Morgan Stanley Direct Lendin Stock

Welcome to Morgan Stanley Direct Lending Fund Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference call 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 Second Quarter 2026 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 Fund's Second Quarter 2026 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 events 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.

Good morning, everyone, and thank you for joining us today. I'll begin with our second quarter performance and outlook before turning the call over to Jeff to discuss the market environment and deployment activity. David will then review our financial results in greater detail, after which we will open the call up for Q&A.

Beginning with operating results. We generated net investment income of $0.45 per share compared with $0.47 per share in the prior quarter. Second quarter earnings reflected a growing contribution from the Capstone JV, offset by the income drag associated with new nonaccruals added during the quarter and higher other financing costs. For the third quarter, the Board declared a dividend of $0.45 per share, unchanged from the prior quarter.

Second quarter net investment income covered the dividend, and we continue to believe the reset dividend level is aligned with MSDL's normalized earnings power. Transitioning to credit. MSDL's overall portfolio health remains solid. NAV compression in the quarter was attributable in large part to a handful of underperforming investments, which had previously exhibited weakness. The increase in nonaccruals reflected the weighting of net borrower addition to nonaccrual status.

Importantly, the proportion of the portfolio in the risk rated 2 or better categories remained stable quarter-over-quarter with approximately 95% of the portfolio generally performing in line with the original underwriting case. Consistent with the first quarter, we took a disciplined approach to capital allocation amid a more dynamic market landscape, seeking to thoughtfully manage leverage and maximize risk-adjusted returns. We remained active in utilizing our share repurchase program, which added $0.05 to NAV per share during the quarter and brought total program-related accretion to $0.10 for the first half of 2026.

In parallel, we continue to scale the JV, which we expect to further ramp over the coming year. While conventional investment activity remained measured as we balance these levers, origination momentum remains solid with 3 new platform investments added during the quarter. On the liability side, we successfully executed 2 proactive financing initiatives, the amendment and extension of our corporate revolver in April and a subsequent unsecured notes offering in June designed to prefund a portion of our February 2027 maturity. Together, these transactions underscore a proactive management of the right-hand side of the balance sheet and our continued access to diversified financing sources, supported by the strength of our business and the depth of MSPC's relationships with bank partners and the fixed income community.

Turning now to our outlook. We would characterize the first half of 2026 as a period of transition for direct lending. Public market valuations are pricing in a more negative outlook than our current portfolio fundamentals support. At the same time, there have been isolated instances of credit softness, and we recognize that several legitimate pressures persist in the market. Borrowers continue to face elevated interest rates, geopolitical uncertainty and the evolving impact of AI. But the underlying fundamentals of the middle market economy remain resilient. Credit performance will vary across the industry as these headwinds affect companies and sectors differently.

However, we believe several of these pressures are beginning to ease and the MSDL portfolio is well positioned to navigate them. Jeff will discuss these dynamics in greater detail shortly. We also remain constructive on the medium- to long-term outlook for new deal activity, although industry lending volume during the first half of the year was more uneven than anticipated. Sponsors remained selective in the second quarter amid geopolitical developments in the Middle East. Encouragingly, we have seen a rebound in private equity exit activity, supported by efficient financing markets and strong demand from strategics. We expect new deployment could accelerate as sponsors gain greater conviction in the geopolitical and macro backdrop.

Even amid subdued market-wide activity relative to expectations at the start of the year, opportunity levels remained respectable in the second quarter. Our deep integration within the Morgan Stanley ecosystem continued to provide what we consider to be a meaningful sourcing advantage. We reviewed a higher number of deals year-over-year and closed on less than 5% of the opportunities we originated in the last 12 months, reflecting both our broad funnel and our high-quality bar. While headlines around direct lending fund flows have weighed on retail investor sentiment, we have observed constructive investor engagement across channels through the lens of our platform's diversified capital base.

Notably, industry-wide institutional demand for the asset class remains strong globally with many investors continuing to seek increased allocations. Retail outflows also showed signs of deceleration in the second quarter, reinforcing our confidence that direct lending will remain a durable allocation for individual investors. And there will be a need for this capital as private equity dry powder is deployed and sponsor-backed M&A volume builds.

Morgan Stanley Investment Management recently surpassed an important $2 trillion AUM milestone. As a visible component of MSIM's growing credit platform, we remain confident in our ability to continue optimizing the performance of MSDL, leveraging the strength of our team, track record and broader support of the Morgan Stanley platform. When we constructed MSDL, we endeavored to provide a differentiated BDC offering, aligned with shareholders through our thoughtful fee structure, competitive expense profile and defensive investment strategy. We remain intently focused on these priorities, positioning MSDL to capitalize on this dynamic backdrop and to continue delivering value to shareholders.

With that, I'll turn the call over to Jeff Day.

Thank you, Michael, and good morning. As we reflect on the market environment, we see a backdrop for private credit in which selectivity and underwriting discipline remain critical. We saw improved supply-demand technicals support a positive shift in deal terms during the second quarter, which was a continuation of the dynamics experienced in the first quarter.

We believe this trend is driven primarily by slower capital formation in the market. 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. While spreads remain wide to the mid- to high 400s trough reached in mid-2025, competition remains high for non-software assets, and we have witnessed some modest tightening in this part of the market third quarter to date.

Beyond pricing, documentation and overall lender protections remain favorable relative to what we observed in mid-2025. Financial covenant packages, EBITDA definitions, requests for PIK toggles at close and other structural protections continue to compare favorably with what we were seeing several quarters ago, allowing disciplined lenders with strong sponsor relationships to continue generating improved risk-adjusted returns. In general, we continue to find better compensation for risk in the upper middle market where larger financings typically require more lender participation than in prior years or than in the lower middle market.

From a use of proceeds perspective, we have also seen a healthy shift in deal composition with LBOs and add-on acquisition activity accounting for more than 75% of our new platform activity in the first half of the year. As it relates to second quarter originations, we closed on 11 first lien senior secured transactions totaling $85 million of new commitments. These included 3 new platforms, 4 refinancings of existing borrowers and 4 incremental commitments to existing portfolio companies, highlighting both the strength of our sponsor relationships and the continued opportunity within our incumbent portfolio.

