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    MSDL
    Earnings call· Jun 2026(Q2 FY26)

    Morgan Stanley Direct Lending Fund Q2 FY26 earnings call MSDL

    Aug 7, 2026 Source

    Executive summary

    Morgan Stanley Direct Lending Fund Q2 FY26 — Solid Portfolio Health Amidst Market Transition

    Morgan Stanley Direct Lending Fund navigated a transitional Q2 FY26 with solid portfolio health and strategic capital management. While net investment income saw a slight contraction and NAV experienced some pressure from specific nonaccruals, the company proactively managed its balance sheet through financing initiatives and share repurchases. The Capstone JV continues to be a growing contributor, and management remains confident in its ability to deliver value amidst evolving market dynamics.

    Highlights

    5

    • Capstone JV accretion contributed $0.03 per share to NII, with expectations for further ramp-up over the coming year.

    • Share repurchase program added $0.05 to NAV per share during the quarter, bringing total program-related accretion to $0.10 for H1 2026.

    • Successfully executed two proactive financing initiatives, including a $350 million unsecured notes offering, prefunding a portion of the Feb 2027 maturity.

    • Portfolio health remains solid with approximately 95% of investments risk-rated 2 or better, performing in line with original underwriting.

    • Successfully completed restructurings for BCA buyer and Abcam, reflecting active portfolio management and value preservation.

    Concerns

    5

    • Net investment income (NII) contracted by $0.02 per share QoQ, from $0.47 to $0.45 per share, due to nonaccruals and higher financing costs.

    • NAV per share decreased to $19.50 from $19.81 in the prior period, largely attributable to underperforming investments and nonaccruals.

    • Nonaccrual investments increased to 2.9% of the portfolio at cost, with US Infra Services Buyer, Spectrio, and VPG Holdings placed on nonaccrual status.

    • Total expenses increased to $50.6 million from $48.6 million, driven by higher other debt expenses and a smaller incentive fee cap benefit.

    • Industry lending volume was more uneven than anticipated in H1 2026, with sponsors remaining selective amid geopolitical developments.

    Guidance & targets

    4
    CategoryTargetConfidence
    Regular Distribution
    $0.45 per share
    medium materiality
    High
    New Deployment Activity
    accelerate
    medium materiality
    Medium
    Capstone JV Scaling
    further ramp
    high materiality
    High
    Capstone JV Scaling
    continue to ramp
    high materiality
    High

    Operational metrics

    50
    Net investment income per share
    $0.45down from $0.47
    Q2 FY26

    Generated net investment income of $0.45 per share compared with $0.47 per share in the prior quarter.

    Net investment income per share
    $0.47
    Q1 FY26

    Generated net investment income of $0.45 per share compared with $0.47 per share in the prior quarter.

    NAV per share
    $19.50down from $19.81
    Q2 FY26

    Ending NAV per share for the second quarter was $19.50 compared to $19.81 in the prior period.

    NAV per share
    $19.81
    Q1 FY26

    Ending NAV per share for the second quarter was $19.50 compared to $19.81 in the prior period.

    Share repurchase program accretion to NAV
    $0.05
    Q2 FY26

    Share repurchase program added $0.05 to NAV per share during the quarter.

    Share repurchase program accretion to NAV
    $0.10
    H1 FY26

    Brought total program-related accretion to $0.10 for the first half of 2026.

    Portfolio risk rating 2 or better
    95%stable QoQ
    Q2 FY26

    Approximately 95% of the portfolio generally performing in line with the original underwriting case.

    Nonaccrual investments
    2.9%
    Q2 FY26

    Increased nonaccruals to 2.9% of the portfolio at cost as of June 30.

    Portfolio at fair value
    $3.6 billion
    Q2 FY26

    Our portfolio totaled $3.6 billion at fair value as of quarter end.

    First lien debt proportion
    93%
    Q2 FY26

    Approximately 93% of the investments were classified as first lien debt.

