Participants

Sanna Johnson; Investor Relations; Morgan Stanley Direct Lending

Jeffrey Levin; President, Chief Executive Officer, Interested Director; Morgan Stanley Direct Lending Fund

Michael Occi; President; Morgan Stanley Direct Lending Fund

David Pessah; Chief Financial Officer; Morgan Stanley Direct Lending Fund

Sean-Paul Adams; Analyst; Raymond James Financial Inc

Melissa Wedel; Analyst; JPMorgan Chase & Co

Paul Johnson; Analyst; Keefe, Bruyette & Woods, Inc

Doug Harter; Analyst; UBS

Presentation

Operator

Welcome to the Morgan Stanley Direct Lending Q4 2024 earnings call. (Operator Instructions) As a reminder, this conference call is being recorded. At this time, I let you turn the conference over to Miss Sanna Johnson. Please go ahead, ma'am.

Sanna Johnson

Good morning and welcome to Morgan Stanley Direct Lending Fund's full year and fourth quarter 2024 earnings call. Joining me this morning are Jeff Levin, Chief Executive Officer; Michael Occi, President; David Pessah, Chief Financial Officer, and Rebecca Shaoul, Head of Portfolio Management. Morgan Stanley Direct Lending Fund's fourth quarter and full year 2024 financial results were released yesterday after market closed and can be accessed on the investor relations section of our website at www.msdl.com.
We have arranged for a replay of today's events that will be accessible from the Morgan Stanley Direct Lending Fund website. During this call, I want to remind you that we may make forward-looking statements based on current expectations. The statements on this call that are not purely historical are forward-looking statements. These forward-looking statements are not a guarantee of future performance and are subject to uncertainties and other factors that could cause actual results to differ materially from those expressed in the forward-looking statements, including and without limitation, market conditions, uncertainty surrounding interest rates, changing economic conditions, and other factors we have identified in our filings with the SEC.
Although we believe that the assumptions on which these forward-looking statements are based or reasonable, any of those assumptions can prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions can be incorrect. You should not place undue reliance on these forward-looking statements. The forward-looking statements contained on this call are made as of the date hereof, and we assume no obligation to update the forward-looking statements or subsequent events. To obtain copies of SEC-related filings, please visit our website. With that, I will now turn the call over to Jeff Levin.

Jeffrey Levin

Thank you, Santa, and thank you for joining us today for Morgan Stanley Direct Lending's fourth-quarter and full year 2024 conference call. We are proud of the strong results that we generated to close what was a critical year for us. In 2024, we successfully executed our IPO in January and continued to deploy capital prudently in our efforts to generate attractive risk adjusted returns for our growing base of shareholders.
I will first begin with a summary of our performance in the fourth quarter before handing it to Michael to discuss our market outlook. Dave will then provide updates on our portfolio and comment on the financial results. Our team delivered solid operating results for the fourth quarter, supported by strong underlying credit performance at $20.81 net asset value per share was stable quarter-over-quarter. We generated net investment income of $0.57 per share, representing 114% regular dividend coverage.
During the quarter, we also had a $0.10 special dividend that had been declared by the board of directors around the time of the IPO and was paid to shareholders of record as of November 4, 2024. For the fourth quarter, new investment commitments totaled approximately $188 million resulting in net funded deployment for the quarter of $144 million an increase from the $124 million in the third quarter.
During the quarter, MSDL's debt to NAV increased from 0.99 to 1.08 times. Importantly, we accomplished the objective that we have previously telegraphed of achieving our 1 to 1.25 times target leverage range over the few quarters following the IPO without stretching on credit.
Our underlying deployment activity in the corridor showcased once again our ability to leverage our unique origination engine to drive quality deal flow. Over the course of 2024, more than three quarters of our non-refinancing gross deployment was to new borrowers. While we remain focused on supporting existing borrowers through incremental financing, we think the skew towards new platforms highlights the value of our unique sourcing platform, even amidst, in our view, a more subdued LBO environment.
Additionally, over the course of 2024, we led or co-led over 90% of the new borrowers added to MSDL's portfolio. We continue to believe that sponsors are drawn to the quality of our team and our ability to be a value-add partner given the broader Morgan Stanley platform we are a part of.
On previous calls we've highlighted the clear benefits of our ability to leverage the broader Morgan Stanley platform. Our breadth and depth of sponsor relationships allows us to see a vast range of deal flow, and that deal flow exceeds our capital base, which breeds selectivity. Flexibility is also key to our strategy. MSDL's median EBITDA has been steady in the mid $80 million dollar context.
We like to credit attributes in this segment of the market, but we have the ability to move up and down market to optimize risk adjusted returns as we had flexed upmarket during the peak of the inflation led dislocation a couple of years ago. We think that the deal flow to capital imbalance in our nimble approach to financing the middle market will continue to serve as a key competitive advantage for us.
With that, I would like to hand the call over to Michael, who will provide some commentary on our broader market outlook. Michael was appointed President of the BDC at the end of 2024, and we are excited to see his role expand as we continue to optimize our business for the benefit of our shareholders.

