Negative Points

• Net investment income decreased to $0.45 per share from $0.47 in the prior quarter, impacted by new non-accruals and higher other financing costs.

• Non-accruals increased to 2.9% of the portfolio at cost, with three new positions added during the quarter, reflecting company-specific operational challenges.

• NAV per share declined to $19.50 from $19.81, driven by unrealized losses on underperforming investments and realized losses from completed restructurings.

• The market environment remains challenging with elevated interest rates, geopolitical uncertainty, and evolving AI impacts, leading to uneven industry lending volumes.

• Competition for non-software assets is high, causing some modest tightening in spreads, which could pressure future yields.

• The company experienced higher other debt expenses and an increase in incentive fees, partially offsetting the benefits from the JV.

• Repayments have been sticky, requiring a balance between redeploying cash into new investments versus repurchasing stock, which may limit growth opportunities.

Q & A Highlights

Q: How is the Board thinking about the sustainability of the $0.45 dividend, given the potential for continued quarter-to-quarter noise from credit issues and new non-accruals? A: Michael Occi (CEO) stated that management and the Board continue to feel good about supporting the $0.45 dividend as a baseline NII matter. While the Board will evaluate the dividend in the coming quarters, the company is actively working to resolve non-accrual situations through restructurings, which could provide an income benefit. The JV is only half ramped, and its benefits have continued to build, providing additional confidence in the current dividend level.

Q: Can you provide more color on the $0.02 quarter-over-quarter contraction in Net Investment Income (NII) and the outlook for its components? A: Michael Occi (CEO) explained that the contraction was driven by several headwinds, including an uptick in financing costs due to higher average leverage, foregone income from new non-accruals, and a higher effective incentive fee. These were partially offset by $0.03 of accretion from the Capstone JV. Looking forward, the higher debt expense is likely persistent, while credit outcomes are uncertain, but the JV's continued scaling and potential restructurings of non-accruals provide offsets. The company feels good about the foundation of NII.

Q: How are you weighing redeploying cash into new investments versus repurchasing stock at a discount, given elevated repayments? A: Michael Occi (CEO) explained that the decision is an optimization question between deploying on the balance sheet versus the JV. Leverage stability is paramount, and the NAV movement dictates available capital. In Q2, the buyback consumed just under $100 million. The company will continue to ramp the JV over the coming year, balancing hold sizes, diversification, and leverage implications.

Q: Can you elaborate on the Bridgepoint transaction and how common it is for MSDL to take a lead agent role? A: Michael Occi (CEO) noted that MSDL acts as agent on about 15% to 20% of its portfolio, but does not have an agent-only model. The Bridgepoint deal was highlighted due to the migration in role, which speaks to improved visibility in the marketplace. Jeffrey Day (Co-President) added that the firm's experience in the sector and ability to commit sizable capital allowed them to take on the administrative agency role.

Q: What are the biggest constraints to ramping up the Capstone JV in the near term? A: Michael Occi (CEO) stated that sourcing is not a constraint. The primary constraints are capacity and leverage implications on the fund, as well as managing single-borrower and industry exposure. The company has flexibility in choosing between dropdowns and direct deployment, while being mindful of pro forma leverage and portfolio read-throughs.

Q: What are the current trends in the pipeline regarding spreads, LTVs, and sponsor versus non-sponsor activity? A: Jeffrey Day (Co-President) noted that for non-software assets, there is slight downward pressure on spreads, now more likely in the 475 basis point range for high-quality assets, as some managers reduce software exposure. Loan-to-values remain stable at just under 40% for new transactions, consistent with the overall portfolio.

Q: Can you provide details on the post-quarter-end unsecured notes issuance and the liability management strategy? A: David Pessah (CFO) confirmed that the $350 million issuance was effectively swapped to align assets and liabilities. The only note not swapped is the one maturing in February 2027. Going forward, the company intends to swap most of its debt to manage interest rate risk.

Q: How is the portfolio positioned regarding AI risk, and what is the current assessment of software investments? A: Jeffrey Day (Co-President) stated that the AI conversation has become more balanced, and the company believes AI is unlikely to drive near-term sector-wide disruption. Software investments remain concentrated in mission-critical systems with high switching costs. The proprietary AI scorecard identifies a low single-digit percentage of the portfolio in the high-risk category, and portfolio companies are well-equipped to leverage AI to enhance their competitive positioning.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .