Morgan Stanley Direct Lending Fund's JV Ramp Timeline and Leverage Guidance Clash With Earlier Statements

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Date of Call: Aug 7, 2026

Financials Results

• Revenue: Not explicitly provided in transcript
• EPS: $0.45 per share, compared with $0.47 per share in the prior quarter
• Gross Margin: Not applicable for a BDC
• Operating Margin: Not explicitly provided in transcript

Guidance:

• Declared a dividend of 45 cents per share for Q3 2026, unchanged from prior quarter.
• Expects new deployment to accelerate as sponsors gain greater conviction in the geopolitical and macro backdrop.
• JV expected to further ramp over the coming year, providing additional source of portfolio growth and accretion to NAI.
• Believes several pressures (e.g., elevated interest rates, geopolitical uncertainty, AI impact) are beginning to ease, and portfolio is well positioned.

Business Commentary:

Net Investment Income and Dividend Stability:

• Morgan Stanley Direct Lending Fund generated net investment income of $0.45 per share, compared with $0.47 per share in the prior quarter.
• The Board declared a dividend of 45 cents per share for the third quarter, unchanged from the prior quarter.
• The income was impacted by new non-accruals and higher financing costs, but the dividend level is aligned with the fund's normalized earnings power.

Portfolio Health and Credit Performance:

• The overall portfolio health remained solid, with approximately 95% of the portfolio performing in line with the original underwriting case.
• The increase in non-accruals was due to one borrower addition, affecting 2.9% of the portfolio at cost.
• Portfolio performance was stable, with healthy revenue and EBITDA growth, and restructuring efforts were active to preserve principal value.

Leverage and Capital Allocation:

• The gross debt-to-equity ratio closed the quarter at 1.21 times, remaining within the target range.
• The fund actively managed its capital allocation, utilizing a share repurchase program that added $0.05 to NAV per share during the quarter.
• The company continued to scale its JV, which is expected to further ramp over the coming year, as a source of portfolio growth and diversification.

Market Conditions and Deal Activity:

• New platform investments added during the quarter totaled $85 million, with three new platform investments and a focus on LBOs and add-on acquisition activity.
• Pricing for new loans stabilized around SOFR plus 500 basis points, with improved documentation and lender protections.
• The fund observed a rebound in private equity exit activity, supported by efficient financing markets and strong demand from strategics.

Sentiment Analysis:

Overall Tone: Positive

• "Overall portfolio health remains solid." "The proportion of the portfolio in the risk-rated two or better categories remained stable quarter over quarter." "We remain constructive on the medium to long-term outlook for new deal activity." "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."

Q&A:

• Question from Finian O'Shea (Wells Fargo Securities): Can you hit on how common is that 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?
  Response: About 15-20% of the portfolio is agented business; the entire portfolio is lead business. The ability to lead and agent is driven by deep sector experience and the platform's visibility, as seen with the Bridgepoint deal.

• Question from Finian O'Shea (Wells Fargo Securities): With NOI at the dividend, are there levers to build a little cushion on that or will you run here and is it something you're sort of visiting?
  Response: The slight contraction in NII was due to specific headwinds (JV accretion, higher financing costs, new non-accruals, higher incentive fees). Looking forward, the JV's continued build-out and potential restructuring of non-accruals should support the dividend baseline.

• Question from Melissa Waddell (UBS): You pointed to some pressure from the incremental NONIC rules 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.
  Response: The board continues to evaluate but feels good about the 45 cent dividend baseline, considering the JV's growth and active resolution of non-accruals, despite potential quarter-to-quarter noise.

• Question from Melissa Waddell (UBS): Following up on the post-quarter end issuance, the $350 million issuance, I know that 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?
  Response: Yes, the $350M issuance was effectively swapped to align assets and liabilities. The goal is to swap most issuances, with the exception of the note maturing in February 2027.

• Question from Haley Sheath (Raymond James): 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 stocks?
  Response: The hierarchy is first maintaining leverage stability via buybacks (using capital dictated by NAV movement). The balance between on-balance-sheet and JV deployment is an ongoing optimization; the JV is expected to continue ramping over the coming year.

• Question from Haley Sheath (Raymond James): Any sort of new trends or anything that you're seeing in the pipeline, just in terms of spreads, LTVs, sponsor versus non-sponsor, anything there?
  Response: For non-software assets, slight downward pressure on spreads (around SOFR plus 475 bps for high-quality assets) but LTVs remain stable just under 40%. Sponsor relationships remain strong.

• Question from David Pessa (Morgan Stanley Direct Lending Fund) - as relayed by Haley Sheath (Raymond James): Could you talk about, I guess, what you think are the biggest constraints to ramping up the JV in the near term?
  Response: Constraints are not sourcing-related but rather capacity and leverage implications on the fund, and pro forma single borrower/industry exposure limits. There is flexibility via drop-downs versus direct deployment.

Contradiction Point 1

Nature and Timing of JV Ramp-Up and Deployment Priority

Contradiction on whether JV deployment is gradual or will reverse in favor of on-balance-sheet.

Haley Sheath (Raymond James) - Haley Sheath (Raymond James)

2026Q2: The decision to deploy capital is an optimization between on-balance-sheet and JV deployment. The JV provides diversification benefits and is expected to be accretive; it will be ramped over the coming year. - Michael Osi(CEO)

How are you balancing redeploying cash into new investments versus repurchasing shares amid elevated repayments and market discounts? - Finian O’Shea (Wells Fargo Securities)

2026Q1: Deployment into the JV will be more gradual and organic over the next four to six quarters... this balance will shift, with on-balance-sheet deployment increasing. - Michael Occi(CEO)

Contradiction Point 2

Management of Leverage and Capital Deployment Priorities

Contradiction on whether leverage is a constraint or a governor for buybacks.

Haley Sheath (Raymond James) - Haley Sheath (Raymond James)

2026Q2: Leverage stability is paramount. The capital consumed by the buyback is dictated by NAV movement. The decision to deploy capital is an optimization between on-balance-sheet and JV deployment. - Michael Osi(CEO)

How are you balancing redeploying cash into new investments versus leveraging market discounts for share repurchases amid elevated repayments? - Cory Johnson (UBS)

2026Q1: Leverage acts as a governor, and the buyback program will continue while balancing accretion and deployment opportunities. - Michael Occi(CEO)

Contradiction Point 3

JV Ramp-Up Timeline and Strategic Allocation

Contradiction on the expected pace and scale of the JV's growth.

Michael Osi (Morgan Stanley Direct Lending Fund) - Follow-up Question (from the audience) - Michael Osi (Morgan Stanley Direct Lending Fund) - Follow-up Question (from the audience)

2026Q2: The main constraints... are: 1) Capacity and leverage implications... 2) Single borrower or industry exposure... There is significant flexibility in deployment between drop-downs and direct investments. - Michael Osi(CEO)

What are the biggest constraints to ramping up the JV? - Heli Sheth (Raymond James & Associates)

2025Q4: The goal is to scale the JV to ~$700 million in funded assets, which could take 4–6 quarters. - David Pessah(CFO)

Contradiction Point 4

Board Confidence in Sustaining the Dividend

Contradiction in the level of certainty expressed regarding the dividend's sustainability.

Melissa Waddell (UBS) - Melissa Waddell (UBS)

2026Q2: The board continues to feel good about the 45-cent dividend... the current dividend level is supported. - Michael Osi(CEO)

Considering new non-accruals and spillover income, is the board confident in maintaining the current dividend level despite quarterly fluctuations? - Ethan Kaye (Lucid Capital Markets)

2025Q4: While no dividend is fully bulletproof, the Board feels good about the $0.45 level over the medium term... - Michael Occi(CEO)

Contradiction Point 5

Dividend Sustainability and NII Pressure

Contradiction on using spillover income to smooth dividends when NII faces headwinds.

Finian O'Shea (Wells Fargo Securities) - Finian O'Shea (Wells Fargo Securities)

2026Q2: The two-cent contraction... due to headwinds... Looking forward, the re-rate on debt expense is likely here to stay... - Michael Osi(CEO)

Are there levers to build a cushion around the dividend given current NOI, and is this being addressed? - Melissa Wedel (JPMorgan Chase & Co)

2025Q3: Spillover income is one option for smoothing distributions, with consistency a priority... The company will evaluate all levers... to optimize ROE and support a compelling distribution. - Michael Occi(CEO)

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