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Item 7. Management’s Discussion and Analysis

2021-03-19 compared with 2020-03-20 · 243 added, 65 removed, 124 unchanged (71% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollar amounts in thousands, except per share data, unless otherwise indicated)

Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollar amounts in thousands, except per share amounts, unless otherwise indicated)

The discussion and analysis contained in this section refers to our financial condition, results of operations and cash flows.

The information contained in this section should be read in conjunction with the financial statements and notes thereto in Part II, Item 8 of this Form 10-K, “Financial Statements and Supplementary Data.” This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in Part I, Item 1A of this Form 10-K, “Risk Factors.” Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed under “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Form 10-K.

The period presented represents the period from May 30, 2019 (inception) through December 31, 2019.

The information contained in this section should be read in conjunction with the consolidated financial statements and notes thereto in Part II, Item 8 of this Form 10-K, “Financial Statements and Supplementary Data.” This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in Part I, Item 1A of this Form 10-K, “Risk Factors.” Our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed under “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Form 10-K.

The year ended December 31, 2019 presented represents the period from May 30, 2019 (inception) to December 31, 2019.

We are an externally managed specialty finance company focused on lending to middle-market companies.

We were formed as a Delaware limited liability company on May 30, 2019 with the name Morgan Stanley BDC LLC and changed our name to Morgan Stanley Direct Lending Fund LLC on August 8, 2019.

Prior to the November 25, 2019 and prior to our election to be regulated as a BDC, we completed the BDC Conversion under which Morgan Stanley Direct Lending Fund succeeded to the business of Morgan Stanley Direct Lending Fund LLC and the member of Morgan Stanley Direct Lending Fund LLC, MS Credit Partners Holdings, Inc., a wholly owned subsidiary of Morgan Stanley and affiliate of the Adviser (“MS Credit Partners Holdings”), became the sole stockholder of Morgan Stanley Direct Lending Fund.

Following the BDC Conversion, we elected to be treated as a BDC under the 1940 Act.

We have elected to be regulated as a BDC under the 1940 Act.

In addition, for U.S.

federal income tax purposes, for our taxable year commencing on the Initial Drawdown Date (as defined below), we intend to elect to be treated, and to comply with the requirements to qualify annually, as a RIC under Subchapter M of the Code.

On December 23, 2019, we completed our Initial Closing of capital commitments to purchase shares of our Common Stock, in a private placement pursuant to subscription agreements with investors.

In this Initial Closing, we received aggregate capital commitments to purchase Common Stock of approximately $755 million, including a capital commitment from MS Credit Partners Holdings.

Pursuant to the terms of MS Credit Partners Holdings’ subscription agreement, MS Credit Partners Holdings made an aggregate capital commitment equal to 20% of total capital commitments to the Company up to $200,000,000.

As of December 31, 2019, the Company has accepted $150,000,000 from MS Credit Partners Holdings’ total capital commitment of up to $200,000,000, representing approximately 20% of aggregate capital commitments received.

federal income tax purposes, we have elected to be treated, and intend to comply with the requirements to qualify annually, as a RIC under Subchapter M of the Code.

Our investment objective is to achieve attractive risk-adjusted returns via current income and, to a lesser extent, capital appreciation by investing primarily in directly originated senior secured term loans issued by U.S.

middle-market companies backed by financial sponsors.

For the purposes of this report, "middle-market companies" refers to companies that, in general, generate annual earnings before interest, taxes, depreciation and amortization ("EBITDA") in the range of approximately $15 million to $100 million, which we believe is a useful proxy for cash flow.

For the purposes of this report, “middle-market companies” refers to companies that, in general, generate annual EBITDA in the range of approximately $15 million to $100 million, which we believe is a useful proxy for cash flow.

We intend to achieve our investment objective by investing primarily in directly originated senior secured term loans including first lien senior secured term loans (including unitranche loans) and second lien senior secured term loans, with the balance of our investments expected to be in higher-yielding assets such as mezzanine debt, unsecured debt, equity investments and other opportunistic assets.

Typical middle market senior loans may be issued by middle market companies in the context of leveraged buyouts ("LBOs"), acquisitions, debt refinancings, recapitalizations, and other similar transactions.

Typical middle-market senior loans may be issued by middle-market companies in the context of LBOs, acquisitions, debt refinancings, recapitalizations, and other similar transactions.

We expect to generate revenues primarily in the form of interest income from investments we hold.

In addition, we generate income from dividends on any direct equity investments, capital gains on the sales of loans and debt and equity investments and various other loan origination and other fees.

