUSINESS WIRE)-- KBRA assigns issuer and senior unsecured debt ratings of BBB to Morgan Stanley Direct Lending Fund (NYSE: MSDL or "the company"). The rating Outlook is Stable.

Key Credit Considerations

The ratings and Outlook are supported by Morgan Stanley Direct Lending Fund's strong ties to the ~$1.5 trillion assets under management and/or supervision from 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 about $19 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 3Q24, MSDL's $3.6 billion diversified investment portfolio at fair value (FV), comprises approximately 96% senior secured first lien loans spread across 200 companies in 33 industries, primarily in less cyclical sectors. The investment portfolio's median EBITDA is $84.7 million, and the top three sectors are Software (17.7%), Insurance (12. 6%), and Commercial Services and Supplies (10.5%). Asset quality is solid with only two portfolio companies on nonaccrual status, representing 0.2% of total investments at both FV and cost as of 3Q24. Despite a relatively unseasoned portfolio due to MSDL's short operating history, 98.3% of the portfolio maintains an internal rating of 2 or higher, indicating that loans are performing at or above expectations at underwriting.

At 3Q24, MSDL maintained gross leverage of 0.99x, 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 3Q24, ~57% of the company’s total debt outstanding is senior unsecured, providing greater financial flexibility and low asset encumbrance for the benefit of unsecured noteholders. Liquidity remains solid with sufficient bank credit availability of $1.1 billion and $88.4 million of cash and cash equivalents set against $275 million of notes due September 2025 and total unfunded commitments of $552.4 million at 3Q24.

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 an 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.

To access ratings and relevant documents, click here.

Methodologies

• Financial Institutions: Finance Company Global Rating Methodology
• ESG Global Rating Methodology

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

Doc ID: 1007249

View source version on businesswire.com: https://www.businesswire.com/news/home/20241216854362/en/

Analytical Contacts



Teri Seelig, Managing Director (Lead Analyst)

+1 646-731-2386

teri.seelig@kbra.com

Kevin Kent, Director

+1 301-960-7045

kevin.kent@kbra.com

Joe Scott, Senior Managing Director (Rating Committee Chair)

+1 646-731-2438

joe.scott@kbra.com



Business Development Contact



Constantine Schidlovsky, Senior Director

+1 646-731-1338

constantine.schidlovsky@kbra.com

Source: Kroll Bond Rating Agency, LLC

FAQ

What is the current credit rating assigned to MSDL by KBRA?

KBRA assigned MSDL a BBB issuer and senior unsecured debt rating with a Stable outlook.

What percentage of MSDL's portfolio is in senior secured first lien loans as of Q3 2024?

96% of MSDL's $3.6 billion investment portfolio consists of senior secured first lien loans.

What is MSDL's current leverage ratio compared to its target range?

MSDL's gross leverage is 0.99x, slightly below its target range of 1.0x to 1.25x.

When did MSDL complete its initial public offering?

MSDL completed its initial public offering on January 26, 2024.

What is MSDL's portfolio nonaccrual rate as of Q3 2024?

MSDL's nonaccrual rate is 0.2% of total investments at both fair value and cost.