One transaction to highlight from the quarter was Bridgepointe. During the quarter, Bridgepointe approached the market with a leverage buyout financing opportunity. Our platform's familiarity with the business and ability to speak for a sizable commitment allowed MSPC to take on leadership roles as both a lender and administrative agent. The transaction improved our lender position and the credit through the addition of significant additional cash equity from the sponsor beneath us in the capital structure while further reducing risk through improved documentation protections.

In addition to balance sheet deployment, we deployed an additional $10 million of equity into the Capstone JV. David will elaborate on the current profile of the JV, and I would invite you to review the new slide we added to our investor presentation this quarter with additional details on the JV. While the investment strategy within the JV is identical to that of on-balance sheet deployment, accounting for the JV portfolio modestly diversifies our top borrowers' weights as of June 30, 2026. The JV provides an additional source of portfolio growth, which we expect to support NII generation as it continues to scale.

Turning to credit. Overall portfolio performance remained broadly stable during the quarter. Revenue growth, EBITDA growth and interest coverage ratios remained healthy and improved from the prior quarter. While payment in kind income has increased slightly, the number of borrowers utilizing PIK remained relatively unchanged from the prior quarter. We continue to closely monitor PIK utilization and have prioritized lending to borrowers who have the cash flows to support the capital structures that we are providing to them. Our mid-single-digit level of PIK remains low relative to publicly traded BDC peers, which we believe is a strength of our portfolio.

As part of these ongoing portfolio management efforts, we also placed US Infra Services Buyer, Spectrio and VPG Holdings on nonaccrual status. These were not new issues that emerged during the quarter. Each company had been experiencing company-specific operational challenges over an extended period, and the move to nonaccrual reflects the continued progression of those situations. We do not view their performance as indicative of broader portfolio stress or specific sector trends. These 3 credits contributed to the NAV mark-to-market movement in the quarter and increased nonaccruals to 2.9% of the portfolio at cost as of June 30.

Restructuring efforts remain active, and we continue to work closely with all relevant parties to preserve principal and achieve timely resolutions for our nonaccrual investments in the coming quarters. During the second quarter, we continued to actively manage challenged situations and successfully completed restructurings for both BCA buyer and Abcam. These outcomes reflect the deep experience of our senior team and our hands-on approach to portfolio management as well as our ability to work constructively with sponsors and management teams to maximize value through periods of operational stress. While several variables may impact how MSDL's credit will evolve over the coming quarters, we believe that the portfolio remains well positioned to navigate different economic scenarios and importantly, the risk ratings distribution is indicative of stability.

As Michael alluded to, the proportion of the book risk rated 3 and 4 declined modestly during the quarter on a fair value basis. We have a proven track record of preserving capital for shareholders. And while NAV may fluctuate from quarter-to-quarter, we believe our active management of the affected credits positions us to preserve value, maximize recoveries and support NAV stability over time. MSDL's NAV per share remains within 2.5% of its starting NAV per share at inception in 2019.

Turning now to software. We have seen the conversation around artificial intelligence become more balanced over the last few months. We believe AI will remain an important area of focus for every industry and its company-specific impact is going to vary meaningfully by business model, end market and product offering. As such, we believe AI is unlikely to drive near-term sector-wide disruption. Our software investments remain concentrated in mission-critical system of record platforms with high switching costs, recurring revenue characteristics and strong customer retention.

Through our ongoing portfolio monitoring and team's proprietary AI scorecard, we continue to identify a low single-digit percentage of our portfolio we consider in the high-risk category. We believe our portfolio companies are well equipped to leverage AI to enhance product functionality, improve operating efficiency and strengthen their competitive positioning over time. Beyond AI, we continue to closely monitor the evolving macroeconomic and geopolitical environment, including renewed volatility in energy markets as tensions in the Middle East have intensified.

In line with other macro-related reviews we conducted over the last several quarters, this quarter, we conducted an assessment of potential exposure impacts across the portfolio. Based on that analysis, we remain confident that our portfolio is well positioned, where fuel is a more meaningful input cost, we currently expect the majority of those borrowers will be able to pass higher costs through to customers over time. Given our concentration in service-oriented businesses, we believe direct exposure remains limited. Overall, while we continue to monitor a small number of company-specific situations and an evolving macro backdrop, we believe the portfolio remains well positioned.

I will now turn the call over to David Pessah.

Thank you. Turning to our balance sheet. Our portfolio totaled $3.6 billion at fair value as of quarter end. With our continued focus at the top of the capital structure, approximately 93% of the investments were classified as first lien debt, 3% in our JV and the remainder in second lien equity and other investments as of June 30.

Inclusive of new investment commitments, total investment fundings amounted to about $146 million during the quarter, offset by $240 million in repayments. The portfolio remains well diversified with 229 portfolio companies across 36 industries and an average borrower exposure of approximately $15.5 million. In addition to some of our credit metrics that Jeff provided, the weighted average loan-to-value across our portfolio was approximately 39% and median EBITDA remained relatively unchanged at $90 million. To provide some additional detail about our JV, the vehicle has total equity commitments of up to $250 million, of which $200 million is committed by MSDL.

To date, approximately 52% of the total equity commitments have been called, supporting approximately $426 million of investment commitments across 58 portfolio companies in 25 industries. The weighted average yield on debt and income-producing investments is 8.8% at cost. On a levered basis, the dividend yield on MSDL's investments equated to approximately 13%. Moving to our operating results for the quarter. Net investment income for the quarter was $38.2 million or $0.45 per share. Total investment income was relatively unchanged at $89 million.

Earnings from the JV increased meaningfully during the quarter. However, that benefit was offset by the impact of positions placed on nonaccrual, which in turn decreased the weighted average yield on our portfolio. Total expenses increased to $50.6 million from $48.6 million in the previous quarter, attributable to higher other debt expenses as well as an increase in incentive fees resulting from a smaller benefit from our incentive fee cap impact this quarter. The net change in unrealized depreciation and realized losses for the second quarter was $30.2 million.

