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

Good morning, and welcome to Morgan Stanley Direct Lending Fund's Third Quarter 2025 Earnings Call. I am joined this morning by 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's third quarter 2025 financial results were released yesterday after market close 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 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 Michael Occi.

Thank you, Sanna. Good morning, everyone. Thank you for joining us today for Morgan Stanley Direct Lending Fund Third Quarter 2025 Conference Call. We'll walk through our third quarter results, provide an update on the portfolio and share our outlook for the remainder of the year. I'll start with a few key highlights before turning it over to Jeff Day to discuss the deal environment. We generated solid performance in the third quarter as the deployment environment gathered momentum. We have witnessed a continued pickup in deal activity as the market has gained more visibility on the trajectory of interest rates and government policy. In terms of operating results, we generated net investment income of $0.50 per share, in line with the $0.50 per share that we earned in the second quarter. Our earnings in the third quarter were once again of high quality, characterized by consistently low contributions from payment in kind and other income. During the quarter, MSDL committed $183 million to new investments, representing a 23% increase relative to the second quarter. Fundings were largely offset by repayments with that organic portfolio churn constituting approximately 5% of the portfolio for the third consecutive quarter. The existing book provided a healthy contribution to overall funding activity. And nearly 75% of the non-refinancing volume during the quarter was driven by new platforms, underscoring the strength of our origination engine. Additionally, we continue to lead nearly all of our deal flow, including agency and the LBOs for FMG suite, Holdings, an incumbent borrower and BCTO Blue Bill, a new platform. We believe that 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 given that this opportunity set dwarfs the scale of our capital base. We believe that our selective approach enables us to stay true to our mission of principal preservation as evidenced by our credit results. The Board declared a distribution of $0.50 per share for the fourth quarter, unchanged relative to prior quarters. Our dividend policy framework remains rooted in our pursuit to generate attractive and transparent risk-adjusted returns to shareholders. Even with the prospect of additional Fed cuts, we expect that gross asset yields will remain elevated in a historical context as spreads have shown some evidence of bottoming. Away from interest income drivers, we have made strides in optimizing the right-hand side of the balance sheet, including through the closing of our inaugural CLO and the repricing of our asset-based facility with E&P. We closed both of these in the third quarter, and these steps will see their full earnings benefit in the quarters ahead. We will otherwise continue to evaluate structural opportunities to enhance returns on net asset value without deviating from our more defensive investment strategy. We believe that our transparent revenue model, efficient and conservative debt profile, relatively low operating expense base and thoughtful fee structure highlight our strong alignment with shareholders. As emphasized last quarter, our platform benefits from Morgan Stanley's global resources and continued focus on MSDL as our platform's most visible pool of capital. The firm has continued to support the build-out of our team as part of the ongoing scaling of MSIM's credit business. We remain focused on generating long-term value for MSDL shareholders through the optimization of our defensive investment strategy and other return levers. With that, I will turn the call over to Jeff Day.

Thank you, Michael. As Michael noted, activity in the private equity community has continued to ramp, likely encouraged by tariff policy actually taking effect in early August and the Fed's resumption of interest rate cuts in September. Over the course of the third quarter and even more recently, we have observed an acceleration in financing volumes as evidenced by our own pipeline build. We believe that we are now in the nascent stages of a multiyear M&A recovery poised to drive a large volume of opportunities in the direct lending market. While there is significant dry powder sitting on the sidelines today, we estimate that the demand for private financings could ultimately exceed the supply of capital by a factor of more than 2x over a 2-year period. As we have said previously, the trajectory for market volumes will not take the shape of a straight line. However, we are encouraged to see the rebound beginning to take hold. Strong risk appetite in the public markets as well as competitive dynamics in the private market have continued to weigh on pricing for direct lending deals. However, the weighted average spread on new capital deployed by MSDL in the third quarter was flat to modestly wider quarter-over-quarter, and we continue to earn an illiquidity premium of approximately 150 basis points over the leveraged loan market. While we are not expecting spreads to widen in the near term, a prolonged rebound in sponsor activity could ultimately help tip the balance in favor of lenders. Beyond pricing, we are generally still seeing reasonable EBITDA definitions, strong protection on collateral leakage, and appropriately sized basket-related documentation provisions. Digging a bit deeper into our portfolio construction, we continue to believe that MSDL's portfolio is relatively insulated from direct tariff impacts and potential cycle volatility. We remain overweight in professional service businesses and underweight in more trade and consumer-oriented verticals relative to other BDCs in the market. Our largest sector exposure continues to be software, which accounted for 19.5% of our portfolio as of the end of the third quarter. This allocation is anchored primarily in ERP-related software businesses that serve as the foundational infrastructure and contain the data for their end customers, which we believe will be more insulated from AI disruption. From a borrower segmentation perspective, we continue to believe that MSDL is positioned in the sweet spot of the middle market with the flexibility to take advantage of attractive credit opportunities across the size spectrum. For the second consecutive quarter, the weighted average borrower EBITDA for new platform deployments exceeded approximately $120 million. Our target remains in that plus or minus $90 million EBITDA range. However, our wide deal funnel has identified what we believe to be attractive risk-adjusted return opportunities slightly more upmarket over the past six months. Our portfolio has continued to perform well, particularly considering the unprecedented economic backdrop that we have lived through. Where we have seen weakness, it has generally been categorized by idiosyncratic issues rather than indicative of any broader underlying macro trends. Our borrowers have weathered the heightened inflation and initial bouts of tariffs with remarkable resilience. Over the last several quarters, we have seen stability in loan-to-value profiles, interest coverage ratios that have ticked modestly higher, and EBITDA margins, which have remained relatively healthy. We think that these credit attributes make for a compelling risk-adjusted return proposition for our shareholders. Stepping back, a unique set of conditions is taking shape that could produce sustained tailwinds for the credit environment. The Fed's increased focus on labor market softness suggests that a continued path of monetary easing may be likely, while fiscal policy and a more accommodative regulatory backdrop are working in tandem to support the broader economic activity. Together, these dynamics are helping to drive renewed momentum in sponsor-backed M&A activity and are likely to be constructive for overall credit performance in the quarters ahead. While we remain cautiously optimistic, we are also well positioned to take advantage of potential market volatility should they surface. Our strategy and capital base provide us with the flexibility to lean in when opportunities arise while maintaining discipline through changing market conditions. Looking ahead, we will remain focused on the same investment strategy that has underpinned our success, making first lien senior secured loans to high-quality middle market sponsor-backed companies and less cyclical sensitive industries. With our robust sourcing network and disciplined underwriting, we believe MSDL is well-positioned to continue to source compelling investment opportunities that offer strong risk-adjusted returns and in turn, create value for our shareholders. I will now hand the call over to David Pessah.