On September 18, 2020, the SEC granted us exemptive relief (the “Order”) that allows us to enter into certain negotiated co-investment transactions alongside certain Affiliated Investment Accounts (as defined in the Order) in a manner consistent with our investment objective, positions, policies, strategies, and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with the Order.

Pursuant to the Order, we are permitted to co-invest with our affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our eligible directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.

RECENT DEVELOPMENTS

Subsequent to December 31, 2019 through March 20, 2020, we have committed to invest $93 million in 3 different portfolio companies.

On January 24, 2020, we delivered a capital drawdown notice to our investors relating to the sale of 2,874,810 shares of our Common Stock for an aggregate offering price of approximately $57.5 million.

The sale closed on February 5, 2020.

On February 3, 2020, we entered into an amendment to the CIBC Subscription Facility that, among other things, increased the borrowing capacity under the CIBC Subscription Facility from $100 million to $325 million.

On March 17, 2020, we delivered a capital drawdown notice to our investors relating to the sale of shares of our Common Stock for an aggregate offering price of approximately $45 million.

The sale is expected to close on March 27, 2020.

Subsequent to December 31, 2020 through March 19, 2021, the Company has closed or the Investment Adviser's Investment Committee has committed/approved approximately $538.0 million of new/add-on investments.

This includes transactions for which a formal mandate, letter of intent or a signed commitment have been issued, and therefore the Company believes are likely to close.

Of these new commitments, approximately 87.8% were first lien senior secured loans, 11.2% were second lien senior secured loans, and 1.1% were common equity investments.

100% of the senior secured loans were floating rate loans.

We remain highly focused on conducting extensive due diligence and leveraging the Morgan Stanley platform.

We continue to seek to invest in companies that are led by strong management teams, generate substantial free cash flow, have leading market positions, benefit from sustainable business models, and are well positioned to perform well despite the impact of Coronavirus.

We believe the current market environment offers opportunities to seek compelling risk adjusted returns.

Our investment pace will depend on several factors including the market environment, deal flow, and the continued impact of Coronavirus.

On January 7, 2021 and March 2, 2021, we delivered capital drawdown notices to our investors relating to the sale of shares of our Common Stock for an aggregate offering price of approximately $35.0 million and approximately $45.0 million, respectively.

The sale of approximately 1,726,689 and 2,171,816 shares of our Common Stock closed on January 20, 2021 and March 12, 2021, respectively.

On February 1, 2021, we closed new capital commitments of $50.0 million, which brings our total capital commitments to $1,495.8 million.

On March 2, 2021, DLF LLC entered into (i) an amendment (the “Second Amendment to CSA”) to the Revolving Credit and Security Agreement, dated as of October 14, 2020, as amended from time to time (the “BNP Funding Facility”), by and among DLF LLC, as the borrower, the Company, as the equityholder and servicer, BNP Paribas, as the administrative agent, U.S.

Bank National Association, as the collateral agent, and the lenders party thereto and (ii) amendments to various supporting documentation, including certain fee letters (together with the Second Amendment to CSA, the “Second Amendment”).

The Second Amendment, among other things, increased the borrowing capacity under the BNP Funding Facility from $300 million to $600 million, made certain adjustments to the borrowing base calculations, reduced the applicable margin on borrowings to a range during the reinvestment period between 1.95% and 2.75% and, after the reinvestment period, between 2.45% and 3.25%, and reduced the LIBOR (Dollar) floor on borrowings to 0.00%.

The other material terms of the BNP Funding Facility remain unchanged.

On March 18, 2021, our Board of Directors declared a distribution of $0.45 per share payable on April 22, 2021 to stockholders on record as of March 18, 2021.

KEY COMPONENTS OF OUR RESULTS OF OPERATIONS

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• initial organization costs and offering costs incurred prior to the filing of our election to be regulated as a BDC (subject to the expense waiver described below)

costs associated with the our initial private offering;

• costs associated with our initial private offering;

• costs of any other offerings of our Common Stock and other securities, if any;

• calculating individual asset values and our net asset value (including the cost and expenses of any third-party valuation services);

out of pocket expenses, including travel expenses, incurred by the Adviser, or members of its investment team or payable to third parties, performing due diligence on prospective portfolio companies and monitoring actual portfolio companies and, if necessary, enforcing the our rights;

• out of pocket expenses, including travel expenses, incurred by the Adviser, or members of its investment team or payable to third parties, performing due diligence on prospective portfolio companies and monitoring actual portfolio companies and, if necessary, enforcing our rights;