Unrealized losses were driven by underperformance in a handful of portfolio companies, which includes the aforementioned positions that were placed on nonaccrual. Net realized losses during the period were related to the 2 restructurings that were completed. As of June 30, our total assets were $3.7 billion and total net assets were $1.65 billion. Our ending NAV per share for the second quarter was $19.50 compared to $19.81 in the prior period. The gross debt-to-equity ratio closed the quarter at 1.21x, modestly below the 1.22x multiple from the previous quarter and comfortably in the target range of where we like to operate.

Unsecured debt was 56% of total funded debt at the quarter end. During the quarter, we successfully amended and extended MSDL's senior secured corporate revolver, extending its maturity while maintaining both pricing and total commitments across the existing syndicate. After quarter end, we completed a new 5-year unsecured notes issuance totaling $350 million at a coupon of 6.10%. This issuance was completed in advance of the upcoming February 2027 maturity, which has a $425 million outstanding notional.

Overall, we remain confident in the strength and positioning of our debt profile through the remainder of 2026 and into 2027. During the period, we repurchased approximately $12.5 million of our shares at prices below NAV, leaving significant capacity remaining on our $100 million share repurchase program we refreshed earlier this year. Regarding distributions, we paid a $0.45 regular distribution in the second quarter.

Additionally, our Board of Directors declared a $0.45 per share regular distribution for the third quarter of 2026 payable to shareholders of record as of September 30, 2026. Our spillover income was approximately $0.86 per share.

With that, operator, please open the line for questions.

[Operator Instructions] And the first question will come from Finian O'Shea with Wells Fargo Securities.

Want to ask about the Bridgepointe credit you highlighted. Can you hit on how common is that is for you to lead agent and so forth? Like what portion of the portfolio is in that category? And given it was a more sort of vanilla type spread, like how competitive it was and how you were able to win that?

Yes, Fin, thanks for the question. To answer the first piece, about 15% to 20% of the portfolio at large is agented business. Entirety of the portfolio is lead business. We don't have an agent-only model, but certainly from a visibility and an active involvement perspective, I think that speaks to the entirety of the portfolio. This is one we highlighted just given the migration in the role, which I think speaks to the improved visibility and presence in the marketplace more broadly.

I don't know, Jeff, if there's anything more specific on Bridgepointe that you'd highlight.

Yes. Fin, we have a lot of experience in the sector more broadly. And we were able to leverage our experience here in the sector as well as the firm from just a refreshed due diligence perspective, which obviously was helpful for us in gaining conviction to provide financing here. And again, our ability to speak for a more sizable commitment in the transaction enabled us to take over the administrative agency transaction on this.

Great. It's helpful. I think you talked to this or around it a little bit. But with NOI at the dividend, are there levers to build a little cushion on that? Or will you run here? And is this something you're sort of visiting?

That's on NII more broadly. I missed the beginning of it.

Yes, just NII and regular dividend coverage.

Yes. So I think the $0.02 of contraction in the quarter reflected a few headwinds. I can give you maybe a little bit more color to what David outlined earlier, but 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.

Offsetting that, you had the uptick in financing costs, in part driven by the fact that we ran at higher average leverage over the course of the quarter. And then a couple of credit-related components in terms of foregone income associated with the new nonaccruals. And on the expense side, less of a lower effective -- a higher effective incentive fee with the look back having a smaller impact in the second quarter. So as we think about the go-forward, we've got to assume that the re-rate of the debt expense is more or less here to stay. Credit is obviously uncertain as some of these new nonaccruals are restructured, income comes back online. Maybe you got the offset with the incentive fee as our lookback kicks in.

And then, of course, the accretion from the JV as we look to continue to build that. All told, we continue to feel pretty good about the foundation of NII and the read-through around the distribution as we look to the quarters ahead.

And the next question will come from Melissa Wedel wit UBS.

I wanted to also, I think, follow on Fin's question. You pointed to some pressure from the incremental nonaccruals in the portfolio yield in this quarter. And obviously, that can have an impact on NII quarter-to-quarter. And you also have some spillover income. So I guess I was trying to gauge how comfortable you think the Board is with the existing dividend level even if there were some quarter-to-quarter noise from any credit issues or things coming on the nonaccrual list before others get resolved.

Yes, Melissa, it's a good follow-up question. Yes, I think we continue to feel good. Naturally, the Board is going to continue to evaluate this in the quarters ahead as we think about the combined impacts of these components in consideration with the fact that the JV is only half ramped, and we've seen the benefits continue to build over the last 1.5 quarters. When we kind of take into account these various components, we continue to feel good about it.

To your point, we can't necessarily bank on certain deal or 2 of the new nonaccruals necessarily coming back online on a certain time line, but we're actively working to resolve these situations vis-a-vis restructurings, which could have an income benefit. But as a baseline NII foundation matter, we continue to feel good about supporting the $0.45 as we see things today.

Carried a rate of just over 6%. Are you guys swapping that? And can you just talk about your view on sort of that liability management right now?

Thanks, this is Dave. Yes, we did effectively swap that transaction. Our goal is to align both the asset and liability side as much as possible across the board. The only note that's not swapped within our liability mix is the one that's coming due in February. So assume on a go forward that for the most part, we look to swap any of these issuances that we ultimately do.

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

So in an environment of elevated repayments, how are you on a go-forward basis, weighing redeploying cash into new investments versus taking advantage of the current market discounts to repurchase stock?

Yes, Heli, great question. It certainly is a balance. The repay activity has been pretty sticky quarter-over-quarter. As we've talked about, it has generally run maybe just above 5% of the portfolio, a little bit of mix in there in terms of pure prepays versus partials versus refinancing activity, but it's generally been tracking in line.

As we think about the hierarchy in terms of capital consumption, leverage stability continues to be paramount. And so the utilization on the buyback, the NAV movement in the quarter effectively dictates what capital we have to consume. That answer happened to be just under $100 million this quarter. And then to answer your question most directly, it really is an optimization question as to whether that is going to be done on balance sheet versus the JV. You saw in the first quarter, it was 2/3 JV. This quarter, it was a little more than 10% JV. We're going to continue to evaluate that over time as we think about hold sizes, diversification read-throughs with the JV. It's a multivariable equation, but you should expect we'll continue to ramp that JV over the coming year, which we believe will be accretive to the diversification profile and the return profile of the business.