Thank you, Jeff. At quarter end, our portfolio totaled $3.8 billion at fair value, maintaining our strong first lien focus comprising of 96% first lien debt, 2% second lien debt, and the remainder in equity and other investments. The portfolio remains well diversified with 218 portfolio companies across 33 industries with an average borrower exposure of approximately 50 basis points. Regarding credit metrics as of quarter end, the weighted average loan-to-value for our portfolio companies was approximately 40%. The median EBITDA was approximately $87 million, and our weighted average yield on debt and income-producing investments was 9.7% at cost and 9.9% at fair value, representing a decline of approximately 35 basis points quarter-over-quarter, which was mainly driven by the decline in base rates. Turning to credit quality, we removed one position from nonaccrual and placed two new positions on nonaccrual. Those being our debt position in Apollo and Atlas Purchaser, which had undergone a prior restructuring in the first quarter of 2024. Our nonaccrual rate was 120 basis points of the total portfolio at cost, which remains quite low. For our investment activity in the third quarter, we made new investment commitments of approximately $183 million across 9 new portfolio companies and 13 existing portfolio companies. Investment fundings, including fundings of existing commitments, totaled approximately $198 million, offset by $200 million in repayments. Moving to our financial results for the third quarter, our total investment income was $99.7 million for the third quarter as compared to $99.5 million in the prior quarter. PIK income continues to remain relatively low representing approximately 4.1% of total income for the third quarter. Total expenses for the third quarter were $56 million compared to $55.9 million in the prior quarter. Net investment income for the third quarter remained unchanged at $43.7 million or $0.50 per share. For the third quarter, the net change in unrealized losses was $16.2 million, which was driven by the underperformance in a handful of portfolio companies. Turning to our balance sheet. As of September 30, total assets were $3.9 billion and total net assets were $1.8 billion. Our ending NAV per share for the third quarter was $20.41 as compared to $20.59 in the prior period. Our debt-to-equity ratio increased to 1.17x as compared to 1.15x in the prior quarter, and our unsecured debt comprised of 54% of total funded debt at the end of the quarter. In September, we closed our inaugural CLO totaling approximately $401 million of aggregate principal at a blended cost of SOFR plus 1.70%. In addition, during the quarter, we repriced our BMP facility, reducing the spread by 30 basis points to SOFR plus 1.95%. We expect the impact of this lower funding cost to be more evident in our fourth quarter results. These transactions, along with our 2030 notes issued last quarter, further strengthened our capital structure by increasing capacity, extending maturities, and reducing our overall cost of capital. We also repurchased approximately $3 million worth of our shares during the quarter at share prices below NAV. Note that our buyback program is formulaic through a 10b5-1 program administered by a third party. 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 fourth quarter of $0.50 per share to shareholders of record on December 31, 2025. Our spillover remains consistent at approximately $0.82. With that, operator, please open the line for questions.

We'll take our first question from Melissa Wedel with JPMorgan.

I think the quarter was pretty straightforward. I'm curious, though, if you could expand on some of your comments from the prepared remarks about the M&A outlook. I'm curious if you're seeing more strategic deals coming through or if you're actually seeing more sort of PE to IPO or PE to PE turnover.

Yes, Melissa, thanks for the question. It's a mix. I think if we think about the evolution that began in this emerging rebound, call it, six months ago, when we look at the pipeline today and the activity in the third quarter, we have pretty good diversity in terms of the use of proceeds, LBOs, take privates, generally a little bit of dividend activity, incrementals. I think we are optimistic to see the continued emergence of regular way LBO activity. We're seeing pretty constructive activity across the board. And our expectation is that it won't be a straight line, but it should continue into 2026.

I appreciate that. And then following up on just the dividend level. Obviously, that was flat quarter-over-quarter. And realizing that you've been earning NII right at that dividend level now for a couple of quarters. I'm curious how you guys think about the spillover income? And should we see NII pressure from declining base rates, would you think about using spillover income to maintain the dividend level? Or is that something that you'll continue to assess?

Yes. We look at the spillover as one option to help with smoothing over time and the prioritization around consistency, which we do think is important. At the end of the day, though, Melissa, earnings are going to drive the dividend power of the business. The Board is also going to remain focused on prioritizing transparency. If you kind of look at net interest income, and Dave commented on this, there are both headwinds and tailwinds as we talked about in prior quarters. From an asset yield point of view, I would highlight the fact that from an NII impact perspective, you see about a $0.015 impact associated with each 25 basis point cut from the Fed. But importantly, there's about a one-quarter lag if you think about the impact on earnings. So the 25 bps cut we saw in September will have a 4Q impact, while the one from October will more or less have a 1Q impact. And spreads are obviously a variable too, as we commented on, we're seeing some bottoming. There are maybe diminishing marginal impacts in asset yield compression associated with that until we see spreads widen. In the tailwinds category, we do have near term a pretty good offset with some of what we've accomplished on the liability side through the CLO and the ABL repricing, about $0.01 of benefit that we should stand to see in 4Q and beyond. Other levers just on an ongoing basis would include other ways to optimize ROE. The buyback is included in that mix. Regular way deployment is included in that mix and potentially other things that we would look to enhance ROE over time. If you see significant cuts kind of going out in the future, it may not be a perfect offset, but we're going to continue to be laser-focused on optimizing ROE, creating value for investors, and that includes paying a compelling distribution that the core earnings can support over time.

