Morgan Stanley Direct Lending Fund(MSDL) - 2020 Q2 - Quarterly Report

Part I. Financial Information Item 1. Consolidated Financial Statements (Unaudited) Unaudited consolidated financial statements for Morgan Stanley Direct Lending Fund are presented, conforming to U.S. GAAP Consolidated Balance Sheets The Fund's total assets reached $309.96 million and net assets $116.34 million by June 30, 2020, reflecting significant growth Consolidated Balance Sheet Summary | | As of June 30, 2020 (in thousands) | As of December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Total Assets | $309,963 | $1,464 | | Total Liabilities | $193,621 | $2,585 | | Total Net Assets | $116,342 | $(1,121) | | Net Asset Value Per Share | $19.21 | $(640.54) | Consolidated Statements of Operations For the six months ended June 30, 2020, the Fund reported $4.81 million in total investment income and a $1.59 million net increase in net assets from operations Consolidated Statements of Operations Summary | (In thousands) | For the three months ended June 30, 2020 | For the six months ended June 30, 2020 | | :--- | :--- | :--- | | Total Investment Income | $3,890 | $4,813 | | Net Expenses | $1,921 | $2,735 | | Net Investment Income (Loss) | $1,969 | $2,078 | | Net Realized and Unrealized Gains (Loss) | $3,306 | $(484) | | Net Increase (Decrease) in Net Assets | $5,275 | $1,594 | | Net Earnings Per Share (basic and diluted) | $0.99 | $0.36 | Consolidated Statements of Changes in Net Assets For the six months ended June 30, 2020, net assets increased by $117.46 million to $116.34 million, primarily due to capital transactions Consolidated Statements of Changes in Net Assets Summary | (In thousands) | For the six months ended June 30, 2020 | | :--- | :--- | | Net Assets at Beginning of Period | $(1,121) | | Net Increase from Operations | $1,594 | | Net Increase from Capital Transactions | $115,869 | | Total Increase in Net Assets | $117,463 | | Net Assets at End of Period | $116,342 | Consolidated Statement of Cash Flows For the six months ended June 30, 2020, cash and cash equivalents increased by $93.06 million, driven by financing activities offsetting operating cash usage Consolidated Statement of Cash Flows Summary | (In thousands) | For the six months ended June 30, 2020 | | :--- | :--- | | Net Cash Used in Operating Activities | $(202,351) | | Net Cash Provided by Financing Activities | $295,406 | | Net Increase in Cash | $93,055 | | Cash at Beginning of Period | $35 | | Cash at End of Period | $93,090 | Consolidated Schedule of Investments As of June 30, 2020, the Fund's investment portfolio had a fair value of $204.52 million, primarily in senior secured debt (93.06% First Lien) Investment Portfolio by Type | Investment Type | Fair Value (in thousands) | % of Total Investments | | :--- | :--- | :--- | | First Lien Debt | $190,333 | 93.06% | | Second Lien Debt | $14,185 | 6.94% | | Total | $204,518 | 100.00% | - The total portfolio had a fair value of $204.5 million, with an amortized cost of $206.4 million[29] - The Fund had unfunded commitments totaling $25.45 million as of June 30, 2020, primarily for delayed draw term loans and revolvers[31] Notes to the Consolidated Financial Statements This section details the Fund's organization, accounting policies, and financial instruments, including its BDC status, credit facility, and $1.2 billion in capital commitments - The Company is an externally managed specialty finance company regulated as a Business Development Company (BDC) and intends to be treated as a Regulated Investment Company (RIC) for tax purposes[34] - The Fund has a revolving credit agreement (CIBC Subscription Facility) with a maximum principal amount of $325 million, of which $179.35 million was outstanding as of June 30, 2020[104][108] - As of June 30, 2020, the Fund had total capital commitments from stockholders of $1.20 billion, with $1.08 billion remaining unfunded[111] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the Fund's financial condition and results, highlighting its strategic positioning amidst COVID-19 and strong liquidity with over $1.2 billion in available capital Overview The Fund is an externally managed BDC investing in senior secured loans to U.S. middle-market companies, strategically positioned for the COVID-19 environment - The Fund's investment objective is to achieve attractive risk-adjusted returns through current income and capital appreciation by investing in directly originated senior secured term loans to U.S. middle-market companies[135] - Management believes the Fund is well-positioned to navigate the COVID-19 environment due to its new portfolio, significant available capital, and focus on non-cyclical industries[139][142] - The investment strategy focuses on lending to companies backed by leading private equity sponsors, offering advantages like strong deal flow and better due diligence access[149] Portfolio and Investment Activity As of June 30, 2020, the portfolio consisted of 13 companies, primarily 93.1% first lien senior secured debt, with a 7.5% weighted average yield - As of June 