Got it. That makes sense. And then any sort of new trends or anything that you're seeing in the pipeline just in terms of spreads, LTVs, sponsor versus nonsponsor or anything there?

Yes. Hey, it's Jeff. It's a great question. I would say we -- for non-software assets, as we mentioned in the prepared remarks, we are seeing that segment be slightly more aggressive as some managers are looking to reduce their overall software exposure. So we are seeing some slight downward pressure in terms of spreads for non-software assets. 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.

But beyond that, we continue to see stability in terms of loan to values. Our LTV remains kind of just under 40% across the portfolio, and that's in line with what we're seeing for new transactions in the market today.

[Operator Instructions] Our next question will come from Hongliang Zhang with JPMorgan.

This is Hongliang on for Rick. I guess as you think about ramping up the JV in the near term, could you talk about, I guess, what you think are the biggest constraints to do...

Yes. It's a good question. There's a fair bit of flexibility as we think about the precise ramping of the portfolio. We obviously have a choice of drop-downs versus direct deployment. I would highlight that the sourcing mousetrap is certainly not a constraint. I would start with capacity and leverage implications on the fund as we optimize back to my prior comment.

Another constraint might be the single borrower exposure, industry exposure that the underlying investment relevant investment would involve. But a fair bit of flexibility as we think about the deployment of the JV being mindful of pro forma leverage and pro forma read through portfolio as we've taken that into account. platform continues to benefit from the scale, sourcing capabilities and institutional infrastructure of Morgan Stanley.

We remain confident in the resilience of the portfolio and believe our strategy positions us well to optimize the execution as we continue to seek to deliver high-quality returns for investors. We look forward to speaking with you again on our third quarter 2026 earnings call in November.

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

Good day, and welcome to the Morgan Stanley Direct Lending Q1 2026 Earnings Call. [Operator Instructions] As a reminder, this conference call 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 First Quarter 2026 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 First Quarter 2026 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 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 in the 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 and Ashwin to discuss the market and deployment. David will then walk through our results in more detail before we conclude with Q&A. Against the backdrop of moderating base rates, improving spreads and an increasing focus on credit quality across the direct lending landscape, MSDL delivered solid performance in the first quarter. In terms of operating results, we earned net investment income of $0.47 per share as compared with $0.49 per share for the prior quarter.

The modest decline was primarily driven by the impact of the December rate cut, which flowed through during the period. Importantly, earnings quality remains high with the underlying portfolio continuing to perform well. In February, we modified the dividend to $0.45 per share, consistent with the actions we're seeing take place across the sector to align payouts with forward earnings power in a normalized rate environment. Our dividend remains well supported with coverage of 104% for the quarter. We view the dividend policy as appropriate over the medium term based on MSDL's earnings levers in the context of the current market environment.

During the first quarter, we took a disciplined approach to capital allocation amid a more dynamic landscape, thoughtfully optimizing the tools at our disposal to maximize risk-adjusted returns. With shares trading at a discount to NAV, share repurchases were accelerated, which was accretive. In parallel, we prioritized seeding our joint venture, which delivered approximately 150 basis points of incremental return relative to on-balance sheet deployment, although that was a contributor for only five weeks of the quarter. While these actions moderated conventional investment activity, origination momentum remains solid with four new platform investments added during the quarter. The direct lending market continues to navigate a range of challenges, including tariffs, ongoing discussions around AI-driven disruption and fresh geopolitical risks emerging from the Middle East.

In our view, the disconnect between narrative and fundamentals is a defining feature of the current phase of the cycle. We expect today's credit environment to be increasingly characterized by differentiation rather than widespread deterioration. We believe MSDL is well positioned to continue to capitalize on this dynamic environment, thanks to our unique sourcing capabilities, consistent focus on underwriting standards and the depth of our portfolio management function.

As we revisit the industry-wide pressures we outlined last quarter, we are beginning to see signs that some of these may begin to ease. Starting with the deal environment. We continue to believe that we're in the early stages of a multi-year recovery in sponsor-backed M&A, underpinned by a conducive economy, substantial private equity dry powder and generally efficient financing markets. While activity was somewhat choppy during the first quarter amid geopolitical developments, overall opportunity levels remain solid, and our deep integration within the Morgan Stanley ecosystem continues to provide a meaningful sourcing advantage.

On credit, we continue to actively monitor potential risk factors across the portfolio, including elevated rates, macro uncertainty and the evolving impact of AI, particularly within software. Despite these crosscurrents, portfolio performance remains relatively stable. Non-accruals declined modestly during the first quarter, and we continue to see resilience across the borrower base. While we did experience some NAV pressure amid heightened public market volatility, we have not witnessed widespread fundamental underperformance of our borrowers with instances generally isolated.

In this context, we believe MSDL's first lien noncyclical orientation positions us to navigate potentially increasing industry dispersion effectively. Turning to asset yields. We are encouraged by signs that the downshift may be now in the rearview. The first quarter of 2026 marked the first quarter in the last eight in which MSDL did not experience yield compression. While the timing of the December rate cut drove the modest quarter-over-quarter decline in net investment income of a couple of pennies, we are now seeing spreads widen and terms on new investments become more lender-friendly.

If sustained, that should support asset yields going forward.

Jeff will provide additional color on market conditions in his remarks.

Finally, on capital formation and investor sentiment through the lens of the broader direct lending market, while retail flows into the asset class have shown variability, we remain confident in the long-term outlook for private credit. MSDL is a visible part of our scaled committed capital base in U.S. direct lending, sitting within Morgan Stanley's broader global private credit business and $270 billion alternatives platform. Our funds are capitalized by a diversified LP base, providing a stable capital foundation.

Long-duration fund structures allow us to be disciplined in our deployment and will continue to support us as we scale further. Private credit has proven to be a durable asset class with a clear and lasting role in diversified portfolios for both institutional and retail investors alike.

