Morgan Stanley Direct Lending Fund

MSDL

Market cap $1.45B

These two income plays just fell hard, but the fundamentals didn't. They have double-digit yields, deep discounts, and balance sheet firepower. It's the kind of setup long-term income investors often wait years for.

Morgan Stanley Direct Lending Fund's weighted average yield fell from 11% in Q3 2024 to 9.9% in Q3 2025, pressuring NII, but that's not my largest concern. MSDL is in trouble because of increasing struggles of its portfolio companies. Is it time to stop buying MSDL? I think so - I've stopped reinvesting as MSDL's portfolio performs in the opposite direction it should.

BDC sector valuations remain depressed, with P/NAV metrics under 1x due to falling rates and credit risk concerns. Dividend sustainability is diverging across BDCs; not all will cut, but the ones with sustainable dividends do not automatically have strong total return prospects. I highlight one BDC as a compelling bargain with strong total return prospects and contrast it with another viewed as highly overpriced.

Investors have started to question how sustainable BDC dividends are. A lot of this skepticism is logical and justified by valid reasons. My calculus shows that on average BDCs could cut their dividends by 20% in order to avoid NAV erosion.

Morgan Stanley Direct Lending Fund (MSDL) remains a sell as persistent NAV deterioration and thin dividend coverage signal elevated risk. MSDL trades at a 16.85% discount to NAV, reflecting portfolio headwinds rather than a value opportunity. Net investment income barely covers the 11.8% yield, with rising non-accruals and limited new investment activity constraining growth.

This Is How I'm Harvesting BDC Cash Flows For My Retirement. The double-digit yields, term 'private credit,' cases like First Brands and Tricolor are just some examples that introduce a high degree of skepticism. However, if done right, BDCs can bring a lot of value to the table for safe passive income investors.

Big yields, but rising risks are quietly reshaping the BDC sector. Interest rates and credit quality are heading toward a collision. My portfolio is positioned very differently for what comes next.

BDCs face earnings pressure from lower base rates, but fears of severe dividend cuts are overstated. Quite many BDCs have several levers to pull in order to absorb ~100 bps of base rate cuts without touching their dividends. Yet, I would say that the non-accrual risk is understated.

It has become a consensus in the market that many BDCs, sooner or later, will have to deliver unpleasant dividend cuts. For example, the sector average dividend coverage level is 100%, which does not look promising amid a lower base rate environment. Yet, as in the case with almost any average, it consists of several positive and negative outliers.

Morgan Stanley Direct Lending Fund (MSDL) offers a compelling 16% discount to book value, backed by high-quality first-lien loans and strong spillover income. MSDL's 96% first-lien, floating-rate loan portfolio positions it defensively versus peers, with non-accruals below the sector average. Despite narrowing NII-dividend coverage, spillover income of $0.82 per share provides a buffer, making a near-term dividend cut unlikely.