Michael Occi

Thank you, Jeff. I look forward to continuing to work with this outstanding team and all of our partners and investors in the years to come. I will start by making some observations on the macro and direct lending backdrop. The punch line is that we are pleased about the performance of MSDL's portfolio and as we look ahead, are optimistic that the market will continue to generate attractive risk adjusted investing opportunities for us.
We believe a generally resilient economy, the outcome of the US Presidential election, and the Federal Reserve's 100 basis points of rate cuts in late 2024 all help to compound market optimism in the fourth quarter. While the health of the public debt markets has driven increased competition in the private credit market, credit performances continue to be solid vis-a-vis MSDL's portfolio, as observed through strong borrower fundamentals as well as healthy fund level credit statistics.
We believe this is a reflection of the continued strength of the middle market economy as well as our defensively minded investment strategy. Spreads for new loans compressed in 2024, although that compression generally stabilized in the second half. In our view, gross asset yields are likely to continue to remain elevated, offering attractive opportunities for us. We think that the market pricing is even more compelling and risk adjusted when you consider the stability over the last several quarters in the loan to values and leverage ratios for the capital we have deployed in MSDL.
Shifting to deal volumes, it was constructive to see a modest pickup in LBO activity during 2024, and private credit remains the funding source of choice for LBOs. Prospectively, we believe that activity will continue to accelerate due to the combination of anticipated deregulation, healthy public and private financing markets, significant private equity dry powder, and aging sponsor portfolios.
In our assessment though, the rebound will be gradual as it is tough for sponsors to underwrite to uncertainty in Washington's legislative agenda, particularly in certain sectors. That said, we believe that we are well positioned to capitalize on that potential M&A pick up over the course of the year as the market gets more policy visibility.
On a related topic, we are closely monitoring for any potential impacts to our existing portfolio from government reform, including tariffs. We believe that the portfolio should be relatively insulated. However, as uncertainty surrounding specific measures and the broader impact remains, we will remain vigilant in monitoring developments and remain in close contact with management teams and private equity sponsors to assess potential risk and action plans.
Over the course of 2025 and beyond, as Jeff alluded to, we look forward to continuing to source and underwrite lending opportunities that offer strong risk adjusted returns and in turn create value for MSDL's shareholders.
I will now hand the call over to David who will provide details on Morgan Stanley direct lending fund's portfolio, investment activity, and financial results.