As I close, I want to reiterate our commitment to the strategy that got us here. MSDL will continue to provide loans to high-quality businesses while leveraging the resources of the integrated Morgan Stanley platform. We believe our transparent revenue model, conservative balance sheet and efficient operating structure, together with our thoughtful fee framework and repurchase program supports strong alignment with shareholders. With that, I will turn the call over to Jeff Day.

Thank you, Michael. Turning to the market environment. Despite elevated headline volatility, we continue to see a constructive set of conditions for private credit with stable fundamentals and improving lender economics. In fact, we believe that periods of uncertainty further reinforce the role of private credit as a reliable source of capital. Importantly, as Michael mentioned, we saw spreads for deployment during the first quarter widened by approximately 25 basis points, accompanied by higher OIDs.

Leverage and other terms trended more lender-friendly as well, supporting an improvement in risk-adjusted returns for disciplined lenders. Through the second quarter-to-date period, we have seen economics move an incremental 25 basis points or more and documentation has continued to shift in lenders' favor with new investments generally including further tightening in EBITDA definitions, greater use of financial covenants and more robust call protection, just to name a few improvements.

At the same time, higher for longer rate dynamics and a growing refinancing need across the private credit landscape are creating a favorable supply-demand imbalance for capital providers. Our approach to capital deployment remains deliberate and selective. MSDL's differentiated sourcing model, leveraging the scale and capabilities of the Morgan Stanley platform supports our thoughtful deployment approach and reinforces our disciplined underwriting standards.

For the last 12 months ending March 31, 2026, we closed on just 5% of the deals we originated, which reaffirms the selective approach to credit investing. Further, our integration within a full-service investment bank positions us as a strategic financing partner to private equity sponsors, enabling access to high-quality, directly originated investment opportunities through both our dedicated origination team and the firm's broader relationships.

Turning to origination. During the first quarter, we closed on 13 first lien senior secured transactions totaling $50 million in new commitments. Among these, four were loans to new borrowers, two were complete refinancings of existing borrowers and seven were incremental commitments, demonstrating the power of our incumbent portfolio to generate deal flow. Of the new borrowers in the first quarter, half were LBO transactions with weighted average loan to values of less than 40%, executed at modestly wider spreads than where capital was deployed in the fourth quarter of 2025.

Beyond the net funding activity, we also seeded the Capstone JV with a total of $94.5 million of equity from MSDL. As of March 31, 2026, the JV portfolio consists of a total of $383 million in investment commitments across 52 borrowers, which David will provide more details on shortly.

Overall, fundings were offset by repayments as a few of our borrowers were acquired by strategic buyers. 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 as market conditions fluctuate.

This was evidenced during the first quarter as our median EBITDA for deals closed was approximately $126 million, which was around 40% higher than the median EBITDA of the MSDL portfolio at large as we saw increased attractive opportunities lending to larger businesses due to dislocation in the liquid loan market.

I will now turn the call over to Ashwin Krishnan.

Thank you, Jeff. Overall, credit performance remained stable with modest improvements across key metrics. Transitioning to more detail on MSDL's portfolio companies, we continue to see positive trends in key metrics with revenue and EBITDA growth rates remaining healthy, net leverage ratios declining modestly quarter-over-quarter. While payment in kind income as a percentage of total income increased modestly to 4.6% quarter-over-quarter, it remains contained and compares favorably to publicly traded BDC peer averages. Non-accruals for the quarter ticked down modestly from 1.6% to 1.5%. The mark-to-market activity that took place during the first quarter was driven by a combination of spread widening in new loans and a small number of credits that have continued to underperform.

Overall, we are pleased that the portfolio remains in good condition.

Turning to software. There has been no shortage of headlines around the potential disruptive impact of AI on the sector. Based on our ongoing portfolio monitoring and underwriting work, we have not seen evidence of material disruption within our portfolio companies. As mentioned in prior quarters, our investments are concentrated in mission-critical system of record platforms with high switching costs and strong customer retention, which we believe provide insulation under a range of economic and technological conditions, including near-term AI disruption.

On balance, while AI introduces the potential for disruption, we expect its impact to be more gradual with effects likely to manifest through sorting rather than wholesale replacement. Within our portfolio of software businesses, we believe there are opportunities to benefit from integrating AI to enhance efficiency and further strengthen competitive positioning. Our approach to evaluating technology risk is both consistent and proactive. We continue to utilize a proprietary AI scorecard for existing portfolio companies and to underwrite new investments. The results of this analysis continue to indicate that our software portfolio exhibits minimal near-term displacement risk with only a low single-digit percentage of our portfolio categorized as high risk for AI disruption as of the end of the first quarter.

In many cases, we believe there is potential opportunity for borrowers to benefit from incremental AI-driven enhancements. Beyond AI, we are closely monitoring the evolving macro and geopolitical landscape, including the recent volatility in energy markets and the potential impact of higher oil prices. Consistent with our approach to prior macro events such as COVID and the implementation of tariffs, we conducted a comprehensive review of our portfolio to assess potential exposure.

Given our sector positioning, where we are indexed to a broad mix of service-oriented businesses, we believe direct risk is limited. While certain companies with field-based operations such as HVAC service companies may experience incremental pressure via fuel cost inflation, we expect that most will be able to offset these impacts through price increases.

Overall, we believe our portfolio is reasonably well positioned to navigate a range of macroeconomic outcomes. Our emphasis on sector selection and active portfolio management continues to underpin our investment strategy. In an environment where conditions are evolving, we believe our ability to remain patient, selective, and focus on downside protection will continue to serve our shareholders well.

I will now turn it over to David Pessah.

Thank you. At quarter end, our portfolio totaled $3.7 billion at fair value, maintaining our strong first lien focus comprising of approximately 94% first lien debt, 2.5% in a joint venture and the remainder in second lien equity and other investments. The portfolio remains well diversified with 227 portfolio companies across 36 industries and an average borrower exposure of approximately 40 basis points.

