Senior unsecured notes are a type of loan a company borrows from investors, promising to pay back with interest. They are called "unsecured" because they aren’t backed by specific assets like buildings or equipment, but "senior" because they are paid back before other debts if the company gets into trouble. Investors see them as a relatively safer way for companies to raise money.
non-accrualfinancial
A non-accrual loan or asset is one for which a lender has stopped counting expected interest as income because the borrower is very late on payments or in serious financial trouble. For investors, non-accruals signal that future cash from interest is uncertain and that the lender may need to write down the loan’s value or set aside extra reserves, similar to a landlord who stops recording rent when a tenant stops paying.
asset coverage ratioregulatory
Asset coverage ratio measures how much of a company’s debt or preferred claims could be paid off using its tangible assets if the business had to be sold. It’s a safety check for investors and creditors, showing the size of the asset “cushion” available to meet obligations; a higher ratio means more protection, like having enough savings and sellable belongings to cover outstanding bills, while a low ratio signals greater risk of loss.
business development companyregulatory
A business development company is a publicly traded investment vehicle that lends to and buys stakes in smaller or privately held companies, acting like a combination of a lender, investor, and business partner. It matters to investors because BDCs offer the potential for higher regular income through dividends and diversified exposure to growing businesses, but they can also carry greater credit and liquidity risk than typical stocks or bonds—think higher-yielding but riskier income instruments.
regulated investment companyregulatory
A regulated investment company is a type of pooled investment (like a mutual fund or ETF) that meets specific tax-law rules allowing it to pass most income, gains and losses directly to shareholders instead of being taxed at the company level. For investors this matters because it affects how distributions are taxed, how often income is paid, and the overall net return—think of it like a collective account that funnels earnings straight to owners rather than keeping profits inside a separate corporate layer.
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NEW YORK--(BUSINESS WIRE)--
KBRA assigns a rating of BBB to Morgan Stanley Direct Lending Fund's (NYSE: MSDL or "the company") $350 million, 6.10% senior unsecured notes due July 15, 2031. The rating Outlook is Stable.
Key Credit Considerations
The rating and Outlook are supported by MSDL's strong ties to the ~$1.9 trillion assets under management and/or supervision of Morgan Stanley Asset Management. The company benefits from investment banking, global capital markets, investment management, and wealth management within the Morgan Stanley (NYSE: MS) ecosystem in addition to MS' robust sponsor and banking relationships. As part of the MS ecosystem, MSDL leverages the broad MS private credit platform (“MSPC”), which includes $23 billion of committed capital in direct lending along with SEC exemptive relief to co-invest with certain other affiliated investment vehicles managed by the company's adviser, MS Capital Partners Inc. ("Adviser") or its affiliates. Furthermore, as of 1Q26, MSDL's $3.7 billion diversified investment portfolio at fair value (FV) comprises approximately 93.8% senior secured first lien loans spread across 227 companies in 36 industries, primarily in less cyclical sectors. The investment portfolio's median EBITDA is $91.1 million, and the top three sectors are Software (20.7%), Insurance Services (10.1%), and IT Services (9.9%). Asset quality remains solid with six portfolio companies on non-accrual, comprising only 1.0% and 1.5% of total investments at FV and cost, respectively at 1Q26. While the portfolio remains somewhat unseasoned due to its short operating history, 94.5% of the investment portfolio maintained an internal rating of 2 or higher, indicating performance at or above underwriting expectations.
At 1Q26, MSDL maintained gross leverage of 1.22x, in line with its target leverage range of 1.0x to 1.25x and well within the regulatory minimum asset coverage ratio of 150%. MSDL's funding mix is solid and includes a corporate revolver, SPV asset-based facilities, and senior unsecured notes. As of 1Q26, ~54% of the company’s total debt outstanding is senior unsecured, providing greater financial flexibility and low asset encumbrance for the benefit of unsecured noteholders. The proceeds from the issuance will used to repay a portion of its secured debt, increasing the percentage of unsecured debt and further increasing financial flexibility. Liquidity remained solid as of 1Q26, with sufficient bank credit availability of ~$1.4 billion and $96.7 million of unrestricted cash and cash equivalents set against $425 million of notes due within the next two years and total unfunded commitments of $449 million, a portion of which is not expected to be drawn.
Counterbalancing MSDL’s credit strengths are the company’s limited operating history offset by the long tenure of its management in private credit, the relatively illiquid investments, retained earnings constraints as a regulated investment company ("RIC"), and an uncertain economic environment with high base rates, inflation, and geopolitical risk that could increase non-accruals.
MSDL is a New York-based, externally managed, non-diversified, publicly traded closed-end investment management company regulated as a business development company ("BDC") under the Investment Company Act of 1940. For tax purposes, MSDL has elected to be treated as a RIC. The company commenced operations in January 2020 and closed its initial public offering on January 26, 2024. MSDL's Adviser is a wholly owned subsidiary of Morgan Stanley, a leading global investment bank. MSDL is neither a subsidiary nor is it consolidated with MS. Morgan Stanley has no obligation, contractual or otherwise, to financially support MSDL. MSDL’s obligations are neither MS’ obligations nor are they guaranteed by MS, and MS has no history of financially supporting any MS BDC even during periods of financial distress.
Rating Sensitivities
Given the Stable Outlook, a rating upgrade is not expected in the medium term. A rating downgrade and/or Outlook change to Negative could be considered if management alters its stated company strategy by increasing its focus on riskier investments coupled with higher leverage metrics. A prolonged downturn in the U.S. economy with negative impact on MSDL’s earnings performance, asset quality, and leverage or a significant change in senior management and/or risk management policies could also lead to negative rating action.
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A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA), one of the major credit rating agencies (CRA), is a full-service CRA registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a Designated Rating Organization (DRO) by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized as a Qualified Rating Agency by Taiwan’s Financial Supervisory Commission and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider (CRP) in the U.S.
