Part I Business Overview MSDL is a BDC and RIC focused on senior secured loans to U.S. middle-market companies - The company is a BDC and RIC focused on lending to U.S. middle-market companies, defined as those with annual EBITDA of approximately $15 million to $200 million1516 - The investment strategy primarily targets directly originated senior secured term loans (first and second lien) in sponsor-backed companies, with a focus on non-cyclical industries and long-term credit performance173234 - On January 26, 2024, the company closed its Initial Public Offering (IPO), issuing 5,000,000 shares at $20.67 per share and trades on the NYSE under the symbol "MSDL"22 - The company is externally managed by MS Capital Partners Adviser Inc, an indirect subsidiary of Morgan Stanley, which managed approximately $18.5 billion in committed capital as of January 1, 20241526 Investment Portfolio The portfolio is heavily concentrated in senior secured debt to US middle-market companies across diverse industries Portfolio Composition as of December 31, 2023 | Investment Type | Fair Value (in thousands) | % of Total Fair Value | | :--- | :--- | :--- | | First Lien Debt | $3,004,544 | 94.1% | | Second Lien Debt | $132,415 | 4.1% | | Other Investments | $56,602 | 1.8% | | Total | $3,193,561 | 100.0% | Key Portfolio Statistics (as of Dec 31, 2023 vs Dec 31, 2022) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Number of portfolio companies | 172 | 150 | | Weighted avg. yield on debt (at cost) | 12.0% | 10.9% | | % of floating rate debt (at fair value) | 99.9% | 100% | | % of portfolio on non-accrual (at cost) | 0.6% | 0.1% | | % of debt investments with financial covenants | 74.6% | 78.0% | - The top three industries by fair value as of December 31, 2023 were Insurance Services (14.9%), Software (14.2%), and Commercial Services & Supplies (9.6%)83 - Geographically, 96.0% of the portfolio at fair value was invested in the United States as of December 31, 202384 Investment Advisory and Administration Agreements The company operates under an advisory agreement with fee waivers and a separate administration agreement - An Amended and Restated Investment Advisory Agreement was entered on January 24, 2024, with the Adviser agreeing to waive the base management fee in excess of 0.75% and the incentive fee in excess of 15% for one year2495105 - The base management fee is 1.0% of average gross assets (excluding cash)95 - The incentive fee has two parts: an income-based fee subject to a 1.5% quarterly hurdle rate and a cumulative three-year lookback, and a capital gains fee97101103 - The capital gains incentive fee is 17.5% of cumulative realized capital gains over cumulative realized losses and unrealized depreciation110 - The Administrator, an affiliate of Morgan Stanley, provides administrative services, and the Company reimburses it for the allocable portion of expenses, including the cost of the CFO and CCO30132133 Regulation The company is subject to BDC, RIC, and BHCA regulations governing its investments, leverage, and distributions - As a BDC, the company must invest at least 70% of its assets in "qualifying assets," primarily securities of U.S. private or small public companies142 - The company is subject to a minimum asset coverage ratio of 150%, allowing it to incur debt and issue senior securities up to two times its net asset value149 - Due to its affiliation with Morgan Stanley, a Bank Holding Company (BHC), the company is subject to certain provisions of the Bank Holding Company Act (BHCA) and the Volcker Rule, which may limit its activities164168170 - To maintain its RIC status for tax purposes, the company must distribute at least 90% of its investment company taxable income annually180 Risk Factors The company faces risks from its BDC structure, investment portfolio, market fluctuations, and adviser relationship - Business & Structure Risks: Dependence on the Adviser, significant potential conflicts of interest with Morgan Stanley affiliates, and operating in a highly competitive market for investment opportunities215224245 - Investment Risks: The majority of investments are in illiquid, non-rated, below-investment-grade debt, which carries a higher risk of default, and approximately 24% of the portfolio was in "covenant-lite" loans as of Dec 31, 2023301313314 - Leverage & Interest Rate Risks: The use of leverage magnifies potential gains and losses, and changes in interest rates affect net investment income as most assets and liabilities are floating-rate209256 - Market & Stock Risks: The market price of the company's common stock may be volatile and trade at a discount to its net asset value (NAV), and distributions may not be sustained346349 - General Risks: The company is exposed to cybersecurity threats, potential litigation, and the impact of economic uncertainty, geopolitical events, and regulatory changes389393402 Cybersecurity Cybersecurity risk is managed through Morgan Stanley's enterprise-level program with no material threats identified in 2023 - The company relies on Morgan Stanley's enterprise-level Cybersecurity Program to manage its cybersecurity risks, including threat intelligence, incident response, and third-party vendor risk management427428430 - Governance includes oversight from the company's Board, its CCO, and experienced senior officers at Morgan Stanley, including a CIO and CISO433435437 - During the fiscal year ended December 31, 2023, the company did not identify any cybersecurity risks or incidents that it believes have materially affected or are reasonably likely to materially affect its business438 Part II Market for Common Equity and Distributions The company's stock trades on the NYSE, with plans for quarterly distributions, a DRIP, and a share repurchase program - The company's common stock began trading on the NYSE on January 24, 2024, under the symbol "MSDL"442 Distributions Declared (Year Ended Dec 31, 2023) | Date Declared | Per Share