In February, we commenced investment operations at Capstone Lending, MSDL's joint venture. The vehicle has total equity commitments of up to $250 million, of which $200 million is committed by MSDL. To date, approximately 47% of total equity commitments has been called, supporting approximately $383 million investment commitments across 52 portfolio companies in 23 industries. The weighted average yield on debt and income-producing investments is 8.7% at cost. Our objective will be to continue to scale the vehicle over time to approximately $700 million in assets. We expect a meaningful contribution to MSDL's total investment income beginning in the second quarter, fully reflecting the timing of the launch.

Turning to credit metrics at quarter end. The weighted average loan-to-value across our portfolio was approximately 39% and median EBITDA remained relatively unchanged at $91 million. The weighted average yield on debt and income-producing investments was flat quarter-over-quarter at 9.3% at cost and 9.5% at fair value, primarily reflecting a relatively stable SOFR curve over the past 2 quarters. In terms of credit quality, two investments were removed from non-accrual, including 4840 as discussed in prior calls. We added three new investments in non-accrual: Abercorn Group Holdings, Vardiman Black Holdings, also known as Specialty Dental Brands and KWOR Acquisition related to a preferred equity position.

As a result, our non-accrual rate decreased by 10 basis points to 1.5% of the total portfolio at cost. Underneath the $145 million new investment commitments were loans to seven new portfolio companies, which includes the joint venture and seven existing portfolio companies. Investment fundings, including those of existing commitments, amounted to about $174 million, offset by $240 million in repayments.

Moving to our financial results for the first quarter. Total investment income was $89.1 million, down from $96.6 million in the prior quarter, primarily reflecting the impact of the most recent Fed rate cuts. Total expenses declined to $48.6 million from $54.2 million in the previous quarter, driven in part by our predominantly floating rate liability structure, which reduced our cost of financing as base rates declined. In addition, the restructuring on 4840 lowered incentive fees earned from realized losses associated. We believe the structure of our incentive fee continues to demonstrate strong alignment with shareholders.

Net investment income for the quarter was $40.5 million or $0.47 per share. The net change in unrealized depreciation and realized losses for the first quarter was $45 million. Unrealized losses were driven by underperformance in a small number of portfolio companies as well as broader spread widening during the quarter, particularly within the software sector. Our weighted average portfolio mark declined by 70 basis points quarter-over-quarter with software experiencing the most significant movement by industry.

Net realized losses during the period were primarily related to the restructuring of 4840. As of March 31, our total assets were $3.8 billion and total net assets were $1.69 billion. Our ending NAV per share for the first quarter was $19.81 compared to $20.26 in the prior period. The debt-to-equity ratio increased to 1.22x from 1.20x in the previous quarter, with our unsecured debt comprising 55% of total funded debt at the end of the quarter. Following quarter end, we successfully amended and extended MSDL senior secured corporate revolver by extending the maturity while maintaining both pricing and total commitments across existing syndicate. Considering the more fragile market backdrop, we view this as a validator of our platform's access to financing, supported by our long-standing banking relationships. We feel confident that the right side of our balance sheet is well positioned for the remainder of the year and into 2027.

As highlighted last quarter, we renewed our share repurchase program and maintained its size at $100 million, a meaningful percentage of our market capitalization, reflecting our commitment to long-term shareholder value. During the period, we repurchased approximately $15 million of our shares at prices below NAV, resulting in roughly $0.05 of NAV accretion.

Regarding distributions, we paid a $0.45 regular distribution in the first quarter with dividend coverage of 104% for the period. Additionally, our Board of Directors declared a $0.45 per share regular distribution for the second quarter of 2026, payable to shareholders of record as of June 30, 2026. As of March 31, 2026, our spillover income was approximately $0.88 per share.

With that, operator, please open the line for questions.

[Operator Instructions]

We'll take our first question from Finian O'Shea with Wells Fargo Securities.

Can you talk about the continued ramp of the JV if there are more sort of clients on the platform that want to sell the portfolio, maybe you could get a good price now that the market has moved a little bit? Or would this come through like more of a portfolio drop-down or a sort of gradual new origination ramp over time?

Yes, Fin, thanks for the question. I would expect it to be more of the latter, organic deployment into the JV, potentially considering dropdowns over time as we see fit. Recalled the initial seeding of this portfolio with approximately $100 million of equity out of MSDL was facilitated in part by a warehouse -- having said that, all MSDL, more recently private credit originated assets, 100% overlap with what's on MSDL's book.

But moving forward, I would expect more rational, gradual deployment over the next four to six quarters for the remaining $100 million as we balance deployment in the JV with on balance sheet. I would not anticipate the similar -- a similar proportion as we saw in the first quarter, where we had about 2/3 of that organic -- of that deployment earmarked for the JV, the balance on balance sheet. We will expect to see organic deployment outpace that moving forward.

Okay. That's helpful. And then a little bit of growth in the lower-rated buckets, portfolio grade three and four and such. Is that -- is that overlaying with the new non-accrual names? Or is that more like midrange sort of underperformers in there?

Yes, Fin, good question. I would first just level set maybe a little bit more detail underneath the two or so percent of NAV move. About 2/3 of that was driven by market or spread widening. The balance more fundamental credit driven in part due to what we've seen in terms of the couple of additions to non-accruals. Obviously, we had the one-offset netting in a similar place. But Rebecca, why don't you give a little bit of color on the risk ratings?

Sure. So as you noted, we saw some movement in the -- primarily the three buckets from a percentage basis, but there's movement and migration within our risk rating categories each quarter, deals move up and down within the categories, but overall remains relatively contained and driven by a small number of companies and kind of company-specific issues rather than more kind of broad-based issues we're seeing.

And so the non-accrual names are certainly part of it, but also some additional changes could be factored in there as we monitor the portfolio each quarter. But overall, very contained, and we continue to have confidence in the overall health of the portfolio and quality with 95% remaining in that risk-rated two or better category.

I appreciate that. If I could sneak one more, and I meant to tie in with the JV question. Did you disclose anywhere the interest rate on that? And I was just looking through last quarter's transcript, is the target leverage again about 3:1?