    JV proportion
    3%
    Q2 FY26

    3% in our JV and the remainder in second lien equity and other investments as of June 30.

    Total investment fundings
    $146 million
    Q2 FY26

    Total investment fundings amounted to about $146 million during the quarter.

    Repayments
    $240 million
    Q2 FY26

    Offset by $240 million in repayments.

    Number of portfolio companies
    229
    Q2 FY26

    The portfolio remains well diversified with 229 portfolio companies across 36 industries.

    Number of industries
    36
    Q2 FY26

    The portfolio remains well diversified with 229 portfolio companies across 36 industries.

    Average borrower exposure
    $15.5 million
    Q2 FY26

    An average borrower exposure of approximately $15.5 million.

    Weighted average loan-to-value
    39%
    Q2 FY26

    The weighted average loan-to-value across our portfolio was approximately 39%.

    Median EBITDA
    $90 millionrelatively unchanged
    Q2 FY26

    Median EBITDA remained relatively unchanged at $90 million.

    Capstone JV total equity commitments
    $250 million
    Q2 FY26

    The vehicle has total equity commitments of up to $250 million, of which $200 million is committed by MSDL.

    Capstone JV equity commitments called
    52%
    Q2 FY26

    To date, approximately 52% of the total equity commitments have been called.

    Capstone JV investment commitments
    $426 million
    Q2 FY26

    Supporting approximately $426 million of investment commitments across 58 portfolio companies in 25 industries.

    Capstone JV weighted average yield on debt and income-producing investments
    8.8%
    Q2 FY26

    The weighted average yield on debt and income-producing investments is 8.8% at cost.

    Capstone JV levered dividend yield on MSDL's investments
    13%
    Q2 FY26

    On a levered basis, the dividend yield on MSDL's investments equated to approximately 13%.

    Net investment income
    $38.2 million
    Q2 FY26

    Net investment income for the quarter was $38.2 million or $0.45 per share.

    Total investment income
    $89 millionrelatively unchanged
    Q2 FY26

    Total investment income was relatively unchanged at $89 million.

    Total expenses
    $50.6 millionup from $48.6 million
    Q2 FY26

    Total expenses increased to $50.6 million from $48.6 million in the previous quarter.

    Total expenses
    $48.6 million
    Q1 FY26

    Total expenses increased to $50.6 million from $48.6 million in the previous quarter.

    Net change in unrealized depreciation and realized losses
    $30.2 million
    Q2 FY26

    The net change in unrealized depreciation and realized losses for the second quarter was $30.2 million.

    Total assets
    $3.7 billion
    Q2 FY26

    As of June 30, our total assets were $3.7 billion.

    Total net assets
    $1.65 billion
    Q2 FY26

    Total net assets were $1.65 billion.

    Gross debt-to-equity ratio
    1.21xdown from 1.22x
    Q2 FY26

    The gross debt-to-equity ratio closed the quarter at 1.21x, modestly below the 1.22x multiple from the previous quarter.

    Gross debt-to-equity ratio
    1.22x
    Q1 FY26

    The gross debt-to-equity ratio closed the quarter at 1.21x, modestly below the 1.22x multiple from the previous quarter.

    Unsecured debt proportion
    56%
    Q2 FY26

    Unsecured debt was 56% of total funded debt at the quarter end.

    Unsecured notes issuance
    $350 million
    Q3 FY26

    After quarter end, we completed a new 5-year unsecured notes issuance totaling $350 million at a coupon of 6.10%.

    Unsecured notes outstanding
    $425 million
    February 2027

    This issuance was completed in advance of the upcoming February 2027 maturity, which has a $425 million outstanding notional.

    Shares repurchased
    $12.5 million
    Q2 FY26

    During the period, we repurchased approximately $12.5 million of our shares at prices below NAV.

    Share repurchase authorization remaining
    $100 million
    Current

    Leaving significant capacity remaining on our $100 million share repurchase program we refreshed earlier this year.

