Morgan Stanley Direct Lending Fund(MSDL) - 2021 Q1 - Quarterly Report

Part I. Financial Information Consolidated Financial Statements This section presents the unaudited consolidated financial statements for Q1 2021, including balance sheets, operations, cash flows, investments, and notes Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP reviewed the interim financial information, finding no material modifications needed for GAAP conformity - The independent auditors, Deloitte & Touche LLP, are not aware of any material modifications that should be made for the interim financial information to be in conformity with U.S. Generally Accepted Accounting Principles (GAAP)[11] Consolidated Statements of Assets and Liabilities This statement provides a summary of the company's financial position, detailing assets, liabilities, and net assets as of March 31, 2021, and December 31, 2020 Consolidated Balance Sheet Summary (in thousands) | Metric | March 31, 2021 (unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $1,023,895 | $656,806 | | Total Investments, at fair value | $947,979 | $636,981 | | Cash | $64,154 | $11,263 | | Total Liabilities | $633,682 | $355,186 | | Debt | $592,350 | $333,850 | | Total Net Assets | $390,213 | $301,620 | | Net Asset Value per share | $20.49 | $20.08 | Consolidated Statements of Operations This statement details the company's financial performance, including investment income, expenses, and net increase in net assets for the three months ended March 31, 2021 and 2020 Consolidated Statement of Operations Summary (in thousands) | Metric | Three months ended Mar 31, 2021 | Three months ended Mar 31, 2020 | | :--- | :--- | :--- | | Total Investment Income | $17,345 | $923 | | Interest Income | $14,956 | $917 | | Net Expenses | $7,281 | $814 | | Interest Expense | $2,758 | $419 | | Management & Incentive Fees | $5,085 | $66 | | Net Investment Income | $10,059 | $109 | | Net change in unrealized appreciation (depreciation) | $4,642 | $(3,790) | | Net Increase (Decrease) in Net Assets | $14,701 | $(3,681) | | Net Earnings Per Share (basic and diluted) | $0.87 | $(1.19) | Consolidated Statements of Changes in Net Assets This statement outlines the changes in net assets, driven by operations and capital transactions, for the three months ended March 31, 2021 - For the three months ended March 31, 2021, net assets increased by $88.6 million, from $301.6 million to $390.2 million, driven by a $14.7 million increase from operations and a $73.9 million net increase from capital transactions[22] Consolidated Statements of Cash Flows This statement summarizes cash inflows and outflows from operating and financing activities, showing the net increase in cash for the three months ended March 31, 2021 and 2020 Cash Flow Summary (in thousands) | Cash Flow Activity | Three months ended Mar 31, 2021 | Three months ended Mar 31, 2020 | | :--- | :--- | :--- | | Net cash (used in) operating activities | $(276,456) | $(83,064) | | Net cash provided by financing activities | $329,347 | $217,098 | | Net increase in cash | $52,891 | $134,034 | | Cash at end of period | $64,154 | $134,069 | Consolidated Schedule of Investments This schedule provides a detailed breakdown of the investment portfolio by type, fair value, and industry diversification as of March 31, 2021 Portfolio Composition by Investment Type (March 31, 2021) | Investment Type | Fair Value (in thousands) | % of Total Investments | | :--- | :--- | :--- | | First Lien Debt | $841,897 | 88.8% | | Second Lien Debt | $96,935 | 10.2% | | Other Securities | $9,147 | 1.0% | | Total | $947,979 | 100.0% | - The investment portfolio is diversified across 21 industries, with the largest concentrations by fair value in IT Services (15.7%), Insurance (14.1%), and Commercial Services & Supplies (11.3%) as of March 31, 2021[123] - As of March 31, 2021, the company had total unfunded loan commitments of $380.9 million, primarily consisting of delayed draw term loans and revolvers[48] Notes to Consolidated Financial Statements These notes provide essential details on the company's accounting policies, investment adviser fees, fair value measurements, and financial highlights - The company is an externally managed Business Development Company (BDC) focused on lending to U.S. middle-market companies and has elected to be treated as a Regulated Investment Company (RIC) for tax purposes[65] - The company pays its Investment Adviser a base management fee (1.0% of average gross assets, partially waived pre-listing) and a two-part incentive fee based on income and capital gains[104][105][107] - As of March 31, 2021, the vast majority of the investment portfolio, valued at $924.2 million (97.5% of total), is classified as Level 3, indicating fair value is determined using significant unobservable inputs[131][138] Financial Highlights (Q1 2021 vs Q1 2020) | Metric | For the three months ended Mar 31, 2021 | For the three months ended Mar 31, 2020 | | :--- | :--- | :--- | | NAV, beginning of period | $20.08 | $20.00 | | Net investment income per share | $0.59 | $0.04 | | Net increase (decrease) in NAV from operations | $0.84 | $(1.70) | | NAV, end of period | $20.49 | $18.47 | | Total return based on NAV | 4.27% | (7.65)% | | Asset coverage ratio | 165.88% | 184.18% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 financial performance, investment strategy, portfolio growth, liquidity, and capital resources, emphasizing post-COVID-19 portfolio construction and sufficient capital - The company's investment objective is to achieve attractive risk-adjusted returns by investing primarily in directly originated senior secured term loans to U.S. middle-market companies backed by financial sponsors[181] - As of March 31, 2021, the portfolio consisted of investments in 53 companies across 21 industries, with 99.8% of the debt portfolio being floating rate and a weighted average yield of 7.4%, all performing as expected[198][207] - Liquidity is strong, with $64.2 million in cash, approximately $407.7 million available under credit facilities, and $1.12 billion in uncalled capital commitments as of March 31, 2021[222] Quantitative and Qualitative Disclosures about Market Risk This section details the company's exposure to market risks, including valuation and interest rate risks, with a sensitivity analysis on net income impacts from rate changes - The company's primary market risks are valuation risk, due to its portfolio of illiquid securities, and interest rate risk, as it funds floating-rate investments with borrowings[244][245][247] Interest Rate Sensitivity Analysis (Annualized Impact on Net Income) | Basis Point Change | Net Income Impact (in thousands) | | :--- | :--- | | Up 300 bps | $3,492 | | Up 100 bps | $(3,675) | | Down 100 bps | $611 | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes to internal control over financial reporting - The company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of March 31, 2021[251] - No material changes to the company's internal control over financial reporting occurred during the quarter ended March 31, 2021[252] Part II. Other Information Legal Proceedings The company is not currently subject to any material legal proceedings, nor is it aware of any threatened against it - As of the filing date, the company is not a party to any material legal proceedings[254] Risk Factors No material changes to previously disclosed risk factors from the Annual Report on Form 10-K were identified during the quarter - The company refers readers to the risk factors disclosed in its Annual Report on Form 10-K, indicating no material changes during the quarter[255] Unregistered Sales of Equity Securities and Use of Proceeds The company issued Common Stock through its Private Offering during the quarter, conducted as unregistered sales under Section 4(a)(2) and Regulation D - During the quarter, the company issued Common Stock through its Private Offering, which are considered unregistered securities under the Securities Act[257] Exhibits This section indexes exhibits filed with Form 10-Q, including a credit agreement amendment and CEO/CFO certifications required by Sarbanes-Oxley - The exhibit index lists required filings, including an amendment to the Revolving Credit and Security Agreement and CEO/CFO certifications pursuant to Sarbanes-Oxley[263]