Welcome to the Morgan Stanley Direct Lending Funds Fourth Quarter and Full Year 2025 Earnings Call. As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Sanna Johnson, Head of Investor Relations. Please go ahead.

Good morning, and welcome to Morgan Stanley Direct Lending Fund's Fourth Quarter and Full Year 2025 Earnings Call. I am joined this morning by Michael Occi, Chief Executive Officer; Jeff Day, Co-President; David Pessah, Chief Financial Officer; and Rebecca Shaoul, Head of Portfolio Management. Morgan Stanley Direct Lending Funds' Fourth quarter and full year 2025 financial results were released yesterday after market close and can be accessed on the Investor Relations section of our website at www.mscl.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, 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.

Good morning, everyone. Thank you for joining us today. I'll start with some earnings highlights and our outlook before turning it over to Jeff Day to discuss deployment in the portfolio. David will then walk through our results in more detail before we conclude with Q&A. We generated solid performance in the fourth quarter. In terms of operating results, we earned net investment income of $0.49 per share as compared with $0.50 per share for the prior quarter. Earnings quality remained high, characterized by limited contributions from payment in kind and other income. Our underlying portfolio continues to perform well, and we remain confident that MSDL is well positioned from an execution perspective. As we reflect on 2025, I would be remiss not to acknowledge at the outset that the direct lending industry faced a number of obstacles. Though these factors have affected sentiment for the asset class, we think that some of these pressures may soon ease. Starting with asset yields. We acknowledge the contraction in MSDL's portfolio yield since the late 2023 peak. However, that contraction has decelerated, and there is evidence that it may be winding down, driven by the spread stability that we witnessed throughout 2025, the repricing trade having largely run its course, and the Fed now potentially in the late innings of its easing cycle. Secondly, investors have been rightfully looking for cues of credit stress across the industry given still elevated rates, tariff policy, and other shifts in the economy. Despite these economic dynamics, our borrowers have been resilient, and we believe that our book has held up well. Underperformance in MSDL's portfolio has been isolated and has not generally been driven by systemic factors. As we have all seen in recent weeks, the market's latest concern has been artificial intelligence as a threat to software. While we recognize that AI will be disruptive, we are confident in our underwriting process that has explicitly taken AI risk into account for a number of years. As part of this, we benefit from being part of the broader Morgan Stanley platform, a global financial services leader in software and technology. As Jeff will review in more detail, this provides us with immense resources that augment our underwriting process as well as our portfolio management efforts. Lastly, on the deal environment, which has been another area of focus for the market. M&A was famously slow to recover from the post-COVID trough. But we started to see a rebound in PE sponsor activity take hold in the second half of 2025. We think that this pickup will be a multiyear phenomenon that will continue to be a structural tailwind for lenders like us. Against this evolving backdrop, we remain focused on protecting NAV, preserving balance sheet flexibility, and providing shareholders with a consistent distribution. These are priorities for our leadership as we position MSDL for long-term success through economic cycles. Accordingly, the Board declared a distribution of $0.45 per share for the first quarter of 2026, representing a $0.05 reduction from the prior quarter. This adjustment aligns the distribution with the normalization of short-term interest rates and implies a still robust yield on NAV of approximately 9%. We think that this enables MSDL to deliver a distribution that is durable and consistent with our dividend policy framework that remains rooted in our pursuit of generating attractive and transparent risk-adjusted returns to shareholders. We will remain focused on optimizing MSDL's return on NAV without deviating from our thoughtful capital management approach and more defensive investment strategy. During the second half of 2025, we made strides to recalibrate the right-hand side of the balance sheet, including through the refinancing of legacy unsecured debt, the execution of our inaugural CLO, and the repricing of our asset-based facility. Aligned with this mission, we also successfully closed the joint venture that will deploy assets consistent with MSDL's selective credit box and that will utilize appropriate leverage. While this only closed one week ago, the JV is already close to 50% ramped, and we believe will be accretive to MSDL's net investment income, all else equal. With the broader support of Morgan Stanley, we have remained true to our strategy of providing loans to high-quality sponsor-backed businesses and leveraging the broader integrated firm in those efforts. We also believe that our transparent revenue model, efficient and conservative debt profile, relatively low operating expense base, thoughtful fee structure, and repurchase program highlight our strong alignment with shareholders. With that, I will turn the call over to Jeff Day.