We'll now take our next question from Robert Dodd with Raymond James.

I'm interested in the other things that you can do. You've mentioned that a couple of times, Michael, in terms of portfolio optimization, etc., but also other return levers. I mean, what are the sorts of things you are contemplating? I mean, are you talking about something like a JV loan fund structure or something like that? Obviously, there's a ramp-up time, right? But some of those other non-just direct lending off the balance sheet structures can enhance ROEs, but do take a while to get set up. I mean just what are the kind of things that you're contemplating there?

Yes, Robert, great question. What I would say is not unlike what we succeeded in doing with the inaugural CLO last quarter, we are in constant evaluation mode around various structural options that could optimize for returns in the normal course. Those options would include, but are not limited to a joint venture, which could enhance the return profile of the company, as you alluded to. Our team has experience with this strategy. To your last point, we're diligent in the exploration of all of these different options to ensure that that solution doesn't involve us actually taking more risk than we would customarily do on the asset or the liability side.

Got it. Regarding the pipeline, I want to address the comments about the expected demand for private capital and the need for borrowing potentially exceeding supply by two times in the next two years. If that is your base case, do you anticipate that if demand for private credit capital significantly surpasses supply, it might lead to widening spreads in the coming years? I'm not referring to next quarter, but you've mentioned a two-year timeframe. Is this how you envision the market's future and the prospects for this BDC?

Yes, Robert, great read of the commentary. I think in short, it is with the convenient caveat that it's tough to peg the point at which that balance will tip. In broad strokes, we measure the opportunity set vis-a-vis stemming from private equity middle market dry powder, maturities it being order of magnitude, something like $500 billion as we measure it over the next couple of years. The offset, to your point, is supply of capital. We think it's plus or minus $200 billion, taking into account ongoing fundraising in evergreen products. And so we think that this supply-demand could ultimately tip the balance in favor of lenders vis-a-vis terms, but it's not going to happen overnight. And so those types of metrics could ultimately support that dynamic, but it's going to take time for us to see the evidence of that.

Got it. And then one more, if I can. Obviously, the pipeline is picking up, and activity is increasing. Are you noticing if the quality of deals in the marketplace is keeping pace with the rebound? You're clearly focusing on higher-quality deals, but is the median deal quality in terms of the underlying buyer starting to decline?

Yes, it's a great question. We see a pretty good variety. The quality is there, probably at the very upper end of the EBITDA spectrum, what falls out into private credit land is limited to a certain extent by very high-quality borrowers that could just as well pursue financing in the public market. If you take a step back and just consider the breadth of our funnel, and we've belabored this before, but it's core to our DNA and our differentiated offering. We've got a very high-quality and growing team that is serving north of 400 private equity firms, but compounding that is other areas within this institution, including a vibrant investment bank that's serving many of the same private equity firms feeding that funnel. And so I'm merely trying to underscore the point that we have a pretty good vantage point vis-a-vis the flow that we have access to. We benefit from having a little bit of a supply-demand imbalance relative to our capital base. It allows us to be selective. And so we're certainly seeing high-quality deals. We're seeing low-quality deals that we have the luxury generally of passing on, which we think is unique testament to our business. And so I think it's a little bit of a mix in terms of quality, not inconsistent with what we've seen in the last couple of years, just the kind of volume is picking up.

Our next question will come from Kenneth Lee with RBC Capital Markets.

