Morgan Stanley Direct Lending Fund 10-K

Item 7. 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 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. OVERVIEW We are an externally managed specialty finance company focused on lending to middle-market companies. We have elected to be regulated as a BDC under the 1940 Act. In addition, for U.S. 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. We are not a subsidiary of or consolidated with Morgan Stanley. 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 EBITDA in the range of approximately $15 million to $100 million, which we believe is a useful proxy for cash flow although not all of our portfolio companies will meet this criteria. We invest 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 asset purchases. 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 generally expect our debt investments to have a stated term of five to eight years and typically bear interest at a floating rate usually determined on the basis of a benchmark such as the LIBOR or SOFR. We 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, including commitment, origination, amendment, structuring, syndication or due diligence fees, fees for providing managerial assistance and consulting fees. On September 18, 2020, the SEC granted us 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. KEY COMPONENTS OF OUR RESULTS OF OPERATIONS Investments Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt available to middle-market companies, the general economic environment and the competitive environment for the type of investments we make. Revenue We generate revenue primarily in the form of interest income on debt investments we hold. In addition, we generate income from dividends on direct equity investments, capital gains on the sales of loans and debt and equity securities and various loan origination and other fees. Our debt investments generally have a stated term of five to eight years and generally bear interest at a floating rate usually determined on the basis of a benchmark such as LIBOR or SOFR. Interest on these debt investments is generally 77 Table of Contents paid quarterly. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. We may also generate revenue in the form of commitment, origination, amendment, structuring, syndication or due diligence fees, fees for providing managerial assistance and consulting fees. Expenses Our primary operating expenses include the payment of: (i) investment advisory fees, including base management fees and incentive fees, to our Investment Adviser pursuant to the Investment Advisory Agreement between us and our Investment Adviser; (ii) costs and other expenses and our allocable portion of overhead incurred by our Administrator in performing its administrative obligations under the Administration Agreement between us and our Administrator; and (iii) other operating expenses as detailed below: • 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 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 our rights; • base management fee and any incentive fee payable under the Investment Advisory Agreement; • certain costs and expenses relating to distributions paid by us; • administration fees payable under the Administration Agreement and any sub-administration agreements, including related expenses; • debt service and other costs of borrowings or other financing arrangements; • the allocated costs incurred by the Adviser in providing managerial assistance to those portfolio companies that request it; • amounts payable to third parties relating to, or associated with, making or holding investments; • the costs associated with subscriptions to data service, research-related subscriptions and expenses and quotation equipment and services used in making or holding investments; • transfer agent and custodial fees; • costs of hedging; • commissions and other compensation payable to brokers or dealers; • any stock exchange listing fees and fees payable to rating agencies; • cost of effecting any sales and repurchases of our Common Stock and other securities; • federal and state registration fees; • U.S. federal, state and local taxes, including any excise taxes; • independent director fees and expenses; • 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 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; • any fidelity bond required by applicable law; • any necessary insurance premiums; • indemnification payments; • any extraordinary expenses (such as litigation or indemnification payments or amounts payable pursuant to any agreement to provide indemnification entered into by the Company); • direct fees and expenses associated with independent audits, agency, consulting and legal costs; 78 Table of Contents • cost of winding up; and • 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 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, 2021, we had investments in 98 portfolio companies across 27 industries. Based