Thank you, Michael. Turning to the market environment. We continue to see a constructive opportunity set across the direct lending landscape supported by improving sponsor engagement and a steady flow of actionable opportunities across a broad range of sectors. Importantly, our origination activity continues to benefit from our differentiated sourcing model. Given our integration within a full-service investment bank, our private equity clients increasingly view us not just as a capital provider but as a long-term strategic financing partner. As a result, we are seeing consistent access to high-quality transactions sourced through our dedicated origination team as well as other parts of the Morgan Stanley platform. During the quarter, MSDL committed $146 million to new investments, the majority of which were for new LBO transactions, underscoring our continued ability to originate and execute on unique well-structured opportunities. Overall, fundings were largely offset by repayments. That being said, we have seen a slowdown in repricing activity and believe nearly all loans that stood to benefit from a repricing event have already done so over the last two years. Looking at the non-refinancing volume in the quarter, nearly 70% was driven by new platforms, and we led or co-led all of these transactions. Rounding things out, the existing portfolio also continued to provide a healthy contribution to overall funding activity. From a borrower segmentation perspective, we continue to believe that MSDL's core middle market focus is positioned in the sweet spot of the market while our origination funnel and capital base afford us the flexibility to take advantage of attractive credit opportunities across the size spectrum. Our median EBITDA for deals closed over the course of the year was approximately $94 million which was in line with the overall median of our entire portfolio of $90 million. The market remains competitive for the highest quality borrowers with durable cash flow profiles. Encouragingly though, spreads have demonstrated stability for the fourth consecutive quarter with weighted average spreads on capital deployed in the mid- to high 400 basis point range, evidence of disciplined market conditions despite increased capital availability. We believe our defensive orientation remains a key differentiator with a conservative weighted average loan to value of just below 40% as of the fourth quarter. In addition, we have continued to see positive trends in key portfolio metrics. Revenue and EBITDA growth rates remained healthy. We saw an increase in the weighted average interest coverage ratio for our borrowers year-over-year while PIK income as a percentage of total income declined quarter-over-quarter. While nonaccruals for the quarter ticked up modestly, we are pleased that the portfolio remains in very good shape and the mark-to-market activity that took place during the fourth quarter was a result of a small number of credits that have been underperformers in prior quarters. Digging a bit deeper into our portfolio construction, we continue to believe that MSDL's portfolio remains relatively insulated from direct tariff exposure and broader cycle volatility with our software investments continuing to demonstrate strong resilience. We remain overweight in professional services businesses and underweight in more trade and consumer-oriented verticals as well as health care borrowers with potential reimbursement risk relative to other BDCs in the market. Looking specifically at our software portfolio, our focus remains squarely on mission-critical system of record platforms, including ERP systems. These businesses sit at the core of their customers' operations often in complex or regulated environments and frequently house proprietary data. As a result, they benefit from long sales cycles, high switching costs, strong renewal dynamics, and durable recurring cash flows. In our view, these are typically the last systems a company would consider replacing even in periods of economic stress. The burden of accuracy for these solutions is remarkably high, and while AI has already or will inevitably be integrated into each of these investments to increase efficiency or improve the user experience, we believe it will be challenging for AI solutions to completely replace these critical software solutions. AI is a disruptive technology by nature, but it is not new to our evaluations of an investment or assessment of our existing portfolio. When we look at new investments, we take a disciplined and analytical approach, leveraging Morgan Stanley's best-in-class software advisory insights as part of our due diligence