David Pessah

Thank you, Michael. Starting with our portfolio, we ended the year with a total portfolio at fair value of $3.8 billion, which represented a year-over-year increase of approximately 19%. Our portfolio is comprised of approximately 97% firstly in debt, 2% secondly in debt, and the remainder in equity and other debt investments.
We had investments in 208 portfolio companies spanning across 33 industries with nearly 100% of our investments in floating rate debt. Our two largest industry exposures remain in software and insurance services, which accounted for 18.9% and 12% of the portfolio at fair value, respectively.
The average position size of our investments was approximately $18.2 million or approximately 50 basis points of our total portfolio on a fair value basis. Further, our top 10 portfolio companies represented approximately 16% at fair value of the total portfolio. Regarding our credit metrics as of yearend, our weighted average loan to value was approximately 40%. The median EBITDA was approximately $86 million and our weighted average yield on debt and income producing investments was 10.4% at cost and 10.5% at fair value.
We did see further compression in yields over the last quarter, which were primarily attributable to the decrease in base rates and to a lesser extent repricing dynamics, which were more concentrated in the second and third quarter of this year. While our portfolio yield may be impacted further by the most recent rate cut, we also stand to benefit on our cost on our floating debts.
Turning to credit quality, over 98% of our total portfolio had an internal risk rating of 2 or better, which is relatively unchanged throughout 2024. As of December 31, our non-accruals remained unchanged from the prior quarter with just 20 basis points of the portfolio at cost. For investment activity in the fourth quarter, we made new investment commitments of approximately $188 million across 10 new portfolio companies and 17 existing portfolio companies.
Investment fundings total approximately $187 million with $44 million in repayments for net funded investment activity of approximately $144 million. For the full fiscal year 2024, we made new investment commitments of approximately $1.5 billion across 60 new portfolio companies. Investment fundings totaled $1.2 billion with $657 million in repayments in 24 portfolio companies for net funded investment activity of approximately $574 million.
Moving to our fourth quarter and year-end results. Our total investment income was $103 million for the fourth quarter as compared to $110 million in the prior quarter. The decline in our core earnings was driven by the aforementioned impact from the change in portfolio yields and the limited non-recurrent income from repayment activity. Pick income continues to remain relatively low, amounted to only 3% of total investment income.
Total net expenses for the fourth quarter were $52.3 million compared to $51 million in the prior quarter. As a reminder, our management fee and incentive fee waiver, which was put into place following our IPO expired recently on January 24, 2025. Net investment income for the fourth quarter was $50.7 million or $0.57 per share compared to $58.7 million or $0.66 per share from the prior quarter.
As of December 31, total assets were $3.9 billion and total net assets were $1.8 billion. Our end in NAV per share for the fourth quarter was $20.81 as compared to $20.83 in the prior period. As Jeff covered earlier, we successfully achieved our target leverage range in the fourth quarter. Our debt to equity ratio increased to 1.08 times as compared to 0.99 times in the prior quarter, with much of the increase being back-end loaded.
Approximately 53% of our funded debt was in the form of unsecured notes with well latter maturities through 2029. Subsequent to quarter end, we successfully executed an extension of our secured revolving credit facility by extending our maturity to February 2030, lowering our draw spread by 10 basis points, and our undrawn spread by 2.5 basis points, and lastly increasing our total commitment by $150 million to $1.45 billion.
We continue to remain pleased with our debt capital stack and we will continue to strategically evaluate opportunities, including with our upcoming unsecured maturity in September of this year. Focusing now on our distributions. In the current quarter, we paid a $0.50 regular distribution as well as our second $0.10 special distribution for the year.
In addition, our Board of Directors declared a regular distribution for the first quarter of $0.50 per share to shareholders of record on March 30, 2025. As of December 31, 2024, our estimated spillover net investment income was $68 million or $0.78 per share. Every year end, the Board authorized an amended and red share repurchase program to repurchase up to $100 million in the aggregate of the company's shares at prices below its net asset value per share.
With that operator, please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions)
Sean-Paul Adams, Raymond James.

Sean-Paul Adams

Hey, guys. Good morning. So a quick scan of your industry concentrations show about 6.6% in auto and automobile components alone. What was your review of the portfolio concentrations when it comes to, the possibilities around tariffs. And have you guys changed your strategy to be a little bit more defensive in the, new outlook for 2025? Thank you.

Jeffrey Levin

Yeah, sure, this is Jeff, and thanks for the question. The -- it's not direct auto exposure typically that's service offering into the end market there or software, enterprise software specifically into dealerships, et cetera. And so again it's not direct exposure. That being said, as you'd expect, substantial work has been underway. On our team with regards to the broader portfolio and potential impact of tariffs that being somewhat challenging to underwrite for both private equity and private credit given uncertainty and things moving around with everything happening in DC.
That being said, the two sectors were the longest are software -- enterprise software, and insurance brokerage, which we think are somewhat insulated. From tariff exposure, that being said, again, it's unknown. So from a primary standpoint, I think we're all protected, but secondary and tertiary impact of how this will play out over the coming months and years is to be determined, frankly.
And so we have a full work stream on our side thinking through and analyzing the various businesses and sectors. That were long, and the risk profile there, we're not overly concerned again given the two sectors were the longest, but that's an analysis that's ongoing. And as we deploy new capital, obviously, this is very much front and center in terms of how we're allocating the dry powder that we have within the portfolio.

Sean-Paul Adams

Got it, thank you. And as a quick follow up, what are your just general thoughts on where you think M&A activity is going to go over the next three quarters?

