Morgan Stanley Direct Lending Fund secures BBB rating for $350 million notes

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Morgan Stanley BBB notes

Highlights

Morgan Stanley Direct Lending Fund secured a BBB rating for its $350 million notes, reflecting strong ties to Morgan Stanley Asset Management and access to the firm's broader private credit platform.
At 1Q26, MSDL holds a $3.7 billion diversified portfolio with 93.8% in senior secured first lien loans and 94.5% rated internally at 2 or higher, despite its relatively short track record.
The new issuance proceeds will repay secured debt, raising the share of unsecured borrowings and reducing asset encumbrance, while liquidity remains strong with $1.4 billion in bank credit and $96.7 million cash.

Rating rationale and portfolio profile

As reported by Kroll Bond Rating Agency, the BBB rating reflects Morgan Stanley Direct Lending Fund's links to Morgan Stanley Asset Management and its access to the wider Morgan Stanley private credit platform. The company benefits from relationships across investment banking, capital markets, investment management, and wealth management, while also using co-investment capabilities through affiliated vehicles managed by its adviser, MS Capital Partners Inc.

At 1Q26, the New York-based business development company holds a $3.7 billion diversified investment portfolio at fair value, with about 93.8% in senior secured first lien loans across 227 companies in 36 industries. The portfolio is concentrated mainly in less cyclical areas, with Software accounting for 20.7%, Insurance Services 10.1%, and IT Services 9.9%, while median EBITDA stands at $91.1 million.

Asset quality remains solid, with six portfolio companies on non-accrual representing 1.0% of total investments at fair value and 1.5% at cost at 1Q26. KBRA also notes that 94.5% of the investment portfolio carries an internal rating of 2 or higher, indicating performance at or above underwriting expectations, although the portfolio remains somewhat unseasoned because of the company's relatively short operating history.

Funding strategy and credit risks

MSDL maintains gross leverage of 1.22x at 1Q26, in line with its target range of 1.0x to 1.25x and within the regulatory minimum asset coverage ratio of 150%. Its funding base includes a corporate revolver, SPV asset-based facilities, and senior unsecured notes, with about 54% of total debt outstanding already unsecured as of 1Q26.

The proceeds from the new issuance are used to repay part of the company's secured debt, which increases the share of unsecured borrowings and gives unsecured noteholders lower asset encumbrance. Liquidity also remains solid at 1Q26, supported by about $1.4 billion in available bank credit and $96.7 million in unrestricted cash and cash equivalents, against $425 million of notes due within two years and total unfunded commitments of $449 million, some of which is not expected to be drawn.

KBRA says constraints on the rating include MSDL's limited operating history, the illiquid nature of its investments, retained earnings limits tied to its regulated investment company status, and an uncertain economic backdrop marked by high base rates, inflation, and geopolitical risk. The agency adds that a rating upgrade is not expected in the medium term under the Stable Outlook, while a shift toward riskier investments, higher leverage, weaker U.S. economic conditions, or major changes in senior management or risk policies could lead to negative rating action.

Our earlier report on quarter-end strain in U.S. equity repo markets explained that financing costs for leveraged stock positions have climbed to record levels as dealer balance-sheet capacity stays constrained. It noted that while core money market rates remained orderly, persistent pressure in equity financing could raise deleveraging risks in crowded trades and potentially spill over into broader funding markets, including U.S. Treasuries.

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