process to validate competitive positioning, assess moats, evaluate enterprise value, and identify potential risks that threaten terminal value well in advance. Since our inception, our robust underwriting approach has included an assessment of potential risks and opportunities associated with AI adoption, competitive dynamics, and long-term enterprise value. We believe this approach enhances our ability to underwrite technology risk thoughtfully rather than react to headlines. In addition, we have been utilizing a proprietary AI scorecard, which we apply to every new investment and is updated on a quarterly basis as part of our ongoing portfolio review process, aiding us in continually monitoring and proactively assessing potential competitive threats or business model disruption. In summary, we are confident about the quality of our existing book and our unique capabilities as a leader in this marketplace. Our sourcing engine is unearthing attractive opportunities and an improving M&A backdrop, and our underwriting discipline equips us well to continue to navigate an evolving market environment for the benefit of 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 227 portfolio companies across 35 industries and an average borrower exposure of approximately 40 basis points. Regarding credit metrics at quarter end, the weighted average loan to value of our portfolio companies was approximately 40%, with a median EBITDA finishing the quarter virtually unchanged at $90 million. The weighted average yield on debt and income-producing investments was 9.3% at cost and 9.5% at fair value, marking a decline of roughly 40 basis points quarter-over-quarter, primarily due to the decline in base rates. In terms of credit quality, we removed Atlas purchaser from nonaccrual and placed DCA investment holdings on nonaccrual. Our nonaccrual rate stood at 160 basis points of the total portfolio at cost. Underneath the $146 million of new investment commitments that Jeff highlighted were loans to 17 new portfolio companies and 15 existing ones. Investment fundings including those for existing commitments amounted to about $164 million, offset by $163 million in repayments. Moving on to our financial results for the fourth quarter. Total investment income was $96.6 million, down from $99.7 million in the previous quarter largely attributable to the recent Fed rate cuts. PIK income remained relatively low, which declined by 20 basis points to 3.9% of total income for the quarter. Total expenses decreased to $54.2 million from $56 million in the prior quarter, largely due to a reduction in incentive fees earned from our incentive fee cap. Net investment income for the fourth quarter was $42.4 million or $0.49 per share. The net change in unrealized and realized losses for the fourth quarter was $13.7 million driven by underperformance in a small number of portfolio companies. Net realized losses for the period were primarily due to the restructuring of and sale of Atlas purchaser. As of December 31, our total assets were $3.9 billion and total net assets were $1.75 billion. Our ended NAV per share for the fourth quarter was $20.26 compared to $20.41 in the prior period. The debt-to-equity ratio increased to 1.20x from 1.17x in the previous quarter, with our unsecured debt comprising 54% of total funded debt at the end of the quarter. As Michael noted, a key focus throughout 2025 has been diversifying our funding sources and lowering our overall cost of capital. During the quarter, we repurchased about $9 million worth of our shares at prices below NAV through a 10b5-1 program administered by a third party. We also renewed our repurchase program and maintained the overall size of the program at $100 million, which is sizable as a percentage of market cap and reflects our commitment to delivering long-term shareholder value. In February, we began investment operations for the joint venture referenced earlier. The vehicle has a total equity commitment of up to $250 million, of which $200 million is committed from MSDL. To date, approximately 47% of the total equity commitment has been called and the joint venture has made $372.8 million investment commitments across 51 portfolio companies. Our objective is to scale this vehicle over time to approximately $700 million in assets. Regarding distributions, we paid a $0.50 regular distribution in the fourth quarter. Additionally, our Board of Directors declared a regular distribution of $0.45 per share for the first quarter to shareholders of record on March 31, 2026. As of December 31, 2025, our spillover is approximately $0.85. With that operator, please open the line for questions.