    Spillover income
    $0.86
    Q2 FY26

    Our spillover income was approximately $0.86 per share.

    NII contraction
    $0.02
    Q2 FY26 vs Q1 FY26

    I think the $0.02 of contraction in the quarter reflected a few headwinds.

    JV accretion to NII
    $0.03
    Q2 FY26

    you essentially had $0.03 of JV accretion that will continue to be a story.

    JV accretion to NII (incremental)
    $0.02
    Q2 FY26 vs Q1 FY26

    That was $0.02 of incremental versus what we saw booked in the first quarter.

    New platform investments
    3
    Q2 FY26

    Origination momentum remains solid with 3 new platform investments added during the quarter.

    Deals reviewed
    higher
    YoY

    We reviewed a higher number of deals year-over-year.

    Origination conversion rate
    <5%
    LTM

    Closed on less than 5% of the opportunities we originated in the last 12 months.

    Weighted average spread on closed deals
    SOFR + 500 bps rangeunchanged QoQ
    Q2 FY26

    Pricing for new loans generally stabilized quarter-over-quarter in the SOFR plus 500 basis point range with our weighted average spread on closed deals in the second quarter unchanged relative to the first quarter.

    LBOs and add-on acquisition activity
    >75%
    H1 FY26

    LBOs and add-on acquisition activity accounting for more than 75% of our new platform activity in the first half of the year.

    First lien senior secured transactions
    11
    Q2 FY26

    We closed on 11 first lien senior secured transactions totaling $85 million of new commitments.

    Equity deployed into Capstone JV
    $10 million
    Q2 FY26

    In addition to balance sheet deployment, we deployed an additional $10 million of equity into the Capstone JV.

    PIK utilization level
    mid-single-digitlow relative to peers
    Q2 FY26

    Our mid-single-digit level of PIK remains low relative to publicly traded BDC peers.

    Non-software asset spreads
    4.75%slight downward pressure
    Q3 FY26 YTD

    I'd say those are now more likely in the 4.75% range for a really high quality down the middle of the fairway asset.

    Industry KPIs

    2
    MetricValueDetails
    Fundraising inflows$250 millionUSD
    Deployment realizations$146 millionUSD

    Deals & partnerships

    1
    BridgepointeLeverage buyout financing opportunity where MSDL took leadership roles as lender and administrative agent.

    MSDL leveraged its familiarity with the business and ability to commit a sizable amount to take on leadership roles, improving its position in the credit.

    Risks & headwinds

    6
    Underperforming investments and increase in nonaccrualsQ2 FY26

    NAV compression in the quarter; nonaccruals increased to 2.9% of portfolio at cost; US Infra Services Buyer, Spectrio, and VPG Holdings placed on nonaccrual status.

    Mitigation: Active restructuring efforts; working closely with parties to preserve principal and achieve timely resolutions; successful restructurings for BCA buyer and Abcam.

    Borrowers facing elevated interest ratesOngoing

    Not quantified directly for impact, but noted as a persistent pressure.

    Mitigation: MSDL portfolio well positioned to navigate; underlying fundamentals of middle market economy remain resilient.

    Geopolitical uncertainty and renewed volatility in energy marketsOngoing

    Not quantified directly for impact; sponsors remained selective in Q2 amid Middle East developments.

    Mitigation: MSDL portfolio well positioned; for fuel-sensitive borrowers, majority expected to pass higher costs to customers; direct exposure limited for service-oriented businesses.

    Evolving impact of AIOngoing

    Low single-digit percentage of portfolio considered high-risk by proprietary AI scorecard.

    Mitigation: Software investments concentrated in mission-critical platforms with high switching costs; portfolio companies well equipped to leverage AI for product functionality, operating efficiency, and competitive positioning; unlikely to drive near-term sector-wide disruption.

    Industry lending volume more uneven than anticipatedH1 FY26

    Subdued market-wide activity relative to expectations at start of year.