30, 2020, the portfolio consisted of investments in 13 companies, with 93.1% in first lien and 6.9% in second lien debt by fair value, and 100% floating rate[159][160] Portfolio and Investment Activity Summary | For the Three Months Ended June 30, 2020 | Amount (in thousands) | | :--- | :--- | | New Investments Committed/Purchased | $156,163 | | Investments Funded (at principal) | $141,609 | | Proceeds from Investments Sold/Repaid | $24,299 | | Weighted Average Yield on Debt Investments (at cost) | 7.5% | - All investments in the portfolio were assigned an Internal Risk Rating of 2, signifying performance in line with initial expectations[164] Consolidated Results of Operations For the six months ended June 30, 2020, the Fund reported $4.81 million in total investment income and a $1.59 million net increase in net assets from operations Consolidated Results of Operations Summary | (In thousands) | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Total Investment Income | $3,890 | $4,813 | | Net Expenses | $1,921 | $2,735 | | Net Investment Income | $1,969 | $2,078 | | Net Increase in Net Assets from Operations | $5,275 | $1,594 | - For the six months ended June 30, 2020, net expenses of $2.74 million were primarily interest expense, management fees, and incentive fees, partially offset by $0.45 million in fee waivers[170] - For the six months ended June 30, 2020, the Fund recognized a net realized gain of $1.4 million and a net change in unrealized depreciation of $1.8 million[175][176] Financial Condition, Liquidity and Capital Resources The Fund maintained a strong liquidity position as of June 30, 2020, with approximately $1.2 billion in total available capital, including cash and uncalled commitments - As of June 30, 2020, the Fund had approximately $1.2 billion in available capital, including $93 million in cash, $146 million in credit facility availability, and $1.08 billion in uncalled capital commitments[182] - Aggregate capital commitments from investors totaled approximately $1.202 billion as of June 30, 2020[183] - The Fund had $179.4 million outstanding under its $325 million CIBC Subscription Facility as of June 30, 2020[184][188] Item 3. Quantitative and Qualitative Disclosures about Market Risk The Fund is primarily exposed to valuation, market, and interest rate risks, with 100% floating rate debt; a 100 bps rate rise would decrease annualized net income by $0.9 million - The company's main financial risks include valuation risk for illiquid securities, market risk from economic conditions like COVID-19, and interest rate risk[200][201][202][203] Interest Rate Sensitivity Analysis | Basis Point Change - Interest Rates | Annualized Impact on Net Income (in thousands) | | :--- | :--- | | Up 300 basis points | $(239) | | Up 200 basis points | $(578) | | Up 100 basis points | $(917) | | Down 100 basis points | $192 | | Down 200 basis points | $192 | | Down 300 basis points | $192 | Item 4. Controls and Procedures Management concluded the Fund's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal controls - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[207] - There were no material changes in internal control over financial reporting during the quarter[208] Part II. Other Information Item 1. Legal Proceedings The Fund, its Investment Adviser, and Administrator are not currently subject to any material legal proceedings - The company is not currently a party to any material legal proceedings[210] Item 1A. Risk Factors This section highlights significant risks from COVID-19's capital market disruption and economic uncertainty, impacting portfolio companies and future distributions - The company is operating in a period of significant capital market disruption and economic uncertainty, primarily due to the COVID-19 pandemic, affecting debt and equity markets[212] - The pandemic poses heightened risks to portfolio companies, including potential defaults, difficulty in obtaining refinancing, and challenges in valuing illiquid assets[212][216] - There is a risk that the Fund may not be able to pay distributions, or that distributions may not grow, and a portion could be a return of capital if economic disruption continues[221] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the quarter, the Fund issued common stock through a Private Offering, exempt from Securities Act registration, and did not repurchase any equity securities - Issuances of Common Stock during the quarter were made through a Private Offering pursuant to Section 4(a)(2) of the Securities Act and Regulation D thereunder[223] Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period - None[225] Item 5. Other Information There was no other information to be reported under this item for the quarter - None[226] Item 6. Exhibits This section provides an index of exhibits filed with the Form 10-Q, including CEO and CFO certifications required by Sarbanes-Oxley Act - The exhibits filed with the report include certifications from the CEO and CFO pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350 (Sarbanes-Oxley Act of 2002)[229]