And we'll take our first question from Rick Shane with JPMorgan.

Look, you guys are demonstrating the ability to do more than one thing at a time in terms of deploying capital, repurchasing shares. I am curious when you sort of weigh those investment opportunities and the potential returns, what you think is most compelling. And also when you think about the use of leverage in this environment on your own balance sheet to lean into one or both of those tactics?

Yes, Rick, it's great to have you on the line. Good question. I'll start, and then Dave can give you a little bit more nuance on the buyback program. We've got multiple capital allocations at our disposal and we think they can all at times be value generative. And so it is a balance, as you suggest, leverage is an input into that regular way deal deployment and the economics of that evolve day by day, quarter by quarter, but we continue to find compelling opportunities in the marketplace to go and deploy capital and refinance legacy investments and we think that can actually be even more attractive in a volatile environment. And so it's really about optimization of these different tools, but we can give you a little bit more color on the buyback activity.

Yes. So our buyback plan, as kind of Michael alluded to, our capital allocation remains prudent. So in the fourth quarter alone, we repurchased $9 million, which is up meaningfully from the third quarter. We're very committed to our buyback program. We understand the accretion benefits associated with that. And most recently with our Board, as of yesterday, just authorized a fresh renewal of the program for up to $100 million in size, which we think is relatively sizable in the context of our current market cap.

We'll go next to Heli Sheth with Raymond James.

So as you begin launching this new JV, any further insight into the pace or trajectory of ramping the JV. How should we think about capital deployment, earnings contribution over the next few quarters?

Yes, no, good question. I'll just give you a quick background on the JV and kind of how we're thinking about the utilization of it. So as mentioned some in the prepared remarks, we put incremental capital to work through that newly formed JV; we committed $200 million in total size. And as mentioned, we nearly called half of that already. Total investments, it's about $373 million across 51 portfolio companies. And there's a credit facility down there of a total debt commitment of about $500 million in size. The idea behind it, I think it just provides capital efficiencies across our portfolio. And then how we're thinking about terms of just overall structural in size, the goal is to get it north of $700 million in funded assets. It can take anywhere from 4 to 6 quarters is our projection in terms of getting there, but we'll be prudent in terms of what we're actually thinking about and scaling that. In terms of the actual investments that are in there, it's honoring our same narrow credit box that's similar to how we've been deploying capital up at MSDL. So I'm thinking about our investment strategy as one and the same between the normal way of course, at MSDL as well as within the joint venture itself.

And a quick follow-up here, switching gears to nonaccrual. This quarter, in the BDC space, we've seen three different nonaccruals in the dental sector, including DCA, which is in your portfolio. Are you noticing anything concerning about the dental sector specifically? Or are there any particular segments within the broader healthcare industry that have raised concerns?

Yes, Heli, that's a good question. As we mentioned earlier, the portfolio remains in strong condition. Overall, the credit quality has shown positive trends across various aspects. When we look at growth, including top-line and EBITDA, we see stability in leverage and loan-to-value ratios, as well as an increase in interest coverage. Regarding nonaccruals, we did experience a one-time event. You asked about dental roll-ups, and there seems to be a trend of some weakness in that area, similar to what we previously mentioned about logistics. These are the main industry-related issues we see as underperforming. However, our exposure to these sectors is limited, and outside of that, any underperformance is primarily due to specific individual cases.

We'll move next to Kenneth Lee with RBC Capital Markets.

Just one follow-up on the new JV there. Just by my math, it sounds as if the overall portfolio allocation could be around 15% or so. Just want to check that. And what do you see in terms of just overall longer-term allocation to this JV?

Yes, Ken, thanks for the question. So the $200 million max equity commitment for MSDL equates to a 5% allocation relative to the total portfolio. So when we think about the economic upside potential for MSDL, we would point you to that type of magnitude relative to the whole. And the way to think about it, to go back to what Dave alluded to in being kind of half of the capital already called, is roughly 2.5% of that full allocation from the start.

Got you. And then in terms of the share repurchase program, the new one, the $100 million, just to clarify, is this a discretionary program? What sorts of restrictions are there around the repurchases there?

Yes, it resembles our previous plan. There are established parameters for submission which are programmatic and managed by a third party that does enforce certain rules regarding the overall plan. However, everything is being handled by this third party. For example, there are various factors including price and other capital structure considerations that are taken into account.

We'll go next to Ethan Kaye with Lucid Capital Markets.

Regarding the joint venture, is the 47% currently invested a one-time asset purchase? Also, were assets sold from MSDL's balance sheet? More generally, is MSDL's strategy to sell assets to the joint venture, and what will the overlap look like?

Yes, I'll start and let Michael or Jeff add anything. It wasn't any assets that were dropped down from MSDL into the JV. It was actually an acquired portfolio of directly originated senior secured loans across our book.

Yes. The logic of having warehouse these assets in advance of the formal closing of the joint venture was designed to accelerate the potential impact on MSDL for the benefit of shareholders. So we weren't starting that ramp from zero day one. As far as overlap is concerned, Ethan, it's a good question. It is the same mandate, and so there will inevitably be overlap as we think about specific allocations at the borrower level and industry level. But importantly, we're going to be laser-focused as far as our portfolio management activities are concerned to monitor for single borrower exposures and industry exposures on a look-through basis taking into account the JV.