on fair value as of December 31, 2021, 99.9% of our debt portfolio was invested in debt bearing a floating interest rate, which primarily are subject to interest rate floors. Approximately 99.3% of our debt portfolio at fair value had a LIBOR floor. The weighted average LIBOR floor across our floating-rate portfolio was approximately 0.9% as of December 31, 2021. These floors allow us to mitigate (to a degree) any impact of spread widening on the valuation of our investments. As of December 31, 2021, our weighted average total yield of debt securities at amortized cost was 7.2%. Weighted average yields include the effect of accretion of discounts and amortization of premiums and are based on interest rates as of December 31, 2021. As of December 31, 2020, we had investments in 36 portfolio companies across 19 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 0.9% as of December 31, 2020. These floors allow us to mitigate (to a degree) any 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. Our portfolio as of December 31, 2021 and December 31, 2020 is presented below: December 31, 2021 December 31, 2020 Cost Fair Value % of Total Investments at Fair Value Cost Fair Value % of Total Investments at Fair Value First Lien Debt $ 2,213,332 $ 2,224,100 93.2 % $ 575,009 $ 580,867 91.2 % Second Lien Debt 120,124 121,550 5.1 53,505 53,155 8.3 Other Securities 39,979 41,724 1.7 2,959 2,959 0.5 Total $ 2,373,435 $ 2,387,374 100.0 % $ 631,473 $ 636,981 100.0 % Our investment activities for the year ended December 31, 2021 and December 31, 2020 are presented below (information presented herein is at amortized cost unless otherwise indicated): 79 Table of Contents As of and For the Year Ended December 31, 2021 December 31, 2020 New Investments Committed/Purchased Gross Principal Balance (1) $ 2,908,710 $ 948,731 Less: Syndications (422,061) — Net New Investments Committed/Purchased 2,486,649 948,731 Investments, at Cost Investments, beginning of period 631,473 — New investments purchased 2,113,463 714,658 Net accretion of discount on investments 10,133 3,606 Payment-in-kind 1,179 9 Net realized gain (loss) on investments 1,895 2,154 Investments sold or repaid (384,708) (88,954) Investments, end of period 2,373,435 631,473 Amount of investments funded, at principal First lien debt investments 2,002,574 678,879 Second lien debt investments 102,632 55,000 Other securities (2) 38,184 2,959 Total 2,143,390 736,838 Amount of investments sold/fully repaid, at principal First lien debt investments 305,942 90,106 Second lien debt investments 36,250 — Other securities (2) 3,347 — Total 345,539 90,106 Weighted average yield on debt and income producing investments, at cost (3) 7.2 % 7.5 % Weighted average yield on debt and income producing investments, at fair value (3) 7.1 % 7.4 % Number of portfolio companies 98 36 Percentage of debt investments bearing a floating rate, at fair value 99.9 % 99.8 % Percentage of debt investments bearing a fixed rate, at fair value 0.1 % 0.2 % (1) Includes new investment commitments, excluding sale/repayments and including new unfunded investment commitments. (2) Represents dollar amount of other securities funded. (3) Computed as (a) the annual stated spread, plus 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. As part of the monitoring process, our Investment Adviser has developed risk policies pursuant to which it regularly assesses the risk profile of each of our debt investments. Our Investment Adviser has developed a classification system to group investments into four categories. The investments are evaluated regularly and assigned a category based on certain credit metrics. Our Investment Adviser’s ratings do not constitute any rating of investments by a nationally recognized statistical rating organization or represent or reflect any third-party assessment of any of our investments. Please see below for a description of the four categories of the Investment Adviser’s Internal Risk Rating system: Category 1 — In the opinion of our Investment Adviser, investments in Category 1 involve the least amount of risk relative to our initial cost basis at the time of origination or acquisition. Category 1 investments performance is above our initial underwriting expectations and the business trends and risk factors are generally favorable, which may include the performance of the portfolio company, or the likelihood of a potential exit. Category 2 — In the opinion of our Investment Adviser, investments in Category 2 involve a level of risk relative to our initial cost basis at the time of origination or acquisition. Category 2 investments are generally performing in line with our initial underwriting expectations and risk factors to ultimately recoup the cost of our principal investment are neutral to favorable. All new originated or acquired investments are initially included in Category 2. Category 3 — In the opinion of our Investment Adviser, investments in Category 3 indicate that the risk to our ability to recoup the initial cost basis at the time of origination or acquisition has increased materially since the origination or acquisition of the investment, 80 Table of Contents such as declining financial performance and non-compliance with debt covenants; however, principal and interest payments are not more than 120 days past due. Category 4 — In the opinion of our Investment Adviser, investments in Category 4 involve a borrower performing substantially below expectations and indicate that the loan’s risk has increased substantially since origination or acquisition. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. For Category 4 investments, it is anticipated that we will not recoup our initial cost basis and may realize a substantial loss of our initial cost basis at the time of origination or acquisition upon exit. The distribution of our portfolio on the Adviser’s Internal Risk Rating System as of December 31, 2021 and December 31, 2020 was as follows: December 31, 2021 December 31, 2020 Fair Value % of Portfolio Number of Portfolio Companies Fair Value % of Portfolio Number of Portfolio Companies Risk rating 1 $ 44,355 1.9 % 1 $ 31,230 4.9 % 1 Risk rating 2 2,343,019 98.1 97 605,751 95.1 35 Risk rating 3 — — — — — — Risk rating 4 — — — — — — $ 2,387,374 100.0 % 98 $ 636,981 100.0 % 36 CONSOLIDATED RESULTS OF OPERATIONS The comparison of the fiscal years ended December 31, 2020 and 2019 can be found in our Form 10-K for the fiscal year ended December 31, 2020 under Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations. The following table represents our operating results: For the year ended December 31, 2021 December 31, 2020 Total investment income $ 119,816 $ 21,903 Less: Net expenses 46,807 11,268 Net investment income 73,009 10,635 Less: Excise tax expense 80 — Net investment income (loss) after taxes 72,929 10,635 Net change in unrealized appreciation (depreciation) 8,431 5,508 Net realized gain (loss) 1,895 2,154 Net increase (decrease) in net assets resulting from operations $ 83,255 $ 18,297 Investment Income Investment income was as follows: For the year ended December 31, 2021 December 31, 2020 Investment income: Interest income $ 108,277 $ 20,269 Payment-in-kind interest income 1,021 9 Dividend income 409 — Other income 10,109 1,625 Total investment income $ 119,816 $ 21,903 The increase in total investment income from $21,903 for the year ended December 31, 2020 to $119,816 for the year ended December 31, 2021 was primarily driven by our deployment of capital and invested balance of investments, partially offset against 81 Table of Contents weighted average asset yield decrease. The size of our investment portfolio at fair value increased from $637.0 million as of December 31, 2020 to $2,387.4 million as of December 31, 2021. As of such dates, 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, 2021 and December 31, 2020, and for the years then ended, all of our first and second lien debt investments were performing and current on their interest payments. Expenses The Company is responsible for investment expenses, professional fees, and other general and administrative expenses related to the Company’s operations. Expenses were as follows for the year ended December 31, 2021 and December 31, 2020, respectively: For the year ended December 31, 2021 December 31, 2020 Expenses: Interest and other financing expenses $ 21,015 $ 3,725 Management fees 13,860 2,238 Income based incentive fee 15,852 2,517 Capital gains incentive fee 1,809 1,341 Professional fees 2,440 1,654 Organization and offering costs 42 676 Directors’ fees 336 349 Administrative service fees 212 183 General and other expenses 1,538 493 Total expenses 57,104 13,176 Expense support 98 (230) Management fees waiver (10,395) (1,678) Net expenses $ 46,807 $ 11,268 Excise tax expense $ 80 $ — For the year ended December 31, 2021, net expenses were primarily comprised of interest expense of $21,015, gross base management fees of $13,860, income based incentive fees of $15,852, capital gains incentive fees of $1,809, administrative service expenses of $212, professional fees of $2,440, fees to independent directors of $336, organization and offering costs of $42 and other expenses of $1,538; offset by management fee waiver of $10,395, and increased by expense support recoupment of previously waived organization and offering costs by the Investment Adviser of $98. 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 waiver and expense support by the Investment Adviser of $1,678 and $230, respectively. Interest and other financing expenses increased from $3,725 for the year ended December 31, 2020 to $21,015 for the year ended December 31, 2021. The increase was primarily driven by approximately $796.3 million of average borrowings at an average effective interest rate of 2.12% during the year ended December 31, 2021, as compared to approximately $114.4 million of average borrowings at an average effective interest rate of 1.93% during the year ended December 31, 2020. Professional fees include legal, audit, tax, 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. For the year ended December 31, 2021, expense support includes recoupment of previously waived excess organization and offering costs of $98. For the year ended December 31, 2020, expense support includes excess organization and offering costs of $230 that the Adviser committed to pay. See “ Item 8. Consolidated Financial Statements—Notes to Consolidated Financial Statements—Note 3. ” 82 Table of Contents 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. For the year ended December 31, 2021, we have accrued $80 of U.S. federal excise tax. No federal excise tax was accrued for the year ended December 31, 2020. Net Realized Gain (Loss) and Unrealized Gain (Loss) on Investments For the year ended December 31, 2021 December 31, 2020 Realized and unrealized gains (losses) on investment transactions: Net realized gain (loss): Non-controlled/non-affiliated investments $ 1,895 $ 2,154 Net change in unrealized appreciation (depreciation): Non-controlled/non-affiliated investments 8,431 5,508 Net realized and unrealized gains (losses) $ 10,326 $ 7,662 For the year ended December 31, 2021 and December 31, 2020, net realized gain on our investments was $1.9 million and $2.2 million, respectively, primarily driven by the sale of debt and equity investments in our investment portfolio. 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, 2021 and December 31, 2020, net change in unrealized gain on our investments of $8.4 million and $5.5 million were primarily driven by the increases of valuations of our debt and equity investments as a result of the tightening credit spread environment and generally strong portfolio company performance. 83 Table of Contents FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES 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, 2021, we had approximately $74.2 million of cash, which taken together with our approximately $89.7 million, $136.5 million and $499.0 million of availability under the CIBC Subscription Facility, the BNP Funding Facility and the Truist Credit Facility (subject to borrowing base availability), respectively, and our approximately $425.7 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. Equity As of December 31, 2021, we had received aggregate capital commitments of approximately $1,585.5 million. During the year ended December 31, 2021, we issued eight 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, 2021 were as follows (dollar amounts in millions): Share Issuance Date Shares Issued Amount January 20, 2021 1,726,689 $ 35.00 March 12, 2021 2,171,816 45.00 April 12, 2021 5,326,877 110.00 May 26, 2021 4,036,582 84.97 July 16, 2021 7,161,130 149.88 October 15, 2021 7,806,514 164.02 November 12, 2021 8,182,294 173.96 December 29, 2021 4,748,891 99.63 Total 41,160,793 $ 862.46 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 Distributions and Dividend Reinvestment The following tables summarize our distributions declared and payable for the year ended December 31, 2021 and December 31, 2020, respectively: 84 Table of Contents Date Declared Record Date Payment Date Per Share Amount Dividend Yield (2) Total Amount March 18, 2021 March 18, 2021 April 22, 2021 $ 0.45 10.1 % $ 8,570 June 23, 2021 June 23, 2021 July 22, 2021 0.49 10.7 % 13,974 September 23, 2021 September 23, 2021 October 27, 2021 0.56 11.1 % 20,080 December 21, 2021 December 21, 2021 January 25, 2022 0.57 (1) 11.9 % 29,691 Total Distributions $ 2.07 $ 72,315 Date Declared Record Date Payment Date Per Share Amount Dividend Yield (2) Total Amount June 19, 2020 June 19, 2020 July 15, 2020 $ 0.29 6.0 % $ 1,533 September 24, 2020 September 24, 2020 October 22, 2020 0.40 9.7 % 3,228 December 29, 2020 December 29, 2020 January 27, 2021 0.61 (1) 14.2 % 9,165 Total Distributions $ 1.30 $ 13,926 (1) Includes a special distribution of $0.11 and $0.18 per share for the year ended December 31, 2021 and December 31, 2020, respectively. (2) Dividend yield (annualized) is calculated by dividing the declared dividend by the weighted average of the net asset value at the beginning of the quarter, the capital called and dividend reinvested during the quarter and annualizing over 4 quarterly periods. We adopted an “opt in” 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 tables summarize DRIP shares issued and amounts for the year ended December 31, 2021 and December 31, 2020: Payment Date DRIP Shares Value DRIP Shares Issued January 27, 2021 $ 2,462 121,484 April 22, 2021 2,276 110,191 July 22, 2021 3,733 178,345 October 27, 2021 5,101 242,789 Total $ 13,572 652,809 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 Debt Our outstanding debt obligations were as follows: December 31, 2021 December 31, 2020 Aggregate Principal Committed Outstanding Principal Unused Portion Aggregate Principal Committed Outstanding Principal Unused Portion CIBC Subscription Facility $ 400,000 $ 310,350 $ 89,650 $ 400,000 $ 333,850 $ 66,150 BNP Funding Facility 600,000 463,500 136,500 300,000 — 300,000 Truist Credit Facility 975,000 476,000 499,000 — — — Total $ 1,975,000 $ 1,249,850 $ 725,150 $ 700,000 $ 333,850 $ 366,150 CIBC Subscription Facility 85 Table of Contents On December 31, 2019, we entered into the CIBC Subscription Facility with CIBC Bank USA as administrative agent and arranger, which was subsequently amended on February 3, 2020 and November 17, 2020. The maximum principal amount of the CIBC Subscription Facility, which was $100.0 million as of December 31, 2019, was increased to $400.0 million on November 17, 2020. As of December 31, 2021, 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 $500.0 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 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. In connection with the CIBC Subscription Facility, 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. During the year ended December 31, 2021 and December 31, 2020, we borrowed $431.5 million and $612.4 million, and repaid $455.0 million and $278.5 million under the CIBC Subscription Facility, respectively. As of December 31, 2021 and December 31, 2020, we had $310.4 million and $333.9 million outstanding debt balance, and $89.6 million and $66.2 million of available capacity, under the CIBC Subscription Facility, respectively (subject to borrowing base restrictions). BNP Funding Facility On October 14, 2020, DLF LLC entered into a Revolving Credit and Security Agreement, which was subsequently amended on December 11, 2020 and March 2, 2021, with DLF LLC, as the borrower, BNP Paribas (“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 (the “BNP Funding Facility”). As of December 31, 2021, the borrowing capacity under the BNP Funding Facility is $600.0 million. The applicable margin on borrowings during the reinvestment period ranges between 1.95% and 2.75% and, after the reinvestment period, between 2.45% and 3.25%. The BNP Funding Facility has a maturity date of October 13, 2025. During the year ended December 31, 2021, we borrowed $538.5 million and repaid $75.0 million under the BNP Funding Facility. As of December 31, 2021, we had $463.5 million outstanding under the BNP Funding Facility. During the year ended December 31, 2020, we had no amount borrowed under the BNP Funding Facility. As of December 31, 2021 and December 31, 2020, we had $136.5 and $300.0 of available capacity, respectively, under the BNP Funding Facility (subject to borrowing base restrictions). Truist Credit Facility On July 16, 2021, we entered into the Truist Credit Facility with Truist Bank, as amended on December 3, 2021. Truist Bank serves as Administrative Agent and Truist Securities, Inc. serves as Joint Lead Arranger and Sole Book Runner. The maximum principal amount of the Truist Credit Facility is $975.0 million, subject to availability under the borrowing base. The Truist Credit Facility includes an uncommitted accordion feature that allows us, under certain circumstances, to increase the borrowing capacity up to $1,000.0 million. The availability period of the Truist Credit Facility will terminate on July 16, 2025. The Truist Credit Facility has a maturity date of July 16, 2026. The Truist Credit Facility is secured by a first priority security interest in substantially all of our assets and the assets of certain of our domestic subsidiaries, subject to certain exceptions. We may borrow amounts in U.S. dollars or certain other permitted currencies. Borrowings under the Truist Credit Facility bear interest at a per annum rate equal to, (x) for loans for which we elect the base rate option, the “alternate base rate” (which is the highest of (a) the prime rate as publicly announced by Truist Bank, (b) the sum of (i) the weighted average of the rates on overnight federal funds transactions, as published by the Federal Reserve Bank of New York plus (ii) 0.5%, and (c) one month LIBOR plus 1% per annum) plus either (A) 0.75%, or (B) 0.875%, based on certain borrowing base conditions, and (y) for loans for which we elect the Eurocurrency option, the applicable LIBO Rate for the related Interest Period for such Borrowing plus either (A) 1.75% per annum, or (B) 1.875% per annum, based on certain borrowing base conditions. We pay an unused fee of 0.375% per annum on the daily unused amount of the revolver commitments. During the year ended December 31, 2021, the Company borrowed $544.0 million and repaid $68.0 million under the Truist Credit Facility. As of December 31, 2021, we had $476.0 million outstanding and $499.0 million of available capacity, under the Truist Credit Facility (subject to borrowing base restrictions). 86 Table of Contents As of December 31, 2021, the Company was in compliance with all covenants and other requirements of each of the credit facilities. RECENT DEVELOPMENTS Subsequent to December 31, 2021 through March 18, 2022, the Company has closed or the Investment Committee has committed/approved approximately $178.6 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 $167.8 million were first lien senior secured loans, $10.7 million were second lien senior secured loans, and $0.1 million 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 the Coronavirus pandemic. 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. Effective January 18, 2022, we provided written notice to CIBC of our intent to permanently reduce the amount of the revolving commitment to $315 million from $400 million in accordance with and as permitted under the CIBC Subscription Facility The other terms of the CIBC Subscription Facility were not changed. On February 3, 2022, we entered into Amendment No. 4 and Limited Waiver, dated as of February 3, 2022, to the CIBC Subscription Facility to, among other things, amend certain covenants in the CIBC Subscription Facility and provide for certain limited waivers. All other material terms of the CIBC Subscription Facility remain unchanged. On February 11, 2022, we issued $425 million in aggregate principal amount of the Notes. The Notes will mature on February 11, 2027 and may be redeemed in whole or in part at our option at any time or from time to time at the redemption prices set forth in the indenture governing the Notes. The Notes are general unsecured obligations of the Company that rank senior in right of payment to all of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the Notes, rank pari passu with all existing and future unsecured unsubordinated indebtedness issued by the Company, rank effectively junior to any of the Company’s secured indebtedness (including unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness, and rank structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company’s subsidiaries, financing vehicles or similar facilities. The Notes were offered to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons outside the United States pursuant to Regulation S under the Securities Act. In connection with the offering of the Notes, we entered into a Registration Rights Agreement, dated as of February 11, 2022 (the “Registration Rights Agreement”), with SMBC Nikko Securities America, Inc., J.P. Morgan Securities LLC, MUFG Securities Americas Inc. and Truist Securities, Inc., as the representatives of the initial purchasers of the Notes. Pursuant to the Registration Rights Agreement, we are obligated to file with the SEC a registration statement relating to an offer to exchange the Notes for new notes issued by the Company that are registered under the Securities Act and otherwise have terms substantially identical to those of the Notes, and to use its commercially reasonable efforts to cause such registration statement to be declared effective. If we are not able to effect the exchange offer, we will be obligated to file a shelf registration statement covering the resale of the Notes and use our commercially reasonable efforts to cause such registration statement to be declared effective. If we fail satisfy its registration obligations by certain dates specified in the Registration Rights Agreement, we will be required to pay additional interest to the holders of the Notes. On March 4, 2022, the Company closed new investor commitments of $40.2 million, which brings total Capital Commitments to approximately $1,625.7 million. CRITICAL ACCOUNTING ESTIMATES 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. Our critical accounting estimates, including those relating to the valuation of our investment portfolio, are described below. The critical accounting estimates should be read in connection with “ Risk Factors ” in Part I, Item 1A of this Form 10-K. Valuation We conduct the valuation of assets at all times consistent with U.S. GAAP and the 1940 Act. Our Board of Directors, with the assistance of our audit committee (our "Audit Committee"), determines the fair value of our assets, for assets with a daily public 87 Table of Contents 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”). Our valuation procedures are set forth in more detail below. ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities, observable market transactions or market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. 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). For significant accounting policies 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. These valuation techniques may vary by investment but include comparable public market valuations, comparable precedent transaction valuations and discounted cash flow analyses. Debt investments are generally fair valued using discounted cash flow analyses technique. Expected cash flows are projected based on contractual terms and discounted back to the measurement date based on a discount rate. The discount rate is determined based upon an assessment of current and expected yields for similar investments and risk profiles . The process used to determine the applicable value is as follows: 1) each portfolio company or investment is initially valued using a standardized template designed to approximate fair market value based on observable market inputs and updated credit statistics and unobservable inputs; 2) preliminary valuation conclusions are documented and reviewed by a valuation committee comprised of members of our Adviser’s senior management; 3) our Board of Directors engages an independent third-party valuation firm to provide positive assurance on a portion of our illiquid investments each quarter (such that each illiquid investment will be reviewed by an independent valuation firm at least once on a rolling twelve-month basis) including review of management’s preliminary valuation and conclusion of fair value; 4) our Audit Committee reviews the assessments of the Adviser and the independent third-party valuation firm and provide our Board of Directors with recommendations with respect to the fair value of each investment in our portfolio; and 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. The fair value is generally determined based on the assessment of the following factors, as relevant: • the nature and realizable value of any collateral; • call features, put features and other relevant terms of debt; • the portfolio company’s leverage and ability to make payments; • the portfolio company’s public or “private letter” credit ratings; • the portfolio company’s actual and expected earnings and cash flow; • prevailing interest rates for like securities and expected volatility in future interest rates; • the markets in which the issuer does business and recent economic and/or market events; and 88 Table of Contents • comparisons to publicly traded securities. Investment performance data utilized will be the most recently available as of the measurement date which in many cases may reflect up to a one quarter lag in information. Our Board of Directors is ultimately responsible for the determination, in good faith, of the fair value of our portfolio investments. Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements will express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements. RELATED PARTY TRANSACTIONS Investment Advisory Agreement In October 2019, the Company’s Board of Directors, including a majority of 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. The initial period of the Investment Advisory Agreement was two years. In November 2021, following approval by the Board of Directors, including a majority of the Independent Directors, we renewed the Investment Advisory Agreement for an additional one year term. See “Item 8. Consolidated Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements—Note 3. Related Party Transactions.” Base Management Fee The base management fee is calculated at an annual rate of 1.0% of our average gross assets at the end of the two most recently completed calendar quarters, including assets purchased with borrowed funds or other forms of leverage but excluding cash and cash equivalents. Prior to an Exchange Listing, the Adviser has agreed to irrevocably waive the portion of the base management fee in excess of 0.25% of our average gross assets calculated in accordance with the Investment Advisory Agreement, which waived base management fees are not subject to recoupment by the Adviser. For services rendered under the Investment Advisory Agreement, the base management fee will be payable quarterly in arrears, and no management fee is charged on committed but undrawn Capital Commitments. Incentive Fee The incentive fee has two parts. The first part is determined and paid quarterly based on our pre-incentive fee net investment income and the second part is determined and payable in arrears based on net capital gains as of the end of each calendar year or upon termination of the Investment Advisory Agreement. Pre-incentive fee net investment income is defined as interest income, dividend income and any other income accrued during the calendar quarter, minus operating expenses for the quarter, including the base management fee, expenses payable under the Administration Agreement, any interest expense and distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as debt instruments with pay-in-kind interest and zero coupon securities), accrued income that Company has not yet received in cash. The Adviser is not obligated to return to us the incentive fee it receives on PIK interest that is later determined to be uncollectible in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pursuant to the Investment Advisory Agreement, the Company pays the Adviser an incentive fee with respect to our pre-incentive fee net investment income as follows: • No incentive fee based on pre-incentive fee net investment income in any calendar quarter in which our pre-incentive fee net investment income does not exceed a hurdle rate of 1.50% (6% annualized); 89 Table of Contents • 100% of pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 1.8182% in any calendar quarter (7.2728% annualized). We refer to this portion of the pre-incentive fee net investment income (which exceeds the hurdle rate but is less than 1.8182%) as the “catch-up.” The “catch-up” is meant to provide the Adviser with approximately 17.5% of our pre-incentive fee net investment income as if a hurdle rate did not apply if this net investment income exceeds 1.8182% in any calendar quarter; and • 17.5% of the pre-incentive fee net investment income, if any, that exceeds 1.8182% in any calendar quarter (7.2728% annualized), which reflects that once the hurdle rate is reached and the catch-up is achieved, 17.5% of all pre-incentive fee net investment income is paid to the Adviser. The second part of the incentive fee is determined on realized capital gains calculated and payable in arrears in cash as of the end of each calendar year or upon the termination of the Investment Advisory Agreement in an amount equal to 17.5% of the realized capital gains, if any, on a cumulative basis from the date of our election to be regulated as a business development company through the end of a given calendar year or upon the termination of the Investment Advisory Agreement, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees (the “Cumulative Capital Gains”). Administration Agreement On October 14, 2019, the Company’s Board of Directors approved the Administration Agreement. The initial period of the Administration Agreement was two years. In November 2021, following approval by the Board of Directors, we renewed the Administration Agreement for an additional one-year term. Pursuant to the Administration Agreement, the Administrator provides services and receives reimbursements equal to an amount that reimburses the Administrator for its costs and expenses and the Company’s allocable portion of overhead incurred by the Administrator in performing its obligations under the Administration Agreement, including the Company’s allocable portion of the compensation paid to our Chief Compliance Officer and Chief Financial Officer. 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. ” Expense Support and Waiver Agreement On December 31, 2019, the Company entered into an expense support and waiver agreement (the “Expense Support and Waiver Agreement”) with the Investment Adviser. Under the terms of the Expense Support and Waiver Agreement, the Investment Adviser agreed to waive any reimbursement by the Company of offering and organizational expenses to be incurred by the Investment Adviser on behalf of the Company in excess of $1,000 or 0.10% of the aggregate Capital Commitments of the Company, whichever is greater. If actual organization and offering costs incurred exceed the greater of $1,000 or 0.10% of the Company’s total Capital Commitments, the Investment Adviser or its affiliate will bear the excess costs. The Company shall reimburse the Investment Adviser for payments of any excess costs borne by the Investment Adviser on the Company’s behalf within three years of Initial Closing Date. License Agreement The Company entered into a license agreement with Morgan Stanley (the “License Agreement”) under which Morgan Stanley has agreed to grant the Company a non-exclusive, royalty-free license to use the name “Morgan Stanley” for specified purposes in the Company’s business. Under the License Agreement, the Company will have a right to use the “Morgan Stanley” name, subject to certain conditions, for so long as the Investment Adviser or one of its affiliates remains the Company’s investment adviser. Other than with respect to this limited license, the Company will have no legal right to the “Morgan Stanley” name. Placement Fees On August 30, 2019, the Company entered into a placement agent agreement (the “Placement Agent Agreement”) with Morgan Stanley Distribution Inc. (the “Paying Agent”), Morgan Stanley Smith Barney LLC (the “Placement Agent”) and the Investment Adviser. Under the terms of the Placement Agent Agreement, the Placement Agent and certain of its affiliates will assist in the placement of Common Stock in the Company’s Private Offering. 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 90 Table of Contents MS Credit Partners Holdings, Inc., a wholly owned subsidiary of Morgan Stanley and an affiliate of the Adviser, or MS Credit Partners Holdings, invested seed capital of $35 in the Company as of December 31, 2019. Pursuant to the terms of MS Credit Partners Holding’s subscription agreement, MS Credit Partners Holdings has made an aggregate capital commitment of $200.0 million to the Company. As of December 31, 2021 and December 31, 2020, MS Credit Partners Holdings’ total capital commitment represented approximately 13% and 14% of aggregate capital commitments received, respectively. Morgan Stanley has no further capital, liquidity or other financial obligation to us beyond this equity investment.