Morgan Stanley Direct Lending consistently delivers strong performance while maintaining a low valuation.

The Morgan Stanley Direct Lending Fund (MSDL) has announced its Q2 results, along with the appointment of a new CEO.

In the second quarter, MSDL delivered a 2.2% total NAV return, which, while below the median, outperformed the average in the coverage. However, the NAV fell slightly due to unrealized depreciation. Despite this, the stock looks attractive on a valuation-adjusted basis, with the company trading near its valuation lows, at a double-digit discount relative to the sector.

One of the highlights of the quarter was MSDL's refinancing of its 2025 7.75% bond with a 6% 2030 issue, lowering its overall interest expense. This move is expected to contribute positively to the fund's future earnings.

The company has also announced the appointment of Michael Occi as the new CEO. Occi, who was previously the President of MSDL and has been with the firm for two decades, takes over from an as-yet-undisclosed predecessor.

MSDL's focus on first-lien underwriting, coupled with a consistently low level of non-accruals, evidence a high-quality underwriting process. The fund allocates primarily to less-cyclical sectors such as Software, Insurance, and Commercial Services. This strategy, along with the high allocation to first-lien loans in MSDL's portfolio, which is one of the highest in the sector and well above the 85% sector median, has helped MSDL to outperform the broader BDC sector in the coverage over various time horizons.

However, the level of outperformance has fallen more recently due to the end of fee waivers and a good credit environment. The non-accruals on fair-value for MSDL rose to 0.7%, which is lower than the 2.5% median and 3.9% average in the coverage.

The fund's portfolio quality, as gauged by internal ratings, improved slightly, with a decline in the allocation to the two lowest-quality buckets. This improvement, coupled with the low management fee of 1% and wide discount, allows MSDL to generate a level of earnings yield not far off the median BDC in the coverage.

MSDL currently trades at an 11.3% dividend yield. The company has also implemented a 10b5-1 share repurchase plan, with $30m bought back year-to-date out of a $100m capacity.

In terms of dividends, MSDL has maintained the same $0.50 base dividend.

The BDC MSDL is part of the $18bn Morgan Stanley private credit platform, which itself is under the $1.5trn Morgan Stanley Investment Management. This affiliation provides MSDL with a robust infrastructure and resources to support its operations.

In conclusion, while MSDL's Q2 results showed some challenges, the fund's long-term strategy, strong portfolio, and new leadership provide a positive outlook for the future.

Morgan Stanley Direct Lending consistently delivers strong performance while maintaining a low valuation.