Jeffrey Levin

Yeah, that's a great question and highly topical these days. I think, at certain points last year there was a really bullish sentiment in terms of the backdrop of private equity, dry powder being pent up. LPs, buyout firms really wanting their capital back. And I think then obviously the natural tailwind of potential deregulation with the new administration.
I think the uncertainty around tariffs has slowed as well as other factors, deportation, et cetera, impact and cost of labor among other issues. And so I think right now we're watching the market closely with regards to deal activity, I'd say I think the backdrop and the tailwind of private equity dry powder continues to be the case. And so with every passing quarter, that shot clock on their capital to invest it and return it continues to pass. And so with every passing quarter, I think the conviction around LBO volume coming back increases.
That being said, I think given the uncertainty right now, it will be more back ended in this calendar year than I think in the first quarter or two based on what we're seeing. All that being said, if you look at 2024, LBO volume was extremely modest. And I think we had somewhere between 50 and 60 new platforms in our portfolio over the course of last year. So again, even in light of a market where I think some of our competitors may have struggled to deploy capital into new platforms, we really didn't have that experience.
And as we noted, the fourth quarter was in line with the with the broader 2024 calendar year. So -- and I think that speaks to two things, we have a really robust investment team here dedicated to the strategy and then as you've heard from us before, we have the benefit of being part of this institution which has a best in class sell side investment bank with you know hundreds if not thousands of bankers interfacing with users of private credit daily, that being corporates and private equity firms. So I think our deal flow arguably really should be best in class, given the combination of what's a great private credit manager and an investment banking house.
And then the -- as we mentioned earlier in the prepared remarks, I think this imbalance of deal flow to capital is really helpful to us, so we can be really selective as we invest. So I continue to be bullish on deal flow over the coming vintage years. It's hard to pick off in what quarter in calendar 25 we're going to see a real uptick in LBO volume. I don't think it's Q1. I'd be surprised, frankly, if it's Q2, but we'll see.

Sean-Paul Adams

Really appreciate the color. Thank you.

Operator

Melissa Wedel, JP Morgan.

Melissa Wedel

Good morning. Thanks for taking my questions. I wanted to touch on NII trends. Obviously, there is a step down, sequentially in four with some rate cuts. I think the question is really, we know that there tends to be a lag, and it changes in base rates and how they flow through BDC income statements. How much of. The rate declines do you think flowed through into 4Q? To put differently should we be expecting something similar, directionally in the first quarter?

David Pessah

Thanks for the question. This is Dave. So about two-thirds of our portfolio did reset within the in Q4, so we do have about a third left in terms of the lag, as you mentioned before. What I would say though in just thinking about NII in general is that if you look at the core NII from Q3 into Q4, it went from $0.62 to $0.57 as you can see in our materials that was, 100% driven by the change in rates period-over-period. We did not have any non-recurrent income flow through into Q4, which is what we saw in Q3. So that was about $0.02 of incremental pick up in Q3 as you just try to do the NII bridge period-over-period.

Melissa Wedel

Okay, that's helpful thank you. When you think about you touched on the liability structure as well just wanted to refresh on how you're thinking about the split ideally between secured and unsecured. Thank you.

David Pessah

Yeah, no, so right now you kind of saw that at 12/31 we're at 50%-30% in the unsecured. I think you'll see us probably be in that 50% mix between security and unsecured. It's not -- it may dip down below that, but we'll try to stay within that kind of framework. I will note and I kind of said that in the prepared remarks as well, we do have that September 2025 note that is coming due, that does have a fixed cost right now of [$755] so we'll look opportunistically to refinance that, this upcoming year.

Melissa Wedel

Thank you.

Operator

Paul Johnson, KBW.

Paul Johnson

Yeah, good morning. Thanks for taking my questions. Interesting to see that just the repayment numbers so low this quarter. Any idea, in terms of what you think drove that?

Jeffrey Levin

Yeah, that's, it's a good question. I think the -- this business reporting quarterly publicly is always interesting because the business in any one quarter or two, we could see huge upticks in deployment or not. You could see repayments spike or not because it can be a lumpy business, so I always encourage people to look and analyze these businesses not over a single quarter but over more like a calendar year or frankly even two, given the nature of the asset class in general.
I don't think anything in particular drove, fewer repayments in Q4. We'll see what this calendar year looks like. Obviously, the public market is in a really healthy place, but I think, within our asset class we've been able to maintain the liquidity premium relative to the syndicated loan market that's been very healthy and steady, frankly. In the fourth quarter, the capital that we put out was at roughly sold for [$500 million]
TBD, the impact of repayments over the coming quarters, but I don't think there's anything in particular to answer your question directly, which drove fewer repayments in the fourth quarter relative to prior quarters.

Paul Johnson

Got you. Thanks for that. And then, just in terms of amendments within the book, just wondering was there any trends there? Any change quarter-over-quarter in terms of sort of credit related amendments in the book in the portfolio?

Jeffrey Levin

Yeah. So I think we -- just had a couple things here as relates to amendments. So repricing was really more of an earlier in '24 dynamic. We saw that subside over the course of the rest of the year. In terms of credit, we're really proud of the health of this portfolio and I think we've executed really in line with what we articulated to both our pre-IPO investors as well as you all in the public markets when we took this vehicle public about a year ago.
The health of the book remains really strong. I think our stats from a non-accruals perspective, from a pick income perspective, have been and continue to be best in class, and again we're really proud of that. And so, through our lens we feel like that we've really executed. We always keep our eye closely to the entire portfolio with a double click on names that are underperforming. That list fortunately is quite narrow here.
So you know we -- and I think in terms of what to expect from us in the future, going to look a lot like the past in terms of staying defensive, focusing on the sectors that we think are resilient. And taking into account, everything that continues to be in motion with regards to the economy, geopolitical issues, tariffs, so on and so forth.
And so it's an interesting time to deploy capital right now. We're being highly selective as you'd expect us to be, and we continue to be hopeful, that deal flow and LBO volume comes back really in full force over the course of the year. But as mentioned, if you look at last year, we didn't have an issue finding good place to invest and so we're hopeful that that same continues to be true this year.

Paul Johnson

Thank you. That's all for me.

Operator

(Operator Instructions)
Doug Harter, UBS.

Doug Harter

Thanks. I was hoping you could talk about your leverage, outlook for the year kind of given the commentary you've made about the environment?

Jeffrey Levin

Yeah, I'll go first and then others in the room feel free. The stated target of one-to-one quarter when we took the vehicle public, I think we guided you all to that we would be in that range at some point over the over the few quarters post IPO, and we executed in line with that strategy as you can tell. I think you know we got upwards of 110 or 111. It was a little bit back ended in terms of the quarter, fourth quarter. TBD, it's a totally fair and it's a great question.
I think we have the benefit of having a really best in class deal flow engine. We have a headwind of a market right now that presents fewer opportunities that we and our competitors would like to see. And so we are doing our absolute best to find ways to deploy capital into deals that we are really comfortable with, and we think offer really good risk of just return.
It'd be really easy, for us to stay within that range or the higher the range for the sake of NII and capital deployment, as I tell the team all the all the time, making a loan is easy. Getting your money back is the hard part. And so we continue to be focused on quality. You know that one-to-one quarter range we think is absolutely reasonable. It goes without saying though, if repayments spike substantially and deal flows really poor and we don't think the market opportunity is attractive, we're not going to put money in the ground for the sake of a leverage multiple over a very short period of time. That in no means is to guide you that I'm worried about our target leverage range. I'm not.
But we're, we think, as I mentioned before, we don't think over the short term within this business. We think medium and long term in terms of how we deploy capital because these assets are -- they're grossly illiquid generally and so we need to be really comfortable when we're deploying capital that we're going to get our money back. But so I think long winded way of saying one-to-one quarter continues to be the range. We're within that range we reside in every given quarter TBD, and we will be based on a number of factors. But rest assured we're deploying capital with an eye towards capital preservation and defensiveness first and foremost.

Doug Harter

Great. Appreciate the answer.

Operator

And it appears there are no further telephone questions. I'd like to turn the conference back to Mr. Levin for closing remarks.

Jeffrey Levin

Thank you. On behalf of the management team, I greatly appreciate you joining us today along with your support of the Morgan Stanley Direct Lending Fund. Our team remains focused on executing our defensive investment strategy to drive shareholder value, and I couldn't be more pleased with our continued execution. We look forward to providing an update on our first quarter, 2025 earnings call in May. Thank you.

Operator

And that does conclude today's conference. We thank you all for your participation. You may now disconnect.