Amount | Total Amount (in thousands) | | :--- | :--- | :--- | | March 28, 2023 | $0.50 | $35,377 | | June 27, 2023 | $0.57 | $40,735 | | September 26, 2023 | $0.60 | $43,211 | | December 28, 2023 | $0.60 | $49,968 | | Total | $2.27 | $169,291 | - Effective January 26, 2024, the company adopted an "opt-out" Dividend Reinvestment Plan (DRIP), automatically reinvesting distributions unless a stockholder elects to receive cash448498 - A share repurchase plan of up to $100 million was approved to buy back common stock at prices below NAV, set to commence on March 26, 202488351506 Management's Discussion and Analysis of Financial Condition and Results of Operations FY2023 saw higher investment income and a significant increase in net assets, driven by portfolio growth and market gains Results of Operations Operations in 2023 saw significantly higher investment income and a positive shift in unrealized gains Consolidated Results of Operations (in thousands) | | For the Year Ended Dec 31, 2023 | For the Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Total investment income | $367,738 | $230,593 | | Net expenses | $168,158 | $102,249 | | Net investment income | $199,580 | $128,344 | | Net change in unrealized appreciation (depreciation) | $32,835 | $(80,005) | | Net increase in net assets from operations | $231,014 | $48,542 | - The increase in total investment income was primarily driven by the deployment of capital into a larger portfolio and the impact of rising SOFR rates on floating-rate debt investments481 - The increase in expenses was mainly due to higher interest and financing expenses, which rose to $112.9 million in 2023 from $67.2 million in 2022, a result of higher average borrowings and increased reference rates484 - The significant swing from net unrealized depreciation of $80.0 million in 2022 to net unrealized appreciation of $32.8 million in 2023 was primarily due to changes in credit spreads489 Liquidity and Capital Resources The company maintains sufficient liquidity through credit facilities and has a strong asset coverage ratio - As of December 31, 2023, the company had $69.7 million in cash and approximately $917.5 million of combined availability under its credit facilities, sufficient to meet its $295.0 million in unfunded commitments492721 Debt Obligations as of December 31, 2023 (in thousands) | Facility | Aggregate Committed | Outstanding Principal | | :--- | :--- | :--- | | BNP Funding Facility | $600,000 | $282,000 | | Truist Credit Facility | $1,120,000 | $520,263 | | 2027 Notes (4.50%) | $425,000 | $425,000 | | 2025 Notes (7.55%) | $275,000 | $275,000 | | Total | $2,420,000 | $1,502,263 | - In October 2023, the company made its final capital call of $220.2 million, fully funding all capital commitments from its private placement investors493 - The company's asset coverage ratio improved to 214.6% as of December 31, 2023, from 191.2% a year prior, remaining well above the 150% regulatory requirement86 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity, with additional exposure to valuation and broader economic risks - The company's primary market risk is interest rate risk, as 99.9% of its debt portfolio carried a floating interest rate as of December 31, 2023514515 Annualized Impact of Hypothetical Interest Rate Changes on Net Income (as of Dec 31, 2023) | Basis Point Change | Net Income Impact (in thousands) | | :--- | :--- | | +300 bps | $71,968 | | +200 bps | $47,979 | | +100 bps | $23,989 | | -100 bps | $(23,989) | | -200 bps | $(47,979) | | -300 bps | $(71,968) | - The company faces valuation risk as most of its investments are illiquid and valued in good faith using unobservable (Level 3) inputs, which requires significant judgment512 Consolidated Financial Statements and Supplementary Data This section presents the audited financial statements for FY2023, showing a 16.40% total return and a NAV per share of $20.67 Financial Highlights (Per Share) | Per Share Data | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Net asset value, beginning of period | $19.81 | $20.91 | | Net investment income (loss) | $2.67 | $2.08 | | Net increase (decrease) in net assets | $3.13 | $0.82 | | Dividends declared | $(2.27) | $(1.92) | | Net asset value, end of period | $20.67 | $19.81 | Key Ratios and Supplemental Data | Ratio/Data | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total return based on net asset value | 16.40% | 3.99% | | Ratio of net expenses to average net assets | 11.14% | 7.99% | | Asset coverage ratio | 214.57% | 191.19% | | Portfolio turnover rate | 11.98% | 14.87% | - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and financial highlights521 Controls and Procedures Management concluded that disclosure controls and internal controls over financial reporting were effective as of year-end 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023750 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the 2013 COSO framework754 - No material changes were made to the company's internal control over financial reporting during the fourth quarter of 2023756 Part III Directors, Executive Compensation, and Corporate Governance Key governance and compensation details are incorporated by reference from the company's forthcoming 2024 Proxy Statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, and principal accountant fees is incorporated by reference from the forthcoming 2024 Proxy Statement759761762 Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed with the report, including key corporate and operational agreements - The financial statements are included in Item 8 of the report, and no separate financial statement schedules are filed766767 - The exhibits include key corporate and operational documents, such as the Amended and Restated Investment Advisory Agreement, Administration Agreement, and agreements governing the company's various debt facilities769
Morgan Stanley Direct Lending Fund(MSDL) - 2023 Q4 - Annual Report