It was about 11.2% in terms of just the yield at the JV level. The target leverage that we're looking to achieve there is somewhere between 1.7 to 1.8x. Just as of quarter end, we were slightly below that. But the idea is to maintain and grow that portfolio, as Michael mentioned, four to six quarters and get to a sustained level of leverage around that targeted range. And just to mention -- yes, the 11.2%, that was -- that's really only reflecting five weeks of activity for funds.

Yes. I meant to ask if I -- sorry if I misworded. The credit facility, like your borrowing rate.

At the JV, it's 1.67%.

Okay. And then like the dividend, therefore -- so it's mid-quarter. -- do we roughly double that? Or is it more based on the higher sort of target leverage than you have in place now?

It's a combination of just organic deployment plus moving up in the target leverage range.

Yes. So to put it in context of the NII, it was about $0.01 of benefit in the first quarter for that partial contribution. At full ramp, $0.02 to $0.03 all sequel.

And we'll take our next question from Ethan Kaye with Lucid Capital Markets.

Just following up on the question or discussion on the yield at the JV. So can you just help kind of reconcile? I see -- you quoted 11.2%. I see something in the high 8% is like a weighted average yield on the portfolio. Is there some kind of timing or mechanical discrepancy there or issue that's causing that discrepancy? And then--

Sorry. Yes, that's the weighted average yield of the portfolio. In terms of the income that was generated off of that, we, at the MSDL level, received 11.2% yield from the income that was produced down at the JV.

Okay.

Okay. Okay. And then I guess -- sorry, go ahead.

Yes. No, the 8.7% is an unlevered asset yield. That's the difference between the 2.

Yes.

So is that comparable to the kind of low 9% on the MSDL balance sheet directly? Is that a fair comparison?

That is [indiscernible].

And do you expect those to kind of converge over time? Is there anything that's that you attribute to the kind of that difference between the yield at the JV and the yield directly on the MSDL balance sheet assets?

Yes, Ethan, I think that's a fair assumption. It's attributable largely to the JV assets being slightly more recent vintage. We would expect that to converge over time.

Got it. And then on portfolio activity, it looks like it was a bit kind of more active in 1Q than maybe we saw at some peers. I suppose kind of half of the fundings though were to the JV, but at least repayment activity was elevated. Kind of any sense of what drove that this quarter? Was it kind of driven by a couple of large exits? Or did you see kind of activity more broadly? And then maybe any sense of what activity is looking like in 2Q?

Yes, Ethan, some -- a lot to unpack there. I would just say on the repays, similar experience to prior quarters. We had in gross terms, about 5% of the commitment base repaid. Definitionally, this captures refinancing activity, but true repayments and paydowns constituted the majority of the $240 million figure you see in the deck. Repayment levels were pretty consistent really with prior quarters. Underneath that, to answer your question, repayment activity driven by a number of different things, some public market takeouts, some refinancing activity that we didn't elect to participate in, some sales to strategics, including portfolio group, which I think was $74 million of notional. And so we could see that moving forward kind of ebb and flow depending on the direction of spreads, but it's been a pretty reliable level over the past few quarters.

On the proportion of deployment, here's how we would break it down. You start with the buyback activity with price as a factor that drove the 50% uptick in terms of us buying back $15 million of stock at lower prices, which, as David alluded to, was accretive by about $0.05. You take that in conjunction with the valuation impact over the course of the quarter and our desire to keep leverage constant or pretty consistent at least as we accomplished. And that more or less dictates what we have to play with in terms of origination activity.

As you alluded to, the prioritization was with the JV that we had previously announced, about 2/3 or $100 million of the $150 million, $50 million was organic. And while not big in dollar terms, it was still accretive from a spread and a diversification perspective. As I mentioned earlier, we would expect those proportions to reverse going forward.

We'll take our next question from Cory Johnson with UBS.

So I just want to talk a little bit about -- so the interest income came down quite a bit this quarter, as you mentioned. And what helped sort of be able to cover dividend this quarter was also just the lower incentive fees paid. So I know you talked about certain levers that you have to be able to maybe make up that difference, the one being the JV and if I understand correctly, that probably add another $0.02 to $0.03 once ramped in order to be able to help achieve that dividend.

But I was just wondering what other levers that you see that you have? And maybe could you talk about like perhaps sizing them in terms of being able to bridge that gap so that we can see how well it will actually cover the dividend over coming quarters and such and add to your earnings power?

Yes, Cory, great question. I think this is a more simple story than in prior quarters, which is a welcome sign for all of us. We started to see that normalization in the first quarter that we referenced a little bit of a bridge from 4Q attributable to that most recent rate cut. It's going to continue moving forward to be a function of a bunch of different things, including spreads and credit, among other things. But at least for now, base rates are not a variable and tough to predict that over time. But still, we've reached the normalization phase.

I would look at the $0.47 directionally as more or less a new baseline. And underneath that, we feel pretty good about the distribution that we've talked about. To your question more directly, it is absolutely going to be a focus on optimization moving forward and the different levers available to us, including the aforementioned JV, including the share repurchase activity. And then one thing I think we haven't emphasized probably to the extent that we would like to is the improving credit environment, how we're seeing repricing or I should say, a credit repricing actively in the marketplace, and we think we're really well equipped to go and take advantage of that.

Great. And just one follow-up. And as you mentioned, your ability to be able to repurchase shares in the market as well. But maybe can you talk a little bit about how you decide to balance that given, I guess, where the leverage is at the moment and you have opportunity to buy back your stock, but also the paying out the dividend and I guess, the need or want to be able to continue to look at attractive opportunities in the market. So can you maybe just talk a little bit about that balance?

Yes, it's a great question. The -- we're committed to the buyback program. I think that's evidenced by our activity in the prior quarters. As I mentioned, price is an input, largely a formulaic program. We did see the pickup in utilization in the first quarter. The -- I think what I would say to give a little bit of commentary underneath the kind of order of operations that I mentioned earlier in terms of starting with leverage, it's -- we're not blindly kind of collecting the results of all of these inputs at the end of the quarter.

We're proactive in terms of anticipating valuation moves, monitoring stock price, evaluating a vibrant portfolio that's dynamic across a large platform that we're managing here to balance all of those things. So I think in short, we would like to continue to take advantage of the buyback program. Obviously, we'd like to see our stock price trade above NAV, and we're optimistic we'll get there in time. And then this conversation will be moot. But leverage is a governor, and we're going to continue to balance the accretion and the return opportunity on the deployment side as well.

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, we appreciate you joining us today and for your continued support of Morgan Stanley Direct Lending Fund. Our private credit platform continues to benefit from the scale, sourcing capabilities and institutional infrastructure of Morgan Stanley.

The firm remains committed to expanding our team and advancing MSDL as a core component of MSIM's growing credit franchise. We are encouraged by our execution and the continued strength of the portfolio. Market conditions have shown early signs of improvement, and our strategy positions us to win in the near and long term. We're taking every opportunity to further optimize the business as we seek to deliver high-quality returns to investors.

We look forward to providing an update on our second quarter 2026 earnings call in August.

Thank you. And this concludes today's call. Thank you for your participation. You may now disconnect.

Welcome to the Morgan Stanley Direct Lending Funds Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] 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 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.

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's 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 1 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 the benefit from a repricing event have already done so over the last 2 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 affords 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 and more trade in 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 a 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 maintain the overall size of the program by the $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.

[Operator Instructions] 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, 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 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, cost of BDC space, we've seen 3 different nonaccruals in the dental space, including DCA, which is in your portfolio. Are you seeing anything concerning about the dental space specifically? Or is there any -- are there any specific sectors within the broader health care industry that's been concerning?

Yes, Heli, it's a great question. I think as we said at the beginning, the portfolio continues to exhibit very good health. So credit generally across the book has exhibited pretty good trends across a bunch of different dimensions. You look at growth, both topline and EBITDA, as we talked about the stability in leverage and LTV, the kind of grind higher and interest coverage.

On the nonaccrual front, we had the one-off, one on. You asked about dental roll-ups. There's probably a pattern there in terms of some weakness we've seen there, as we've talked previously about some weakness in logistics in both of those categories, which is really the extent of kind of industry-related themes that we would highlight as underperforming. We are -- we have limited exposure to both of those and more broadly and away from that, underperformance truly is idiosyncratic.

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 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 having half of the capital already called, 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. No, it's similar to the plan that we had prior. There are parameters in place to submit it's programmatic and administered by a third party that does have some governors in terms of the overall plan in itself. But that -- but then again, it's all being facilitated by the third party. So like for instance, yes, various parameters such as price and other capital structural considerations that go into it.

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

On the JV, so the 47% that currently invested. It sounds like it may have been a kind of onetime asset purchase. I guess firstly, is that the case? Secondly, did that -- were assets sold down from kind of MSDL's balance sheet? And more generally, is that the strategy where MSDL will be selling assets down to the JV? Or are these kind of what will the overlap look like, I guess, is the question?

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 1. 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 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, 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 -- relative 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 bullet proof 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.

[Operator Instructions] 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 like 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.

Welcome to Morgan Stanley Direct Lending Fund Third Quarter 2025 Earnings Call. [Operator Instructions] 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, underscoing 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 return on NAV 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 contains 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 6 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 tariff 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 buy of 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 2 new positions on nonaccrual. Those being our debt position in [indiscernible], where our PIK note has already been on nonaccrual 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 $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 were $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.

[Operator Instructions]

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, 6 months ago, when we look at the pipeline today and the activity in the third quarter, pretty good diversity in terms of 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 kind of seeing that emerge if we look at the pipeline. So we're pretty -- 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 '26.

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's 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 1 quarter lag if you think about the impact on earnings. So the 25 bps cut we saw in September, that's a 4Q impact, the one from October, more or less a 1Q impact. And spreads are obviously a variable, too, as we commented on, we're seeing some bottoming. There's maybe diminishing marginal impacts in asset yield compression associated with that until we see spreads widen. In 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. And 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 like portfolio optimization, et cetera, 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 technology. 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. Then just on the pipeline, right? And I mean, in the comments particularly about -- I think it was like expect demand for private capital, the need for borrowing could exceed supply by 2x over the next 2 years. I'd just like to -- I mean, so if that's your base case, is it your expectation that if that happens, right, if this pendulum swings the other way and there's much more demand for your capital than -- private credit capital than there is supply. Do you believe that, that is likely to result in spread widening over the next couple of years? I'm not talking about next quarter, but obviously, you gave a kind of 2-year time frame. I mean, is that your kind of base case and how you're thinking about the future for the market and obviously, 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 kind of ongoing fundraising in evergreen products. And so we think that, that 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 ultimately could 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, on the pipeline, as you said, is picking up. Activity is picking up. Are you seeing -- is the quality of deals in the marketplace, obviously, you're going to focus on the higher quality but is the quality of deals keeping up with the rebound? Or is the median deal in terms of our quality of the underlying buyer, is the median deal, so to speak, starting to deteriorate? Obviously, if you're a AAA company, so to speak, you could refinance at any point in the last few years. it's the weaker end of the spectrum that hasn't been doing so. So any thoughts there?

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 a 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 a 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.

[Operator Instructions] 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, 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 -- supported this increasing kind of volume dynamic on the deal side. We continue to leverage Morgan Stanley more broadly in the brand and the 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 1/3 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. I think specific to your -- to the deal you're alluding to, there was a restructuring that took place Q1 of 2024. The business has continued to underperform. And so there's likely to be another event that will take place. So we've moved that to nonaccrual as a result and expect that 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 kind of 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 kind of downward 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 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 what 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 kind of ongoing specific problems, which we don't think are indicative of anything systemic. But maybe I'll turn it over to Jeff to kind of comment on the nonaccruals and the migration that you asked about.

Yes. Ethan, great to catch up. So we did have, as we alluded to, 2 investments that were added to nonaccrual status during the quarter as well as obviously one that had been removed. For context, that was out of a portfolio of 218 borrowers. So quite low from that perspective. These are names that were -- as Michael mentioned, these were idiosyncratic underperformance. They were names that businesses that operated in different industries, different end markets. And so the portfolio -- or the issues that they encountered were not signs of weakness in any specific industry, but really just underperformance that was 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.

[indiscernible] 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.