Fortifying Portfolios in Tariff Turbulence: Why MSDL is the Defensive Credit Play for 2025

As global trade tensions escalate and tariffs cast a shadow over traditional industries, investors are grappling with how to navigate a landscape where once-reliable sectors falter. Enter the Morgan Stanley Direct Lending Fund (MSDL), a credit vehicle engineered to thrive in precisely this kind of environment. With a portfolio anchored in tariff-resistant sectors, pristine credit metrics, and a strategic capital structure primed for growth, MSDL isn’t just weathering the storm—it’s positioning itself to profit from it.

The Definitive Play in Tariff-Resistant Sectors

MSDL’s strategy is built on a simple but powerful premise: avoid industries where tariffs and geopolitical posturing reign. Instead, it has concentrated 31.5% of its fair value in software and insurance services, two sectors insulated from the vagaries of trade wars. Software’s recurring revenue models and the intangible nature of its products make it impervious to import/export disruptions. Insurance, similarly, thrives on predictable cash flows from liability protection and risk mitigation—services that remain in demand regardless of tariffs.

This sector focus is no accident. Over 50% of MSDL’s assets are allocated to industries with minimal offshore manufacturing exposure, while it actively avoids trade-sensitive verticals like manufacturing and consumer goods. The fund’s portfolio spans 34 industries and 210 companies, with an average position size of just 0.5% of total assets—a testament to its rigorous diversification.

Credit Quality: The Bedrock of Resilience

In a world where defaults are rising, MSDL’s non-accrual exposure of just 20 basis points stands out as a beacon of stability. Over 98% of its portfolio carries an internal risk rating of 2 or better—a score that signals high-quality credits with robust cash flows. Crucially, the fund’s reliance on payment-in-kind (PIK) income remains minimal (4% of total investment income), a clear sign that its borrowers are performing.

Even as credit spreads widen across the market, MSDL’s disciplined underwriting has shielded it from the bulk of the pain. The recent removal of Alacrity from non-accrual status and the strategic addition of Continental Battery (now under watch) reflect a proactive management approach, not a deteriorating credit profile.

Leverage Optimization: Balancing Risk and Reward

The fund’s post-refinancing capital structure is another pillar of its defensive moat. While its debt-to-equity ratio rose slightly to 1.11x in Q1 2025, this remains comfortably below its target range of 1.15–1.20x. Management has ample room to increase leverage without compromising credit quality—a flexibility that becomes a competitive advantage in volatile markets.

To fuel growth, MSDL has established a $300 million at-the-market equity issuance program, allowing it to raise capital accretively when conditions are favorable. Pair this with its extended $1.45 billion revolving credit facility (now maturing in 2030), and the fund is armed with the liquidity to capitalize on dislocations without overextending.

The Origination Edge: Outpacing M&A Stagnation

While public markets falter and M&A activity slows due to tariff uncertainty, MSDL is deploying capital with precision. Its origination engine, fueled by Morgan Stanley’s ecosystem, has secured $233.4 million in new commitments in Q1, with 70% allocated to new borrowers—not refinancings. This focus on fresh deals ensures the portfolio remains dynamic and unencumbered by legacy risks.

The fund’s ability to lead or co-lead facilities for new borrowers underscores its credibility in the middle-market. As larger borrowers ($200–500 million EBITDA) turn to private credit amid syndicated loan market volatility, MSDL is primed to capture the spoils.

A Dividend Machine with Room to Grow

With a stable $0.50 per share dividend, fully covered by net investment income (NII), MSDL offers investors a reliable income stream. Even after a slight dip in Q1 NII to $0.52 per share (due to expired IPO fee waivers), the dividend remains secure. The NAV, while modestly down to $20.65, reflects broader market-wide credit spread widening—not a failure of MSDL’s strategy.

Why Act Now?

The case for MSDL is clear: it combines sector resilience, credit discipline, and strategic leverage flexibility into a package that thrives when others falter. With tariffs unlikely to retreat anytime soon and market volatility here to stay, this fund offers a rare blend of income and downside protection.

Investors seeking to hedge against trade wars while maintaining yield should take note: MSDL isn’t just a defensive play—it’s a strategic imperative for 2025.

The time to act is now.