Just one on the prepared remarks. I think you briefly mentioned about building out the team, expansion of the MSIM platform there. Wonder if you could just further expand upon that. Wondering if there's any kind of potential additions down the line for the originations funnel there.

Yes, it's a great question, Ken. What I'd say is that the team has continued to grow. We alluded to that. It's a high-quality team. We couldn't be prouder of what we've assembled and continue to curate in this business, with headcount approaching about 80 individuals. The redundancy in the sponsor coverage effort and just the build-out in terms of sheer headcount has supported what is this increasing volume dynamic on the deal side. We continue to leverage Morgan Stanley more broadly in the brand and relationships, as I just alluded to. And specifically, the firm has continued to support the team expansion. So net headcount has grown by over 10% since the start of the third quarter. And that pickup is about one-third since the IPO at the beginning of last year. The firm remains committed in terms of the talent build, also committed to supporting this business in terms of ongoing investment in product and distribution capabilities, too.

Got you. Very helpful there. And one follow-up, if I may, on the nonaccrual side, I think you mentioned for them that there was a further restructuring after a prior restructuring. Wondering if you could provide a little bit more details around that, what drove the latest restructuring and how you see the potential recovery path there?

Yes, Ken, you probably point out that they were both kind of known issues. I don't know, Rebecca, if you want to address that more specifically.

Yes. Regarding the deal you mentioned, there was a restructuring that occurred in the first quarter of 2024. The business has continued to underperform, and there is likely to be another event soon. As a result, we have classified that as nonaccrual and expect it to be resolved in the near term.

We'll now take a question from Ethan Kaye with Lucid Capital Markets.

Curious what drove the deceleration in share buybacks? I know you mentioned it's formulaic, but the stock multiples seem to contract this quarter. So just hoping to kind of get a better understanding of what are the other inputs into that formula and specifically, what may have caused the decline this quarter?

Yes, Ethan, it's a good question. As you alluded to, the plan is formula-based, administered by a third party. It takes into account various inputs such as share price but also capital structure considerations. We're committed to the program. We acknowledge the accretion benefits associated with it. At the same time, though, we have multiple capital allocation options at our disposal. And so that includes regular way deal deployment, among other things, and those can be value generative too. And so we think of these different options together as we measure the usage of capital over time; we will continue to optimize that with the goal of generating value for shareholders.

Understood. And then I guess one other quick one. So there was some migration downwards in the internal risk ratings you published, nothing dramatic really, but just kind of wondering whether this reflects the name or names that were added to nonaccrual or if there are maybe some other positions that experienced some negative trends there?

Yes, Ethan, I'll start by just reiterating that the portfolio, we think, continues to perform really well. Borrower health has remained resilient in the wake of the peak inflation and early days here on tariffs. We continue to see pretty good growth, top line in the double digits, mid- to high single digits EBITDA. We've seen that interest coverage ratio grind a little bit higher over the last series of quarters. Where we've seen issues, including those that you're alluding to, it has been isolated to certain companies with ongoing specific problems, which we don't think are indicative of anything systemic. But maybe I'll turn it over to Jeff to comment on the nonaccruals and the migration that you asked about.

Yes, Ethan, it's good to reconnect. During the quarter, we added two investments to nonaccrual status, while one was removed. This was out of a total of 218 borrowers, so the occurrence is quite low. These were specific underperformers, as Michael pointed out, and they come from different industries and end markets. The challenges they faced do not reflect weaknesses in any particular industry but are rather unique to those individual businesses.

Great. Yes. Obviously, aggregate credit quality continues to look great. So I appreciate that color.

That does conclude our question-and-answer session for today. At this time, I'd like to turn the call back to Mr. Michael Occi for closing remarks.

We are executing our defensive investment strategy to drive shareholder value, and I couldn't be more pleased with our continued execution. We're confident 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 fourth quarter 2025 earnings call in February of next year.

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