Morgan Stanley Direct Lending Fund(MSDL) - 2020 Q1 - Quarterly Report

Part I. Financial Information Presents unaudited consolidated financial statements and management's analysis for Q1 2020 Item 1. Consolidated Financial Statements (Unaudited) Provides unaudited consolidated financial statements for Q1 2020, detailing financial position and performance Consolidated Balance Sheets Summarizes the company's financial position, highlighting significant asset growth and debt funding in Q1 2020 Consolidated Balance Sheet Summary (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $227,302 | $1,464 | | Total Liabilities | $129,656 | $2,585 | | Debt | $116,000 | $0 | | Total Net Assets | $97,646 | $(1,121) | | Net Asset Value (NAV) per Share | $18.47 | $(640.54) | - The company significantly ramped up its operations in Q1 2020, with total assets growing from $1.5 million to $227.3 million, primarily funded by $116 million in debt and the issuance of common stock[17] Consolidated Statement of Operations Outlines the company's financial performance for Q1 2020, showing investment income and net loss from operations Statement of Operations for the three months ended March 31, 2020 (in thousands) | Metric | Amount | | :--- | :--- | | Total Investment Income | $923 | | Net Expenses | $814 | | Net Investment Income | $109 | | Net Unrealized Loss | $(3,790) | | Net Decrease in Net Assets from Operations | $(3,681) | | Earnings Per Share (basic and diluted) | $(1.19) | - For its first quarter of operations, the company generated positive net investment income of $109 thousand but experienced a net loss of $3.7 million due to unrealized depreciation on its investments[19] Consolidated Schedule of Investments Presents the investment portfolio composition, primarily senior secured debt, as of March 31, 2020 Portfolio Composition as of March 31, 2020 (in thousands) | Investment Type | Cost | Fair Value | % of Net Assets | | :--- | :--- | :--- | :--- | | First Lien Debt | $78,526 | $75,492 | 77.31% | | Second Lien Debt | $14,705 | $13,949 | 14.29% | | Total Portfolio Investments | $93,231 | $89,441 | 91.60% | - The investment portfolio is primarily composed of senior secured debt, with a significant concentration in the Software and Services industry[26][77] - As of March 31, 2020, the company had unfunded loan commitments totaling approximately $9.1 million[29] Notes to the Consolidated Financial Statements Offers detailed disclosures on company formation, accounting policies, credit facilities, and capital commitments - The company was formed in May 2019, converted to a corporation in November 2019, and commenced investing operations on January 31, 2020. It intends to be treated as a Regulated Investment Company (RIC) for tax purposes[34][35] - The Investment Adviser earns a 1.0% annual base management fee on average gross assets, which is irrevocably waived to 0.25% prior to an exchange listing. For Q1 2020, base management fees were $66 thousand, with $49 thousand waived[66][67][163] - The company entered into a revolving credit agreement (CIBC Subscription Facility) with a maximum principal amount of $325 million. As of March 31, 2020, $116 million was outstanding[101][104] - As of March 31, 2020, the company had received total capital commitments of $1.07 billion, of which approximately $968 million remained unfunded[109][116] Financial Highlights (Per Share Data) | Metric | For the three months ended March 31, 2020 | | :--- | :--- | | Net asset value, beginning of period | $20.00 | | Net investment income (loss) | $0.04 | | Net unrealized and realized gain (loss) | $(1.74) | | Net asset value, end of period | $18.47 | | Total return based on net asset value | (7.65)% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses business overview, investment strategy, Q1 2020 results, and liquidity, with COVID-19 impact - 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[134] - Management believes the company is well-positioned to manage the COVID-19 environment due to its new portfolio with no legacy issues, significant available capital ($1.3 billion), and a focus on non-cyclical industries[138][140] Q1 2020 Results of Operations Summary (in thousands) | Metric | Three Months Ended March 31, 2020 | | :--- | :--- | | Total investment income | $923 | | Net expenses | $814 | | Net investment income | $109 | | Net unrealized depreciation | $(3,790) | | Net decrease in net assets | $(3,681) | - Net unrealized losses of $3.8 million were primarily driven by a widening credit spread environment and weakness in the broadly syndicated loan market due to the economic impact of COVID-19[167] - As of March 31, 2020, the company had significant liquidity, including $134 million in cash, $209 million of availability under its credit facility, and approximately $968 million in uncalled capital commitments[171] - Subsequent to quarter-end, from April 1 to May 8, 2020, the company committed to invest an additional $57 million in 8 portfolio companies, taking advantage of market dislocation[183] Item 3. Quantitative and Qualitative Disclosures about Market Risk Outlines exposure to market risks, including valuation, general market, and interest rate risks, with sensitivity - The company's primary market risks are valuation risk (due to illiquid Level 3 investments), general market risk (exacerbated by COVID-19), and interest rate risk[188][189][190] - As of March 31, 2020, 100% of the company's debt investments at fair value were at floating rates, making net investment income sensitive to changes in benchmark rates like LIBOR[192] Annualized Impact of Interest Rate Changes on Net Income (in thousands) | Basis Point Change | Impact on Net Income | | :--- | :--- | | Up 300 bps | $(965) | | Up 100 bps | $(322) | | Down 100 bps | $9 | | Down 300 bps | $(290) | Item 4. Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal controls in Q1 2020 - The company's management concluded that its disclosure controls and procedures were effective as of the end of the period covered by the report[195] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[196] Part II. Other Information Presents additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings Reports no material legal proceedings currently or threatened against the company or its affiliates - As of the filing date, the company was not subject to any material legal proceedings[198] Item 1A. Risk Factors Updates risk factors, emphasizing heightened risks from COVID-19, including market disruption and defaults - The company is operating in a period of capital market disruption and economic uncertainty, primarily due to the COVID-19 pandemic, which could negatively impact its business and operations[200] - The COVID-19 outbreak has led to extreme market volatility and could result in increased defaults by portfolio companies, difficulty in valuing assets, and increased requests for loan amendments and waivers[200] - Terrorist attacks, natural disasters, and pandemics like COVID-19 may disrupt the operations of the company, its portfolio companies, and the Investment Adviser, potentially harming business results[207] - There is a risk that the company may not be able to pay distributions, or that distributions may not grow, due to the economic impact of market disruptions. A portion of distributions could be a return of capital[210] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Discloses the issuance of common stock during Q1 2020 as part of a private offering exempt from registration - During the quarter, the company issued Common Stock as part of its Private Offering pursuant to Section 4(a)(2) of the Securities Act and Regulation D thereunder[212] Item 3. Defaults Upon Senior Securities Reports no defaults upon the company's senior securities during the period - None[214] Item 4. Mine Safety Disclosures States that this item is not applicable to the company - Not applicable[215] Item 5. Other Information Reports no other information for this item - None[215] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including credit agreement amendment and CEO/CFO certifications - The exhibit index lists certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002 and an amendment to the company's credit agreement[218]