    Mitigation: MSDL's deep integration with Morgan Stanley provides sourcing advantage; opportunity levels remained respectable; expectation for new deployment to accelerate as sponsor conviction improves.

    Headlines around direct lending fund flows weighing on retail investor sentimentQ2 FY26

    Retail outflows noted.

    Mitigation: Constructive investor engagement across channels; industry-wide institutional demand remains strong; retail outflows showed signs of deceleration in Q2; direct lending expected to remain a durable allocation.

    What to watch in Q3 FY26

    5

    JV accretion to NII

    Next quarter / coming year
    Current$0.03 per share (Q2 FY26)
    TargetContinued ramp-up and accretion

    Why it matters

    JV is expected to be a growing contributor to NII and portfolio diversification, crucial for dividend coverage.

    you essentially had $0.03 of JV accretion that will continue to be a story. That was $0.02 of incremental versus what we saw booked in the first quarter.

    Q&A highlights

    7

    How common is it for MSDL to lead/agent deals, what portion of the portfolio is agented, and how did they win the Bridgepointe deal given competitive spreads?

    Michael Occi stated that 15% to 20% of the portfolio is agented business, and the entire portfolio is lead business. Jeff Day added that their experience in the sector, refreshed due diligence, and ability to commit a sizable amount allowed them to take a leadership role in Bridgepointe, improving their lender position and credit through additional cash equity and improved documentation.

    “about 15% to 20% of the portfolio at large is agented business. Entirety of the portfolio is lead business.”

    asked by Finian O'Shea · answered by Michael Occi

    2 min read6 chapters

    Detailed Narrative

    01

    Q2 Performance Overview

    MSDL reported Q2 FY26 net investment income of $0.45 per share, a slight decrease from $0.47 in the prior quarter. This was influenced by increased contributions from the Capstone JV, offset by new nonaccruals and higher financing costs. The Board declared a stable $0.45 per share dividend for Q3, which management believes aligns with normalized earnings power.

    02

    Portfolio Health and Credit Quality

    The overall portfolio health remains solid, with approximately 95% of investments risk-rated 2 or better, performing in line with original underwriting. While NAV compression occurred due to a few underperforming investments and an increase in nonaccruals to 2.9% of the portfolio at cost, management emphasized these were not new issues and restructuring efforts are active. Successful restructurings for BCA buyer and Abcam highlight proactive portfolio management.

    03

    Capital Allocation and Financing

    MSDL maintained a disciplined approach to capital allocation, utilizing its share repurchase program to add $0.05 to NAV per share in Q2, totaling $0.10 for H1 2026. The company also proactively managed its liabilities by amending and extending its corporate revolver and executing an unsecured notes offering to prefund a portion of its February 2027 maturity, demonstrating continued access to diversified financing.

    04

    Market Environment and Origination

    The direct lending market is characterized as transitional, with public market valuations more negative than portfolio fundamentals suggest. While industry lending volume was uneven, MSDL's deep integration with Morgan Stanley provided a strong sourcing advantage, reviewing a higher number of deals year-over-year and closing on less than 5% of opportunities. Origination momentum remains solid, with 3 new platform investments added in Q2.

    05

    Capstone JV Expansion

    The Capstone JV is a key growth driver, with $10 million of equity deployed in Q2, bringing total equity commitments called to 52% of the $250 million total. The JV supports $426 million of investment commitments across 58 portfolio companies, offering portfolio diversification and NII generation as it continues to scale. The investment strategy within the JV mirrors on-balance sheet deployment.

    06

    AI and Macro Monitoring

    Management views AI as unlikely to cause near-term sector-wide disruption, with software investments concentrated in mission-critical platforms. A proprietary AI scorecard identifies a low single-digit percentage of the portfolio as high-risk. The company also assessed potential impacts from geopolitical tensions and energy market volatility🌐, concluding direct exposure remains limited for its service-oriented businesses.

    AI-generated summary of the company’s earnings call. Not investment advice.