Great. I appreciate that. And then 1 or 2 more just on the dividend. So you guys comfortably covered the new dividend by about $0.04 per share this quarter. With that being said, there are still some NII headwinds out there. I guess the question is, how confident are you that you can earn this NII level or this dividend level through the rate cycle? Or is this kind of something you see continuing to have to be reassessed 6, 12 months down the road?

Yes, Ethan, I'll try to break it down maybe starting from the bridge for the $0.49 relative to the $0.50 in the prior quarter. The $0.01 effectively was largely driven by the September cut impact part of the October Fed cut impact as we relate it to the $0.49 baseline moving forward and focused on the potential impact to SOFR. This quarter, the first quarter of 2026, is really the first quarter where we're going to see the impact of all of the Fed cuts that have happened previously, including the December cut. So probably a couple of pennies directionally impact relative to the $0.49 as we think about all else equal, the impact of the Fed cuts that we've seen. As you alluded to, as we talked about in the earlier remarks, there are a couple of additional cuts expected from the Fed over the course of the year and into '27. That obviously ebbs and flows that can introduce additional drag on NII. But importantly, the joint venture, which was obviously relevant for the prior questions, can provide incremental ROE and NII to MSDL. It's going to ramp gradually, but as we talked about, it's kind of 50% there out of the gate. We wouldn't expect meaningful impact in the first quarter, given the timing of that closing, but we would stand for this to potentially be a contributor beginning with the second quarter and ramping from there. So a lot of these variables we're taking into account as we think about the dividend decision with the Board. There's no way to fully bulletproof any level, including the one that we decided on at the $0.45 is we don't control monetary policy spreads and other variables. But we feel pretty good about the size of the distribution over the medium term based on what we know today.

Great. I guess it would be easier if you did control monetary policy, but great.

We will move next to Doug Harter with UBS.

This is Cory Johnson on for Doug. I had a question. I guess in regards to the dividend, I guess, given where you guys are at in terms of earnings and also what the spillover that you have. Should we expect, I guess, any supplemental or special dividend going forward?

Yes, Cory, it's a good question. We spent a lot of time thinking about different permutations prior to the IPO. We actually had the supplemental formula that was in a different environment, a rising rate environment. We ultimately concluded to kind of keep it simple and transparent back to kind of some of the principles that we're focused on as it relates to dividend policy. And so as we just talked about, we feel pretty comfortable about the level based on the earnings model and kind of the variables that we can account for today. Should there be excess income at year-end, that's something the Board can evaluate in terms of potential for an annual special.

Got it. And just one other question. Just given all of the noise currently about AI threats and disruption and such. Are there any areas which you maybe went to historically, which you're seeing clear of now or any areas that would give you concern or any areas in particular that you are leaning into or looking to lean into more?

Yes. The short answer is, No. We have had a high bar as it relates to capital deployment from the very beginning. It's part and parcel to our more defensive model. That applies to software. It applies to every industry that we invest in. Within that, we're focused on, of course, the underlying business at the very top of the list, but also structure leverage pricing, et cetera. And so that certainly applies to software, where AI has been part of the equation as it relates to the original underwrite for a while now and certainly on an ongoing basis. And it's not just software as we evaluate the potential impact, positive or negative, from AI to other businesses away from that industry vertical. So in short, the industry allocations are going to ebb and flow. They're going to ebb and flow based on conscious decisions that we are making on a regular basis to deploy capital. And certainly, there's a governor that we have in mind as it relates to making sure at the portfolio level that there's significant diversification throughout.

And at this time, I would 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 from Morgan Stanley Direct Lending Fund. As I've mentioned before, our platform benefits from Morgan Stanley's global resources and our continued focus on MSDL as our 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. I'm very pleased with our continued execution, particularly in the face of the more eventful backdrop. We're seeing potentially constructive market developments, and our strategy and structure position us to win in the marketplace. We also remain methodical about optimizing the business with the goal of delivering high-quality returns to investors. We look forward to providing an update on our first quarter 2026 earnings call in May.

Thank you. Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time.