• base management fee and any incentive fee payable under the Investment Advisory Agreement;

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• costs of preparing financial statements and maintaining books and records, costs of preparing tax returns, costs of Sarbanes-Oxley Act compliance and attestation and costs of filing reports or other documents with the SEC (or other regulatory bodies), and other reporting and compliance costs, including registration and listing fees, and the compensation of professionals responsible for the preparation or review of the foregoing;

the costs of any reports, proxy statements or other notices to our stockholders (including printing and mailing costs), the costs of any stockholders’ meetings and the compensation of investor relations personnel responsible for the preparation of the foregoing and related matters;

• the costs of any reports, proxy statements or other notices to our stockholders (including printing and mailing costs), the costs of any stockholders’ meetings, and costs and expenses of preparation for the foregoing and related matters;

• the costs of specialty and custom software for monitoring risk, compliance and overall investments;

our fidelity bond;

• any fidelity bond required by applicable law;

• any necessary insurance premiums;

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• all other expenses incurred by either the Administrator or us in connection with administering our business, including payments under the Administration Agreement based upon our allocable portion of the compensation paid to our Chief Financial Officer and Chief Compliance Officer and reimbursing third-party expenses incurred by the Administrator in carrying out its administrative services including, but not limited to, the fees and expenses associated with performing compliance functions.

We will reimburse the Administrator or its affiliates for amounts paid or costs borne that properly constitute Company expenses as set forth in the Administration Agreement or otherwise.

We expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines.

PORTFOLIO, INVESTMENT ACTIVITY AND RESULTS OF OPERATIONS

As of December 31, 2020, we had investments in thirty-six portfolio companies across nineteen industries.

Based on fair value as of December 31, 2020, 99.8% of our debt portfolio was invested in debt bearing a floating interest rate, which primarily are subject to interest rate floors.

Approximately 95.2% of our debt portfolio at fair value had a LIBOR floor.

The weighted average LIBOR floor across our floating-rate portfolio was approximately 1.0% as of December 31, 2020.

These floors allow us to mitigate (to a degree) the impact of spread widening on the valuation of our investments.

As of December 31, 2020, our weighted average total yield of debt securities at amortized cost was 7.5%.

Weighted average yields include the effect of accretion of discounts and amortization of premiums and are based on interest rates as of December 31, 2020.

During the period from May 30, 2019 (inception) to December 31, 2019, we had no investment activities.

We commenced our investment activities on January 31, 2020.

During the period from May 30, 2019 (inception) to December 31, 2019, we had no investment income.

We commenced our investment operations on January 31, 2020.

Our investment activities for the year ended December 31, 2020 is presented below (information presented herein is at amortized cost unless otherwise indicated):

For the year ended December 31, 2020

New Investments Committed/Purchased

Gross Principal Balance (1)

Investments, at Cost

Investments, beginning of period —

New investments purchased 714,658

Net accretion of discount on investments (2)

Net realized gain (loss) on investments 2,154

Investments sold or repaid (88,954)

Investments, end of period $ 631,473

Principal amount of investments funded

First lien debt $ 678,879

Second lien debt 55,000

Unsecured debt 1,509

Common equity (3)

Total $ 736,838

Principal amount of investments sold or repaid

First lien debt $ 90,106

Total $ 90,106

As of December 31, 2020

Weighted average yield on debt and income producing investments, at cost (4)

Weighted average yield on debt and income producing investments, at fair value (4)

Number of portfolio companies 36

Percentage of debt investments bearing a floating rate 99.8 %

Percentage of debt investments bearing a fixed rate 0.2 %

(1) Includes new investment commitments, excluding sale/repayments and including unfunded investment commitments.

(2) Includes capitalized PIK interest.

(3) Represents dollar amount of common equity funded.

(4) Computed as (a) the annual stated spread, plus applicable Prime/LIBOR or Floor, as applicable, plus the annual accretion of discounts, as applicable, on accruing debt securities, divided by (b) total debt investments (at fair value or cost, as applicable) included in such securities.

Actual yields earned over the life of each investment could differ materially from the yields presented herein.

The distribution of our portfolio on the Adviser's Internal Risk Rating System as of December 31, 2020 is as follows (dollar amounts in thousands):

December 31, 2020

Fair Value % of Portfolio Number of Portfolio Companies

Risk rating 1 $ 31,230 4.9 % 1

Risk rating 2 605,751 95.1 % 35

$ 636,981 100.0 % 36

CONSOLIDATED RESULTS OF OPERATIONS

We were formed on May 30, 2019 and commenced our investment operations on January 31, 2020.

The following table represents our operating results (dollar amounts in thousands):

For the year ended December 31, 2020 From May 30, 2019 (inception) to December 31, 2019

Total investment income $ 21,903 $ —

Net expenses 11,268 1,156

Net investment income 10,635 (1,156)

Net change in unrealized appreciation (depreciation) 5,508 —

Net realized gain (loss) 2,154 —

Net increase (decrease) in net assets resulting from operations $ 18,297 $ (1,156)

Investment Income

Investment income was as follows (dollar amounts in thousands):

For the year ended December 31, 2020 From May 30, 2019 (inception) to December 31, 2019

Interest income $ 20,278 $ —

Other income 1,625 —

Total investment income $ 21,903 $ —

For the year ended December 31, 2020, total investment income was driven by our deployment of capital and invested balance of investments.

The size of our investment portfolio at fair value was $637.0 million as of December 31, 2020 and, as of such date, all our debt investments were income-producing.

Interest income on our debt investments is dependent on the composition and credit quality of the portfolio.

Generally, we expect the portfolio to generate predictable quarterly interest income based on the terms stated in each loan’s credit agreement.

As of December 31, 2020, and for the year then ended, all of our first and second lien debt investments were performing and current on their interest payments.

During the period from May 30, 2019 (inception) to December 31, 2019, we had no investment income and had not commenced our investment operations.

The Company is responsible for investment expenses, legal expenses, auditing fees and other expenses related to the Company’s operations.

During the period ended December 31, 2019, we incurred total expenses of $1,155,944 (net of Expense waiver of $78,673) towards organization costs, directors’ fee and other general expenses.

During the year ended December 31, 2020 and the period from May 30, 2019 (inception) to December 31, 2019, we incurred total expenses of $13,176 (before expense waivers of $1,908) and $1,235 (before expense waiver of $79), respectively, towards organization costs, directors’ fee and other general expenses.

Expenses were as follows (dollar amounts in thousands):

For the year ended December 31, 2020 From May 30, 2019 (inception) to December 31, 2019

Interest expense $ 3,725 $ —

Management fees 2,238 —

Income based incentive fees 2,517 —

Capital gains incentive fees 1,341 —

Professional fees 1,654 66

Organization and offering costs 676 1,079

Directors' fees 349 43

Administrative service fees 183 —

General and other expenses 493 47

Total expenses 13,176 1,235

Expense waiver (Note 3) (230) (79)

Management fees waiver (Note 3) (1,678) —

Net expenses $ 11,268 $ 1,156

For the year ended December 31, 2020, net expenses were primarily comprised of interest expense of $3,725, gross base management fees of $2,238, income based incentive fees of $2,517, capital gains incentive fees of $1,341, administrative service expenses of $183, professional fees of $1,654, fees to independent directors of $349, organization and offering costs of $676 and other expenses of $493;

offset by management fee waivers and expense waivers by the Investment Adviser of $1,678 and $230, respectively.

During the period from May 30, 2019 (inception) to December 31, 2019, net expenses were primarily comprised of professional fees of $66, fees to independent directors of $43, organization costs of $1,079 and other expenses of $47;

offset by expense waivers by the Investment Adviser of $79.

Interest expense for the year ended December 31, 2020 was driven by approximately $114.4 million of average borrowings (at an average effective interest rate, of 1.93%), under our CIBC Subscription Facility related to borrowings for investments and expenses.

There was no interest expense incurred during the period from May 30, 2019 (inception) to December 31, 2019.

Professional fees include legal, audit, tax, valuation, and other professional fees incurred related to the management of our Company.

Administrative service fees represent fees paid to the Administrator for our allocable portion of the cost of certain of our executive officers that perform duties for us.

Other general and administrative expenses include insurance, filing, research, subscriptions and other costs.

Organization costs and offering costs include expenses incurred in our initial formation and our offering of stock.

As of December 31, 2020, expense support includes the management fee waiver of $1,678 and excess organization and offering costs of $230 that the Adviser has committed to pay.

As of December 31, 2019, expense support includes excess organization and offering costs of $79 that the Adviser has committed to pay.

Excess organization and offering costs are subject to reimbursement to the Adviser at a future date.

See “ Item 8.

Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 3.

Income Taxes, Including Excise Taxes

We have elected to be treated as a RIC under Subchapter M of the Code, and we intend to operate in a manner so as to continue to qualify for the tax treatment applicable to RICs.

To qualify for tax treatment as a RIC, we must, among other things, distribute to our stockholders in each taxable year generally at least 90% of the sum of our ICTI, as defined by the Code (without regard to the deduction for dividends paid), and net tax-exempt income for that taxable year.

To maintain our tax treatment as a RIC, we, among other things, intend to make the requisite distributions to our stockholders, which generally relieve us from corporate-level U.S.

federal income taxes.

Net Realized Gain (Loss) and Unrealized Gain (Loss) on Investments

For the year ended December 31, 2020, net realized gain on our investments was $2.2 million.

We determine the fair value of our portfolio investments quarterly and any changes in fair value are recorded as unrealized gains or losses.

For the year ended December 31, 2020, net change in unrealized gain on our investments was $5.5 million.

For the period from May 30, 2019 (inception) to December 31, 2019, there were no realized gain (loss) or changes in unrealized gains/losses on investments since the Company commenced operations on January 31, 2020.

For the year ended December 31, 2020 From May 30, 2019 (inception) to December 31, 2019

Net realized gain (loss):

Non-controlled/non-affiliated investments $ 2,154 $ —

Net change in unrealized appreciation (depreciation):

Non-controlled/non-affiliated investments 5,508 —

Net realized and unrealized gain (loss) $ 7,662 $ —

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We generate cash from the net proceeds of offerings of our Common Stock and through cash flows from operations, including investment sales and repayments as well as income earned on investments and cash equivalents.

We may also fund a portion of our investments through borrowings under the CIBC Subscription Facility and any additional senior secured credit facilities, as well as through securitization of a portion of our existing investments.

We generate cash from the net proceeds of offerings of our Common Stock, net borrowings from our credit facilities, and through cash flows from operations, including investment sales and repayments as well as income earned on investments and cash equivalents.

Details of our credit facilities are described in “ —Debt ” below.

We may from time to time enter into new credit facilities, increase the size of existing credit facilities or issue debt securities.

Any such incurrence or issuance would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors.

As of December 31, 2020, we had approximately $11.3 million of cash, which taken together with our approximately $66.2 million and $300.0 million of availability under the CIBC Subscription Facility and the BNP Funding Facility (subject to borrowing base availability), respectively, and our approximately $1,148.4 million of uncalled capital commitments to purchase shares of Common Stock, or capital commitments, we expect to be sufficient for our investing activities and to conduct our operations in the near term.

As of December 31, 2020, we had received aggregate capital commitments of approximately $1,445.8 million, of which $200.0 million was from an affiliate of the Investment Adviser.

During the year ended December 31, 2020, we issued six capital calls to our stockholders.

As a result, the total shares issued and proceeds received related to capital drawdowns delivered pursuant to the Subscription Agreements for the year ended December 31, 2020 were as follows (dollar amounts in millions):

Share Issuance Date Shares Issued Amount

February 5, 2020 2,874,810 $ 57.50

March 27, 2020 2,410,313 44.95

June 26, 2020 769,194 14.95

August 11, 2020 2,002,070 39.98

September 28, 2020 3,504,634 69.99

December 1, 2020 3,410,138 69.98

Total 14,971,159 $ 297.35

During the period from May 30, 2019 (inception) to December 31, 2019, we received seed capital of $35 from and issued 1,750 shares to MS Credit Partners Holdings.

Distributions and Dividend Reinvestment

The following table summarizes our distributions declared and payable for the year ended December 31, 2020:

Date Declared Record Date Payment Date Per Share Amount Total Amount

June 19, 2020 June 19, 2020 July 15, 2020 $ 0.29 $ 1,533

September 24, 2020 September 24, 2020 October 22, 2020 0.40 3,228

December 29, 2020 December 29, 2020 January 27, 2021 0.61 (1) 9,165

Total Distributions $ 1.30 $ 13,926

(1) Includes a special distribution of $0.18 per share.

We adopted an “opt in” dividend reinvestment plan (“DRIP”).

As a result, our stockholders who elect to “opt in” to the DRIP will have their cash dividends or distributions automatically reinvested in additional shares of Common Stock, rather than receiving cash.

Stockholders who receive distributions in the form of shares of Common Stock will generally be subject to the same U.S.

federal, state and local tax consequences as if they received cash distributions;

however, those stockholders will not receive cash with which to pay any applicable taxes.

Shares issued under the DRIP will not reduce an investor’s outstanding capital commitment.

The following table summarizes DRIP shares issued and amounts for the year ended December 31, 2020:

Payment Date DRIP Shares Value DRIP Shares Issued

July 15, 2020 $ 227 11,668

October 22, 2020 796 39,848

Total $ 1,023 51,516

Our outstanding debt obligations were as follows (dollar amounts in thousands):

December 31, 2020

Aggregate Principal Committed Outstanding Principal Unused Portion (1)

CIBC Subscription Facility $ 400,000 $ 333,850 $ 66,150

On December 31, 2019, we entered into a revolving credit agreement (the “CIBC Subscription Facility”) with CIBC Bank USA as administrative agent and arranger.

The CIBC Subscription Facility allows us to borrow up to $100 million at any one time outstanding, subject to certain restrictions, including availability under the borrowing base, which is based on unused capital commitments.

BNP Funding Facility 300,000 — 300,000

Total $ 700,000 $ 333,850 $ 366,150

(1) The unused portion (subject to borrowing base availability) is the amount upon which commitment fees, if any, are based.

CIBC Subscription Facility

On December 31, 2019, we entered into the CIBC Subscription Facility with CIBC Bank USA as administrative agent and arranger.

During the year ended December 31, 2020, we amended the CIBC Subscription Facility by increasing the total commitment amount to $400.0 million.

As of December 31, 2020, the CIBC Subscription Facility allows us to borrow up to $400.0 million at any one time outstanding, subject to certain restrictions, including availability under the borrowing base, which is based on unused capital commitments.

The amount of permissible borrowings under the CIBC Subscription Facility may be increased to up to an aggregate amount of $500 million with the consent of the lenders.

The CIBC Subscription Facility has a maturity date of December 31, 2022.

The CIBC Subscription Facility bears interest at a rate at our election of either (i) the per annum one-, two-, or three-month London Interbank Offered Rate, divided by a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities, plus 1.65% or (ii) the prime rate plus 0.65%, as calculated under the CIBC Subscription Facility.

The CIBC Subscription Facility is secured by the unfunded commitments of certain investors of the Company.

The CIBC Subscription Facility bears interest at a rate at our election of either (i) the per annum one-, two-, or three-month LIBOR, divided by a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities, plus 1.65% or (ii) the prime rate plus 0.65%, as calculated under the CIBC Subscription Facility.

The CIBC Subscription Facility is secured by the unfunded commitments of certain of our investors.

We have made customary representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar credit facilities.

Borrowings under the CIBC Subscription Facility are subject to the leverage restrictions contained in the 1940 Act.

During the period ended December 31, 2019, there was no amount borrowed under the CIBC Subscription Facility.

As of December 31, 2019, we were in compliance with all covenants and other requirements of the CIBC Subscription Facility.

Borrowings under the CIBC Subscription Facility are subject to the leverage restrictions contained in the 1940 Act, as amended, or the 1940 Act.

During the year ended December 31, 2020, we borrowed $612.4 million and repaid $278.5 million under the CIBC Subscription Facility.

As of December 31, 2020, we had $333.9 million outstanding under the CIBC Subscription Facility.

As of December 31, 2019, we had no amount borrowed under the CIBC Subscription Facility.

As of December 31, 2020 and December 31, 2019, we had $66.2 million and $100.0 million, respectively, of available capacity under the CIBC Subscription Facility.

As of December 31, 2020 and December 31, 2019, we were in compliance with all covenants and other requirements of the CIBC Subscription Facility.

BNP Funding Facility

On October 14, 2020, DLF LLC entered into a Revolving Credit and Security Agreement (the “Credit and Security Agreement”) with DLF LLC, as the borrower, BNP, as the administrative agent and lender, the Company, as the equityholder and as the servicer, and U.S.

Bank National Association, as collateral agent, pursuant to which BNP has agreed to extend credit to DLF LLC in an aggregate principal amount up to $300 million at any one time outstanding (the “BNP Funding Facility”).

The BNP Funding Facility is a revolving funding facility with a reinvestment period ending October 14, 2023 and a final maturity date of October 14, 2025.

Subject to certain conditions, the reinvestment period and final maturity are both subject to a one-year extension.

Advances under the BNP Funding Facility are available in U.S.

dollars, pound sterling, Euro or Canadian dollars, and subject to certain exceptions, the interest charged on the BNP Funding Facility is based on LIBOR (Dollar), LIBOR (GBP), EURIBOR or CDOR, as applicable (or, if LIBOR (Dollar) is not available, a benchmark replacement or a “base rate” (which is the greater of a prime rate and the federal funds rate plus 0.50%), as applicable), plus a margin that generally ranges between 2.25% and

3.25% (depending on the types of assets such advances relate to), with a weighted average margin floor for all classes of advances of (i) 2.80% during the reinvestment period and (ii) 3.30% following the reinvestment period, with specific margins for non-U.S.

dollar advances as set forth in the Credit and Security Agreement.

The obligations of DLF LLC under the BNP Funding Facility are secured by all of the assets held by DLF LLC, including certain loans to be sold or transferred by the Company to DLF LLC pursuant to the terms of the Purchase and Sale Agreement (the “Purchase and Sale Agreement” and, together with the Credit and Security Agreement, the “Agreements”) between the Company and DLF LLC entered into in connection with the BNP Funding Facility, pursuant to which the Company will sell to DLF LLC certain loans it has originated or acquired or will originate or acquire (the “Loans”) from time to time.

Under the Agreements, the Company and DLF LLC, as applicable, have made representations and warranties regarding the Loans, as well as their businesses, and are required to comply with various covenants, servicing procedures, limitations on disposition of Loans, reporting requirements and other customary requirements for similar revolving funding facilities.

The Credit and Security Agreement includes usual and customary events of default for revolving funding facilities of this nature, including allowing BNP, upon a default, to accelerate and foreclose on the Loans and to pursue the rights under the Loans directly with the obligors thereof.

In connection with the entry into the BNP Funding Facility, DLF LLC also entered into various supporting documentation, including an account control agreement.

During the year ended December 31, 2020, we had no amount borrowed under the BNP Funding Facility.

As of December 31, 2020, we were in compliance with all covenants and other requirements of the BNP Funding Facility, as well as the leverage restrictions contained in the 1940 Act.

OFF BALANCE SHEET ARRANGEMENTS

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however, the maximum potential exposure is unknown.

No accrual has been made in our financial statements as of December 31, 2019 in Part II, Item 8 of this Form 10-K, for any such exposure.

No accrual has been made in our financial statements as of December 31, 2020 and December 31, 2019 in Part II, Item 8 of this Form 10-K, for any such exposure.

We have in the past and may in the future become obligated to fund commitments such as revolving credit facilities, bridge financing commitments, or delayed draw commitments.

We had no unfunded commitments to fund delayed draw and revolving senior secured loans as of the December 31, 2019.

As of December 31, 2020, we had delayed draw and revolving senior secured loans with an aggregate of $206.5 million of unfunded commitments.

We had no unfunded commitments to fund delayed draw and revolving senior secured loans as of December 31, 2019.

Other Commitments and Contingencies

From time to time, we may become a party to certain legal proceedings incidental to the normal course of our business.

As of December 31, 2020, management is not aware of any material pending or threatened litigation relating to us.

CONTRACTUAL OBLIGATIONS

A summary of our contractual payment obligations under our credit facilities as of December 31, 2020 is as follows (dollar amounts in thousands):

Payments Due by Period

1 year 1-3 years 3-5

years After 5

CIBC Subscription Facility $ 333,850 $ — $ 333,850 $ — $ —

BNP Funding Facility — — — — —

Total Contractual Obligations $ 333,850 $ — $ 333,850 $ — $ —

As of December 31, 2019, we did not have any contractual payment obligations under our credit facilities.

CRITICAL ACCOUNTING POLICIES

The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses.

Changes in the economic environment, financial markets, and any other parameters used in determining such estimates could cause actual results to differ.

Changes in the economic environment, financial markets, and any other parameters used in

determining such estimates could cause actual results to differ.

Our critical accounting policies, including those relating to the valuation of our investment portfolio, are described below.

The critical accounting policies should be read in connection with “ Risk Factors ” in Part I, Item 1A of this Form 10-K.

We conduct the valuation of assets at all times consistent with U.S.

GAAP and the 1940 Act.

We conduct the valuation of assets at all times consistent with GAAP and the 1940 Act.

Our Board of Directors, with the assistance of our Audit Committee, determines the fair value of our assets, for assets with a daily public market, and for assets with no readily available public market, on at least a quarterly basis, in accordance with the terms of Topic 820 of the Financial Accounting Standards Board's Accounting Standards Codification, as amended, Fair Value Measurement (“ASC 820”).

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However, the objective of a fair value measurement in both cases is the same—to estimate the price when an orderly transaction to sell the asset or transfer the liability would take place between market participants at the measurement date under current market conditions (that is, an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).

ASC 820 establishes a hierarchical disclosure framework which ranks the observability of inputs used in measuring financial instruments at fair value.

The observability of inputs is impacted by a number of factors, including the type of financial instruments and their specific characteristics.

Financial instruments with readily available quoted prices, or for which fair value can be measured from quoted prices in active markets, generally will have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value.

The three-level hierarchy for fair value measurements is defined as follows:

Level 1 —inputs to the valuation methodology are quoted prices available in active markets for identical financial instruments as of the measurement date.

The types of financial instruments in this category include unrestricted securities, including equities and derivatives, listed in active markets.

We will not adjust the quoted price for these instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.

Level 2 —inputs to the valuation methodology are quoted prices in markets that are not active or for which all significant inputs are either directly or indirectly observable as of the measurement date.

The types of financial instruments in this category include less liquid and restricted securities listed in active markets, securities traded in markets that are not active, and certain over-the-counter derivatives where the fair value is based on observable inputs.

Level 3 —inputs to the valuation methodology are unobservable and significant to the overall fair value measurement, and include situations where there is little, if any, market activity for the investment.

The inputs into the determination of fair value require significant management judgment or estimation.

The types of financial instruments in this category include investments in privately held entities, non-investment grade residual interests in securitizations and certain over-the-counter derivatives where the fair value is based on unobservable inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.

In such cases, the determination of which category within the fair value hierarchy is appropriate for any given financial instrument is based on the lowest level of input that is significant to the fair value measurement.

Assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument.

Pursuant to the framework set forth above, we value securities traded in active markets on the measurement date by multiplying the exchange closing price of such traded securities/instruments by the quantity of shares or amount of the instrument held.

We may also obtain quotes with respect to certain of our investments from pricing services, brokers or dealers' quotes, or counterparty marks in order to value liquid assets that are not traded in active markets.

Pricing services aggregate, evaluate and report pricing from a variety of sources including observed trades of identical or similar securities, broker or dealer quotes, model-based valuations and internal fundamental analysis and research.

When doing so, we will determine whether the quote obtained is sufficient according to U.S.

GAAP to determine the fair value of the security.

If determined adequate, we will use the quote obtained.

For further information on the fair value hierarchies, our framework for determining fair value, and the composition of our portfolio, see “ Note 5 to the Consolidated Financial Statements in Part II, Item 8.

Consolidated Financial Statements and Supplementary Data ” of this Form 10-K .

Securities that are illiquid or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Adviser or our Board of Directors, does not represent fair value, each is valued as of the measurement date using all techniques appropriate under the circumstances and for which sufficient data is available.

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(5) our Board of Directors discusses the valuation recommendations of our Audit Committee and determine the fair value of each investment in our portfolio in good faith based on the input of the Adviser and, where applicable, the third-party valuation firm.

Our Audit Committee's recommendation of fair value is generally based on its assessment of the following factors, as relevant:

The fair value is generally determined based on the assessment of the following factors, as relevant:

• the nature and realizable value of any collateral;

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Investment Advisory Agreement

On October 14, 2019, the Company’s Board of Directors, including a majority of the directors who are not “interested persons” as defined in Section 2(a)(19) of the 1940 Act (the “Independent Directors”), approved an investment advisory agreement (the “Original

Investment Advisory Agreement”) between the Company and the Investment Adviser in accordance with, and on the basis of an evaluation satisfactory to such directors as required by, Section 15(c) of the 1940 Act.

As of December 31, 2019, no management fee or incentive fees were accrued or paid to the Adviser.

In October 2019, the Company’s Board of Directors, including a majority of the directors who are not “interested persons” as defined in Section 2(a)(19) of the 1940 Act (the “Independent Directors”), approved the Investment Advisory Agreement between the Company and the Investment Adviser, which was effective November 25, 2019, in accordance with, and on the basis of an evaluation satisfactory to such directors as required by, Section 15(c) of the 1940 Act.

Consolidated Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 3.

Related Party Transactions.”

Base Management Fee

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Reimbursement under the Administration Agreement occurs quarterly in arrears.

See “ Item 8.

Consolidated Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 3.

Related Party Transactions.

Placement Fees

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The Company is not liable for any payments to the Placement Agent pursuant to the Placement Agent Agreement, which payments will be made by the Investment Adviser and, to the extent the Paying Agent receives any payments, from the Paying Agent.

MS Credit Partners Holdings Investment

MS Credit Partners Holdings, Inc., a wholly owned subsidiary of Morgan Stanley and an affiliate of the Adviser has made an aggregate capital commitment of $200.0 million to the Company as of December 31, 2020.

As of December 31, 2020 and December 31, 2019, MS Credit Partners Holdings’ total capital commitment represented approximately 14% and 20% of aggregate capital commitments received, respectively.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis