Morgan Stanley Direct Lending: Well Supported Dividend And Low Non-Accruals

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Morgan Stanley Direct Lending is a new business development company with solid potential as a long-term holding.Net investment income per share covers the distribution by a comfortable margin.Non-...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nMorgan Stanley Direct Lending: Well Supported Dividend And Low Non-Accruals\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-07-02 19:34 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4702007-morgan-stanley-direct-lending-well-supported-dividend-and-low-non-accruals><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Morgan Stanley Direct Lending is a new business development company with solid potential as a long-term holding.Net investment income per share covers the distribution by a comfortable margin.Non-...</p>\n\n<a href=\"https://seekingalpha.com/article/4702007-morgan-stanley-direct-lending-well-supported-dividend-and-low-non-accruals\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"MSDL","symbol_name":"Morgan Stanley Direct Lending Fund","start_time":0,"source_url":"https://seekingalpha.com/article/4702007-morgan-stanley-direct-lending-well-supported-dividend-and-low-non-accruals","article_id":"2448587781","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/507091815/image_507091815.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2448587781","pubTimestamp":1719920087,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Morgan Stanley Direct Lending Fund  operates as a business development company with an inception as recent as January of 2024. Although the fund is named after Morgan Stanley, it is externally managed by MS Capital Partners Adviser. MSDL generates its earnings by investing in directly originated senior secured loans, while maintaining an emphasis on middle market companies. MSDL has a market cap of about $1.93B. To add some history here, MSDL was previously named Morgan Stanley BDC LLC and that company's inception dates back to 2019. Therefore, while we have a limited price history to reference for MSDL, there are some old documents related to their financials that we can reference. The BDC has a base management fee of 1%. We can see that when compared against some of the more popular BDCs in the sector, MSDL actually does quite well!","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"MSDL":"Morgan Stanley Direct Lending Fund","LU1363072403.SGD":"Fidelity Global Financial Services A-ACC-SGD","LU0320765646.SGD":"FTIF - Franklin Income A MDIS SGD-H1","LU2125154935.USD":"ALLSPRING (LUX) WF GLOBAL EQUITY ENHANCED INCOME \"I\" (USD) INC","LU0106831901.USD":"贝莱德世界金融基金A2","IE00BZ1G4Q59.USD":"LEGG MASON CLEARBRIDGE US EQUITY SUSTAINABILITY LEADER \"A\"(USD) INC (A)","BK4581":"高盛持仓","BK4504":"桥水持仓","BK4135":"资产管理与托管银行","FDUS":"Fidus Investment Corporation","LU2360032135.SGD":"ALLSPRING GLOBAL EQUITY ENHANCED INCOME \"A\" (SGDHDG) INC","LU0971096721.USD":"富达环球金融服务 A","LU1074936037.SGD":"JPMorgan Funds - US Value A (acc) SGD","LU0098860793.USD":"FRANKLIN INCOME \"A\" INC","BK4127":"投资银行业与经纪业","FSK":"FS KKR Capital","IE00BKVL7J92.USD":"Legg Mason ClearBridge - US Equity Sustainability Leaders A Acc USD","MS":"摩根士丹利","LU1668664300.SGD":"Blackrock World Financials A2 SGD-H","BK4534":"瑞士信贷持仓","BK4585":"ETF&股票定投概念","LU1989772840.SGD":"CPR Invest - Climate Action A2 Acc SGD-H","OBDC":"Blue Owl Capital Corporation","LU1989772923.USD":"CPR Invest - Climate Action A2 Acc USD-H","XLRE":"Real Estate Select Sector SPDR Fund","LU2125154778.USD":"ALLSPRING GLOBAL EQUITY ENHANCED INCOME \"A\" (USD) INC","LU1162221912.USD":"FRANKLIN INCOME \"A\" (USD) ACC","BK4588":"碎股","ARCC":"阿瑞斯"},"translate_title":"摩根士丹利直接贷款：股息支持良好，非应计费用较低","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"XLRE":1,"OBDC":1,"MSDL":1,"MS":1,"FDUS":1,"FSK":1,"ARCC":1},"content_text":"Morgan Stanley Direct Lending is a new business development company with solid potential as a long-term holding.Net investment income per share covers the distribution by a comfortable margin.Non-accruals are relatively low, sitting at 0.4% at cost.The current dividend sits at 9.2% and there is potential for growth if the portfolio continues to grow.Lower interest rates may have an effect on NII per share, but this can be offset through a higher volume of potential borrowers.RiverNorthPhotography/iStock Unreleased via Getty Images Overview I've covered many business development companies over the last 12 months, but now there's a new kid on the block! Morgan Stanley Direct Lending Fund (NYSE:MSDL) operates as a business development company with an inception as recent as January of 2024. Although the fund is named after Morgan Stanley, it is externally managed by MS Capital Partners Adviser. MSDL generates its earnings by investing in directly originated senior secured loans, while maintaining an emphasis on middle market companies. MSDL has a market cap of about $1.93B. To add some history here, MSDL was previously named Morgan Stanley BDC LLC and that company's inception dates back to 2019. Therefore, while we have a limited price history to reference for MSDL, there are some old documents related to their financials that we can reference. The BDC has a base management fee of 1%. We can see that when compared against some of the more popular BDCs in the sector, MSDL actually does quite well! MSDL has a total return over 10% for the year, which outperforms peer BDCs such as Blue Owl Capital (OBDC), Ares Capital (ARCC), and Fidus Investment Corp (FDUS). MSDL is able to compete with these peer business development companies through their underwriting strategies, which focuses on finding deals that can provide stable cash flow and low expenditure requirements. As the federal funds rate continues to remain at a decade high, this BDC may be a good place to receive a high distribution yield. Data by YCharts With an annual distribution of $2.00 per share, the current dividend yield sits at 9.2%. This makes MSDL a great option for income focused investors. I believe that MSDL may also serve as a great long-term holding because of the strong distribution coverage pulled in by the fund's net investment income. The strong coverage may enable future distribution raises as MSDL's investment portfolio continues to grow over time. There's a specific structure and investment philosophy that prefer my BDCs to follow. The BDC must remain diverse and limit industry concentration, while also displaying strong underwriting criteria to limit risk. Since MSDL is directly linked to Morgan Stanley's reputation, this BDC is unique because it can leverage this reputation to expand their network and unlock the opportunity for attractive deals. MSDL follows a lot of these so let's first start by taking a look at the fund's strategy and holdings within. Strategy & Vulnerabilities What I like a lot about MSDL is that the fund has a majority focus on senior secured first lien debt investments, accounting for approximately 94.6% of their portfolio. Senior secured debt sits at the top of the capital structure, which means that it has the highest priority in terms of repayment. This focus offers a layer of security in cases where a portfolio company's performance is disappointing and is forced to liquidate assets. This increases the chances that MSDL gets some capital back as opposed to losing all of their investment. Similarly, 100% of MSDL's investments are on a floating rate basis. This means that MSDL has been able to efficiently capitalize on this higher interest rate environment. As interest rates go up, so does the potential for higher net income earned through their investments from the higher interest payments required by borrowers. While this can effectively increase earning potential, it's also important that MSDL's underwriting has effectively screened all borrowers so that the highest rates do not put too much strain on their ability to pay the required debt maintenance. MSDL's investment strategy remains diverse across many different industries. This spread helps mitigate any sort of concentration risk. We can see that their investment portfolio is spread across 31 different industries, with insurance services leading the industry allocation at 15.1% of net assets. Software companies make up the second-largest portion of the exposure at 14.8%. Something that makes MSDL unique is the exposure to real estate management and development, accounting for 5.1%. MSDL Q1 Presentation While I have nothing against having some exposure to the real estate sector, I do believe this opens the door to some vulnerabilities. Real estate has been the most heavily impacted sector during the rise of interest rates. The real estate sector (XLRE) remains reliable on access to affordable debt to help fund operational growth, new projects and developments, acquisitions, and other growth initiatives. Additionally, lots of real estate-based companies have balance sheets filled with debt. As a result, this higher interest rate environment has made the environment around lending a lot less attractive, while simultaneously shrinking profit margins for the sector. As a result, this may be a part of the portfolio to remain suppressed as rates remain at their decade high. However, there may be some relief on the horizon as I am starting to see signs of the tide shifting. The Fed kept rates unchanged as of their latest meeting as they await more economic data to roll in around inflation, the labor market, and consumer spending. However, inflation has ticked downward now for two months in a row and slowly creeps toward the 3% mark. Similarly, the unemployment rate has consistently crept upward over the last year and now sits at the 4% mark. Lastly, the upcoming Presidential election may add higher levels of uncertainty in the market. The combination of these things may serve as strong enough catalysts to enable the Fed to start cutting rates, which may allow more price upside as the volume of borrowers starts to increase. To MSDL's credit, the quality of their investments remain very strong. As previously mentioned, higher rates translates to higher earning potential but also means increased risk of portfolio company default. However, the credit quality of their investments has remained solid with most of the investments performing in line with expectations. MSDL uses an internal numbered rating system between 1 through 4, with 1 being the highest rating and 4 being the worst. MSDL Q1 Presentation We can see that a small 0.3% of their investments fall at a 1-rating. The majority of their portfolio companies are rated at a 2, which means that these investments have a performance that aligns with original expectations. Only 1.6% of their portfolio companies have fallen to a rating of 3, which indicates that there is an elevated level of risk with these investments but principal and interest payments are not more than 120 days past due. There are only three companies in non-accrual status at the moment, representing about 0.40% at cost. Non-accruals are portfolio companies that are significantly underperforming and can no longer keep up with the required principal and interest payments. As a result, these investments are no longer contributing to MSDL's total earnings. For reference, here are the non-accrual rates for peer BDCs.  FS KKR Capital (FSK): 6.5% non-accrual rate at cost. Ares Capital (ARCC): 1.7% non-accrual rate at cost. Fidus Investment (FDUS): 1% non-accrual rate at fair value.  Financials MSDL reported their Q1 earnings report in early May and I thought the results were very strong. The most important figure was the net investment income landed at $0.63 per share, amounting to a total of $54.7M. Investments at fair value also slightly increased up to $3.29B, up from the prior quarter's total of $3.19B. This growth took place while the BDC simultaneously decreased total outstanding debt to $1.49B, down from the prior quarter's amount of $1.5B. However, I do think that more focus can go onto the fund's NAV (net asset value) per share growth, since it remained flat at $20.67. Seeking Alpha I believe that this NAV growth can be achieved through MSDL's continued focus on new investments. The fund's average investment size is at $18.5M may increase as the rate of investments increase. Over the first quarter, MSDL committed $232M in new investments to help growth their overall portfolio. Staying in line with their investment strategy, 100% of these new funds were invested on a first lien senior secured basis. MSDL's liquidity remains solid with $64.7M in cash on hand. However, there are debt maturities fast approaching in 2025 totaling $275M, but we still have several quarters to accumulate more cash to help cover this balance. Additionally, MSDL has $924M on hand as undrawn debt capacity to help them navigate these upcoming maturities if needed. MSDL Q1 Presentation We haven't quite seen how MSDL would perform in a lower interest rate environment, however. If interest rates start to come down, there's a possibility that we see net investment income per share come in slightly lower, since most of their investments are on a floating rate basis. While this is certainly possible, it's also possible to see a higher volume of borrowers in a more attractive environment. A higher volume of borrowers could help grow MSDL's net asset value and offset any potential losses in NII per share as a result. This is something I plan to come back and revisit when interest rates do start to come down a bit. Dividend As of the latest declared quarterly dividend of $0.50 per share, the current dividend yield sits around 9.2%. While we are dealing with a limited history, I believe that there is a strong potential for distribution increases over time. At the bare minimum, I believe that there's also a low chance of distributions being cut in a decreasing interest rate environment. This is due to the strong coverage rate from net investment income. As previously mentioned, NII per share landed at $0.63 over this most recent quarter. This means that net investment income per share covers the distribution by a healthy cushion of 126%. MSDL Q1 Presentation Looking back their dividend history, we can see that there have been some supplementals that were issued. This helps reassure us that the distributions have remained consistent and despite being externally managed, the additional earnings flow through to shareholders. This helps reinforce the idea that I believe the distribution to be safe and likely to remain at the same rate with a low threat of reduction. Just as a point of reference, we can see that the distribution was not cut over the course of 2020. While MSDL may have not been entirely the same BDC at the time, it still serves as a great reference point since a handful of BDCs did cut their distribution at the time to preserve capital and offset the impact of the covid induced market drop. This consistency makes MSDL a solid long-term holding if you aim to collect a high distribution yield. The high distribution yield may be appealing if you are a retired investor and depend on the income generated from your portfolio. However, it is important to note that the distributions received from MSDL are classified as ordinary dividends. This means that the income received from MSDL have less favorable tax consequences compared to the qualified dividends you would receive from a more traditional dividend growth company. Valuation In terms of valuation, it may be too soon to get a grasp around a historical trading range. This is also true in regards to the price to NAV relationship. However, I will reference the fact that the price currently trades at a slight premium to NAV of 5.7%. However, most investors don't initiate a position within a BDC for the price growth. Ideally, we'd want to enter here at a discount to NAV, but it's quite common to see high quality BDCs trade at massive premiums to NAV. With that being said, I do believe that MSDL has the strategy, diversity, and performance to eventually trade at a larger premium to NAV. Therefore, I would still feel comfortable adding here as the portfolio continues to grow and additional investments are made. CEF Data NAV remained at $20.67 per share due to the IPO offering and underwriting costs. Without the IPO cost happening again, we may see a bit of NAV growth as a result of the investments made. As another source of reference, Wall St. thinks that there is a slight upside of 1.7% from the current price level. The average price target sits at $22.10 per share. I think a lot of the value depends on how MSDL performs through future rate cuts. If they are able to effectively offset any drops in NAV with new investments and new portfolio companies, we may see investor cash pile in as confidence in management's ability grows. Takeaway  In conclusion, MSDL is a new business development company that has a lot of the right strategies methods in place to be a large player in the BDC space. While the public history is short, the performance and consistency in net investment income per share makes this a Buy. The BDC remains highly diversified with a majority focus on senior secured first lien debt as well as floating rate investments. NII per share currently covers the distribution by a comfortable margin, and additional investments made over the quarter should help fuel growth going forward. Future interest rate cuts may cause some uncertainty on its outlook around net investment income per share, but I believe this can be offset through an increased volume of potential borrowers. 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