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Morgan Stanley

Fitch Affirms Morgan Stanley Direct Lending Fund at 'BBB-'; Outlook Stable

Strategic Insights

— 2 min read

Morgan Stanley Direct Lending Fund, a business development company (BDC), has been affirmed by Fitch Ratings with a Long-Term Issuer Default Rating (IDR) and unsecured debt rating of 'BBB-'. The secured debt rating has been set at 'BBB', with a stable outlook. This affirmation comes as part of a broader review of 12 publicly rated BDCs. The rating drivers for MSDL are its affiliation with Morgan Stanley, providing access to deal flow, investment and sector expertise, risk management capabilities, and relationships with sponsors and banks.

Key Takeaways:

  • MSDL's ratings reflect its affiliation with Morgan Stanley, which provides access to deal flow, investment and sector expertise, risk management capabilities, and relationships with sponsors and banks.
  • The fund's above-average exposure to first lien investments, solid credit performance to date, appropriate leverage target, ample liquidity, and solid funding flexibility are key rating drivers.
  • The rating is primarily constrained by MSDL's short operating history and elevated growth in a competitive environment.
  • The fund's focus on senior secured lending positions is viewed favorably, particularly given the more challenging macroeconomic backdrop.
  • Operating income fell by 21.1% year-over-year to $44.1 million in Q125, driven by lower interest income and fees from lower leverage.
  • MSDL's unsecured debt represented 55.9% of total debt at Q125, which provides solid funding flexibility and is within Fitch's 'bbb' category benchmark range.
  • The fund has no debt maturities until 2027 and is expected to continue to opportunistically access the unsecured debt markets to maintain unsecured debt of at least 35% of total debt.
  • Adequate liquidity includes $1.1 billion of borrowing capacity and $65.6 million of unrestricted cash, sufficient to fund lending commitments.
  • Net investment income (NII) coverage of regular dividends declared was 105.0% in Q125, compared to 123.8% in 2024.
  • Payment-in-kind (PIK) income has increased modestly from prior years but is below the peer average.

Statistics:

  • MSDL's portfolio at fair value comprised 96.3% first lien debt, 1.9% second lien debt, 0.3% unsecured debt, and 1.5% preferred and common equity as of March 31, 2025.
  • Net realized losses amounted to 0.5% of the average portfolio at value in 2024, which was below average.
  • The company recognized a negligible realized gain in Q125.
  • Earnings headwinds are expected to continue due to tighter spreads and potential additional non-accruals.
  • Fitch expects MSDL's NII yield to remain below 5.0% due to reduced yields and potential interest rate cuts.

Sources:

  • Fitch Ratings: "Fitch Affirms Morgan Stanley Direct Lending Fund at 'BBB-'; Outlook Stable"
  • Fitch Ratings: "Fitch Ratings Completes Peer Review of 12 US BDCs"
  • Fitch Ratings: "Rating Action Report: Morgan Stanley Direct Lending Fund, Inc."
  • Fitch Ratings: "ESG Relevance Scores"

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