Welcome to Morgan Stanley Direct Lending Second Quarter 2025 Earnings Call. As a reminder, this conference call is being recorded. At this time, I'd like to turn the conference over to Sanna Johnson. Please go ahead.

Good morning, and welcome to Morgan Stanley Direct Lending Fund Second Quarter 2025 Earnings Call. I am joined this morning by David Miller, Chairman; Michael Occi, Chief Executive Officer; Ashwin Krishnan, Chief Investment Officer; Jeff Day, Co-President; David Pessah, Chief Financial Officer; and Rebecca Shaoul, Head of Portfolio Management. Morgan Stanley Direct Lending Fund second quarter 2025 financial results were released yesterday after market close and can be accessed on the Investor Relations section of our website. We have arranged for a replay of today's event 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, uncertainties 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 are 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 David Miller.

Thank you, Sanna. Good morning, everyone. Thank you for joining us today for Morgan Stanley Direct Lending Fund's Second Quarter 2025 Conference Call. I'm David Miller, Global Head of Private Credit and Private Equity of Morgan Stanley and Chairman of Morgan Stanley Direct Lending fund. Before we begin, I'd like to take a moment to acknowledge the tragic events that occurred last week at 345 Park Avenue. This heartbreaking incident has deeply affected our community and our industry. On behalf of our entire company, we extend our heartfelt condolences to all those affected. Turning now to today's call, the management team will walk you through MSDL's second quarter performance. I wanted to introduce the team this quarter to underscore the confidence that I, the Board and the broader Morgan Stanley platform have in our private credit strategy. This quarter marks an important leadership transition at MSDL and across our North American direct lending business. Morgan Stanley Investment Management has a proud 40-year track record of alternatives investing and the bedrock of the entire franchise is a deep and experienced team of professionals. The leadership appointments that we recently announced at MSDL exemplified that. The announcement included the naming of Michael Occi as CEO of Morgan Stanley Direct Lending Fund following Jeff Levin's resignation in July. Michael has been with the firm for nearly two decades, bringing a wealth of advisory experience and a deep familiarity with the Morgan Stanley integrated ecosystem, which serves as a key differentiator of our investing platform. Additionally, Ashwin Krishnan was named Chief Investment Officer of MSDL, a newly created role as well as Chair of our Investment Committee. Ashwin has been part of the private credit business since its inception in 2009 and prior to these appointments served as the Co-Head of North America Private Credit. Succeeding Michael in his former role are Jeff Day and Orit Mizrachi, who now serve as co-Presidents of MSDL. Orit and Jeff each have multiple decades of experience in the direct lending marketplace and have been key architects of the build-out of our direct lending strategy over the years. We believe that this set of changes demonstrates our relentless focus on investing in talent and our intentional approach to preserving leadership continuity. This helps us toward our pursuit of generating strong risk-adjusted returns for investors supported by an unwavering commitment to our defensive credit approach. Our investment process remains rigorous and consistent. The team that has constructed our portfolios and originated hundreds of investments while maintaining our high credit quality remains firmly in place. The team has the full support of the broader Morgan Stanley platform to continue building on this strong foundation, including MSDL, the North America direct lending platform which has now grown to more than $20 billion of committed capital. As we look ahead, the Board and I have deep confidence in this team's ability to serve as a trusted partner to sponsors and to continue delivering strong results for shareholders. Thank you for your partnership and continued support. And with that, I'll hand the call over to Michael.

Thank you, David. I'm honored to speak with you for the first time in my new role as CEO, and I'm excited to carry forward the momentum that we have built across the platform. As David noted, this has been an important period in the evolution of MSDL. I'm incredibly proud of the quality of our team, and I'm energized by the opportunity to help lead the next chapter of our growth. Ashwin Krishnan stepping into the new role of CIO and the expanded roles for Orit Mizrachi and Jeff Day reflect a thoughtful, long-term vision for the platform, one rooted in continuity, deep investment experience and an unwavering commitment to delivering for our stakeholders. We'll walk through our second quarter results, provide an update on the portfolio and share our outlook for the second half of the year. I'll start with a few key highlights before turning it over to Ashwin. We generated solid performance in the second quarter as we continue to deploy capital prudently in the face of another volatile environment for financial markets. We are encouraged by some positive trends in sponsor activity levels that took hold in the second half of the quarter. At the same time, we're prepared for the risk of more turbulence over the balance of the year as investors grasp for more visibility on trade policy impacts and the direction of the economy. In terms of operating results, we generated net investment income of $0.50 per share, in line with the $0.50 dividend declared. Our high-quality earnings in the second quarter were driven by continued stability in the underlying credit performance of the portfolio and were characterized by low and declining contributions from payment in kind and other income. We remain comfortable with our distribution level, supported by a normalization in asset yields and due to the progress that we have continued to make on optimizing the right-hand side of the balance sheet. To that end, we successfully executed upon several of the debt-related enhancements during and subsequent to the quarter. First, fund-level leverage increased modestly to 1.15x with much of that increase being back-end loaded in the quarter. Second, we successfully refinanced our legacy unsecured debt with a new 5-year bond that we priced in May at a yield improvement of 130 basis points. Lastly, earlier this week, we priced our inaugural CLO, a financing that will serve to further diversify MSDL's leverage mix. While the full benefit of these actions is yet to be realized, they reinforce our proactive and nimble approach to managing our liability profile. On the deployment side, gross and net investment activity was relatively consistent quarter-over-quarter, with $204 million of investment fundings, offset by a similar quantum of repayments. Our unique sourcing engine generated what we believe to be a diverse mix of attractive lending opportunities across our preferred industry verticals. Our mix of new capital deployed in the quarter was consistent with prior periods, with nearly two-thirds of the non-refinancing volume driven by new platforms we added in the quarter, all of which were transactions that we led or co-led. In addition to that, we saw a healthy source of fundings from the existing book. We believe the combination of our deep origination team and our ability to leverage the broader Morgan Stanley franchise continues to differentiate our business in the marketplace. Sponsors increasingly look to us as a value-add partner, one that is capable of delivering more than just capital. Our breadth and depth of relationships allows us to see a vast range of deal flow, and we can remain selective even in slower deal environments given that this opportunity set towards the scale of our capital base. We believe that our selective approach enables us to stay true to our core mission of principal preservation as evidenced by our credit results. Furthermore, we believe our transparent revenue model, efficient and conservative debt profile, relatively low operating expense base, and thoughtful fee structure highlight our strong alignment with shareholders and reinforce our continued focus on executing a defensive investment strategy to drive long-term shareholder value. With that, I'll turn the call over to Ashwin.

Thank you, Michael and David for the warm introduction. It has been amazing to see the evolution of this platform since I joined the team in 2009, and I'm looking forward to connecting with many of you in this expanded role as CIO of MSDL. As Michael noted, the quarter began with elevated macro uncertainty driven by the potential for meaningful changes to global tariffs, contributing to volatility in the public markets. This prompted larger borrowers to seek capital in the private credit market. As a result of this dynamic, the weighted average borrower EBITDA for new platform deployments during the quarter increased slightly relative to the first quarter to approximately $120 million. This highlights the breadth of our origination funnel and our ability to take advantage of attractive credit opportunities across the size spectrum, similar to how we flexed higher amid the regional banking crisis in the first quarter of 2023. Our target remains in that plus or minus $90 million EBITDA range as evidenced by MSDL's blended portfolio median, which finished the quarter largely unchanged at that level. Beginning in June, we began to witness a meaningful shift in activity levels amongst the private equity community as evidenced by our own pipeline build in response to optimism on the resilience of the U.S. economy. While we are optimistic that the recovery in sponsor activity can be in the early stages of finally materializing, we are well-positioned to take advantage of potential bouts of volatility as the market digests the evolving macro picture, underlying tariff impacts and rate policy responses among other factors. With private equity dry powder now running at approximately 5x the level of private credit dry powder, the industry is well positioned to take advantage as financing opportunities emerge. While we could ultimately witness a dynamic where the recovery in deal activity is strong enough to shift deal terms back in favor of lenders, that dynamic did not materialize during the second quarter. Spreads on total capital deployed by MSDL in the second quarter compressed by approximately 25 basis points relative to Q1 to an average of SOFR plus 475 basis points. Importantly, we continue to earn an illiquidity premium of more than 100 basis points over the leveraged loan market. Gross asset yields remain elevated in a historical context offering attractive opportunities for shareholders. Should we see Fed cuts, a corresponding compression in borrowing costs should serve as a positive benefit for our borrowers' free cash flow profiles, all else being equal. Over the last several quarters, we have seen MSDL's interest coverage ratio move higher and our PIK total income ratio to decline. When you also consider the stability in loan-to-value and leverage ratios for the capital we have deployed in MSDL over the last several quarters, we think that these credit attributes make for a compelling risk-adjusted return proposition. Digging a bit deeper into portfolio construction, we maintain an overweight in professional services businesses and an underweight in more trade-sensitive verticals such as manufacturing and consumer goods-oriented companies relative to other BDCs in the market. We believe that the sectors that will be hit hardest by tariffs will be those that rely on offshore assembly or parts such as consumer and capital goods. In contrast, software, insurance services and business services should be better insulated from the tariffs and retaliatory tariffs. We believe MSDL's sector weighting is more defensive relative to other BDCs. We continue to closely monitor potential tariff impacts across the portfolio and remain in close contact with management teams and private equity sponsors to assess potential risk and action plans. Sponsors and management teams have been proactive in formulating thoughtful strategies to mitigate any potential tariff impacts. Based on our geographic and industry orientation, we continue to believe that MSDL's portfolio is relatively insulated from direct impact. Looking ahead, we will remain focused on the same strategy that has made us successful, making first lien senior secured loans to high-quality middle market companies in less cyclically sensitive industries. We believe that we continue to be well-positioned to source and underwrite investment 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 Pessah.

Thank you. Starting with our portfolio. We ended the quarter with a total portfolio at fair value of $3.8 billion. Our portfolio was comprised of approximately 96% first lien debt, 2% second lien debt and the remainder in equity and other debt investments. Our investments increased to 214 portfolio companies spanning across 34 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 19.4% and 11.4% of the portfolio at fair value, respectively. The average position size remains at approximately 50 basis points of our total portfolio. Our portfolio continues to be highly diversified with low borrower concentrations. Regarding credit metrics, for our portfolio companies as of quarter end, the weighted average loan-to-value was approximately 40% and the median EBITDA was approximately $90 million, and our weighted average yield on debt and income-producing investments was 10.1% at cost and 10.2% at fair value, representing a decline of approximately 10 basis points quarter-over-quarter. Turning to credit quality, we placed two positions on non-accrual, 48Forty Solutions and FPG Intermediate Holdco. Our non-accrual rate increased to just 70 basis points of the total portfolio at cost, which remains quite low in an industry context. It is also important to note that the credit health of the book remains high in our assessment with the proportion of the portfolio risk rated 2 or better, amounting to over 98%, unchanged quarter-over-quarter. For investment activity in the second quarter, we made new investment commitments, net of syndications of approximately $149 million across 9 new portfolio companies and 12 existing portfolio companies. Investment fundings included fundings of existing commitments totaling approximately $204 million, offset by $208 million in repayments, which continued to be elevated during the quarter. Moving to our financial results for the second quarter. Our total investment income was $100 million for the second quarter as compared to $101 million in the prior quarter. PIK income continues to remain relatively low and decreased quarter-over-quarter from 4.1% to 3.9% of total investment income. Total net expenses for the second quarter were $55.9 million compared to $55.2 million in the prior quarter. Net investment income for the second quarter was $43.7 million or $0.50 per share compared to $46.2 million or $0.52 per share from the prior quarter. As mentioned during our last earnings call, we are expecting a reduction of $0.01 per share due to the timing of when the IPO-related waivers expired. The remainder of the bridge consisted of a combination of repricing and refinancing activity during the quarter. For the second quarter, the net change in unrealized losses was $7.7 million, which was driven by underperformance in a small number of portfolio companies. Turning to our balance sheet. As of June 30, total assets were $3.9 billion and total net assets were $1.8 billion. Our ending NAV per share for the second quarter was $20.59 as compared to $20.65 in the prior period. Our debt-to-equity increased to 1.15x as compared to 1.11x in the prior quarter. Our unsecured debt comprised 55% of funded debt at the end of the quarter. In May, we issued a $350 million 5-year unsecured note at 6% with the premise of refinancing our $275 million unsecured note priced at 7.55% that was coming due in September, which we were able to repay in full in June. This transaction further optimized our debt mix by adding capacity, extending our maturity ladder and lowering our overall cost of capital. We expect the benefit from this cost reduction to be more pronounced in our Q3 results. In addition, this week, we reached another milestone for our platform by successfully pricing our inaugural private credit CLO that further diversifies our funding mix at a highly efficient cost of capital. The aggregate principal amount is approximately $100 million, which is expected to close sometime in September. Focusing now on our distributions. In the current quarter, we paid a $0.50 regular distribution. In addition, our Board of Directors declared a regular distribution for the third quarter of $0.50 per share to shareholders of record on September 30, 2025. Our spillover remains consistent at approximately $0.82. With that, operator, please open the line for questions.

And our first question comes from Doug Harter. The first question will come from Melissa Wedel with JPMorgan.

It seems that there's a lot going on in terms of managing the liability stack, that all makes sense. Also noticed that you guys really leaned into the share repurchase this quarter. I wanted to just revisit that a bit. And I assume it looked like that stepped up with the discount to NAV increasing, I assume we should expect more of the same and also just wanted to confirm. It looks like you've got about half of the repurchase authorization left. Can you update us on that?

Yes, Melissa, thanks. It's Michael. Just on the buyback, as we've talked about in prior quarters, it's formulaic. It's a 10b5-1 program. We have subscribed to the accretion arguments, which we obviously benefited from modestly given your discount comment, a little bit more utilization in Q2 versus Q1 in light of the more elevated volatility following Liberation Day. We've got about 70% left. So call it $30 million of cumulative utilization in the first half of the year. We kind of size that program based on market precedent, but we think it's appropriately sized relative to the equity base.

I appreciate that update. I also wanted to touch on the current status of the portfolio. You have managed to increase leverage to the middle of the target range. Your repayments and exits over the past few quarters have largely balanced out new deployment. I'm interested in your thoughts on the second half of the year regarding deployment opportunities and any insights you have on repayment.

Yes, that's a great question. If you examine the repayments, they are quite consistent with the previous quarter and average over the last several quarters, exceeding $200 million. Breaking it down, about one-third are true repayments, with a diversified range including takeouts from public markets and mergers and acquisitions with both strategic and financial buyers. There are no significant abnormalities in the repayment behavior. Looking ahead at managing capacity and deployment, we expect this trend to continue. However, nearly 50% of the portfolio has undergone repricing over the past 18 months. We anticipate a quarterly churn rate around 5% as we've experienced in the second quarter. Regarding deployment and leverage, we discussed targeting a range of 115 to 120 within 1 to 1.25, allowing some flexibility and potential for leverage upside, though we aren't rushing to take advantage of it. Thus, with our leverage capacity and expected repayments, we have the capacity to deploy. While it's not as aggressive as before the IPO dilution, with a capital base exceeding $20 billion, we are in a good position. We remain very active in terms of pipeline development, as noted by Ashwin regarding the positive signs we've begun to see in the latter part of the second quarter. It's important to note that with MSDL, we are currently in optimization mode. We can deploy capital, but it requires careful attention to borrower and industry concentrations, while still benefiting from diversification through various pools of capital supported by our unique origination process.

And we'll go to Doug Harter with UBS Next.

This is Cory Johnson on for Doug. In the press release, you just mentioned that one of the reasons for decrease in investment income from 1Q was a result of lower base rates. I guess given that those cuts took place in Q4, should we expect any further impact from those? And certainly, like how long does it take to run through the portfolio? Is it maybe about 2 quarters or so?

Yes, Cory, the residual impact was really in reference to some incremental spread compression we saw in the quarter. You'll see we quoted 4.75% for the weighted average of new capital deployed in the quarter relative to where it had been for the prior 9 months at plus or minus 500. The band in the current market kind of look at the pipeline is anywhere between 450 and 550 mathematically. Some modest tightening. We do think it has troughed in terms of the tightening we've seen in the market. Said differently, the 10 bps of asset yield compression you saw in the second quarter, that has started to diminish. We expect there to be stability. There's a convergence in kind of the back book asset yield and where the market is today. So as we think about NII and the kind of confidence we communicated around the $0.50 for Q3 and what the Board kind of talked about, maybe some modest residual impact in terms of that portfolio churn I just referenced. With new deals coming in at modestly tighter spreads than they're coming off. But you do have the offset in terms of standing to benefit from the actions we've done on the debt side, the refinancing on the unsecured, we'll get the full benefit of from in the third quarter, a little bit of leverage upside. You kind of add it all together in the blender, and we continue to be confident in the $0.50. I think it's attractive on a NAV basis when you consider the senior orientation of the portfolio. Going from there, back to your question on reference rates, tough to predict what the Fed is going to do. And that will obviously be a factor. Ultimately, it's a Board decision. But for now, we're very good with the $0.50.

And our next question will come from Heli Sheth with Raymond James.

I wanted to check in on tariffs. Do you have any updates regarding the size of the tariff impact now that we have more clarity on it?

Yes, Heli, thanks for the question. We've continued to update that dynamic assessment of potential impacts, as Ashwin said. We do expect kind of direct impacts given the orientation domestically also towards the services businesses. We are overweight the market in that regard. We quoted in the first quarter potential for kind of low to mid-single digits direct impact. I think just more taking a step back on macro, it does feel like the economy continues to fight through. Some of that, I think, is understandable, considering that a lot of the tariffs initially rolled out were deferred. But through the lens of the portfolio, some good resiliency. If you look at kind of revenue and EBITDA growth rates continue to be in a very good place quarter-over-quarter in the teens and mid- to high single digits, respectively. We are monitoring it, to be clear, not complacent about tariffs. We're looking at input costs. But based on the kind of conversations we're having with the sponsors and the underlying borrowers over the last few months, we continue to feel good about this posture around less direct impact continued to face the unknown around secondary impacts, but we think we're pretty well positioned.

And we'll take a question from Paul Johnson with KBW.

Yes. I am curious about the recent management transition and the significant investment involved. With Jeff's departure, how does the committee's structure change? Is there any alteration in the dynamic or other considerations related to Jeff's previous role?

Yes, Paul, thanks for the question. I think the headline, which you've heard before, and I think the market has generally validated, is business as usual, and that includes from the perspective of the investment strategy. So as Ashwin alluded to, continues to be a focus that very top of the capital structure avoiding the cyclicals. And from an investment committee composition point of view, it's a deep committee. I think the follow-through comment on that just on the depth of the team, also kind of business as usual from the point of view of redundancy in sponsor coverage. But the makeup and the DNA of what we do, how we invest, how we screen, how we deploy capital remains unchanged. I don't want to steal Ashwin's thunder, but his kind of presence on that committee as co-head previously continues on naturally in this seamless transition.

I'd appreciate all that. And one on just the new written non-accrual this quarter for 48Forty. Just kind of wondering if you can maybe provide some color on kind of where maybe that's at and in the stage of restructuring kind of that has the lender support in the lender group to kind of move forward? Or is it still very early in the process there?

Yes, Paul, it's still a little fresh. I don't have a lot of precision on predicting when there's going to be a resolution there, rest assured that we're working with the other lenders and the sponsor for as swift a conclusion as possible. In the meantime, we're monitoring the liquidity situation. But I think in totality, as we talked about, it's a small, less than a handful that falls in that mix. We continue to feel very good about the health of the book, the composition of the credit ratings mathematically going down quarter-over-quarter. Ashwin talked a little bit about the other credit stats, but we feel very good. It's not to say that we couldn't get some macro headwinds here. But if you think about the underlying credit performance vis-a-vis loan-to-value or the fundamentals vis-a-vis leverage and then the sector by sector health of the portfolio, we continue to feel very good about our positioning ahead of that potential macro uncertainty.

And at this time, I'd like to turn the call back to Michael Occi for closing remarks.

Thank you. On behalf of the management team, I greatly appreciate you joining us today, along with your support of 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 are pleased with how MSDL is positioned in this environment due to the sourcing advantages of our unique credit platform. We look forward to providing an update on our third quarter 2025 earnings call in November.

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.