UBS Raises Morgan Stanley Direct Lending Fund to Buy, Cuts Price Target to $14.50
Key Facts
UBS raised its rating on Morgan Stanley Direct Lending Fund to Buy from Neutral, while cutting its price target to $14.50 from $15.50, Investing.com reported on November 10, 2026. The move followed the fund’s results for the quarter ended September 30, when net investment income rose to $40.3 million, or $0.48 per share. That figure represents net investment income per share, not accounting earnings; the fund recorded a loss of $0.32 per share during the quarter. The upgrade reflects UBS’s assessment of the impact of fee reductions and growth in the Capstone project, according to the report. The new outlook therefore combines improved investment income and expected project growth with a lower price target and pressures evident in book value and investments.
Net investment income rose from $38.2 million, or $0.45 per share, in the second quarter to $40.3 million, or $0.48 per share, in the third quarter, according to the fund’s filing with the U.S. Securities and Exchange Commission. By contrast, earnings per share shifted from a profit of $0.09 in the second quarter to a loss of $0.32 in the third. Net realized and unrealized losses totaled $0.81 per share in the third quarter. Total investment income also declined to $86.1 million from $88.8 million in the previous quarter. The fund attributed the decline to the impact of non-accrual positions and lower non-recurring income.
Credit and valuation pressures were reflected in net asset value, which stood at $18.76 per share on September 30, compared with $19.50 on June 30, 2026. The fund recorded an unrealized depreciation of $29.4 million during the quarter and realized losses of $38.2 million. The restructuring of Bright Pet was the largest single contributor to the decline in asset value, according to the fund’s filing. The fund placed investments in 11 companies on non-accrual status, representing 3.4% of total investments at cost at the end of September. The debt-to-equity ratio rose to 1.25x from 1.21x at the end of June.
The fair value of the fund’s portfolio was about $3.4 billion on September 30, comprising 233 companies across 37 industries. The weighted average yield on debt investments rose to 9.6% at amortized cost and 10.0% at fair value, from 9.1% and 9.4%, respectively, at the end of June. Floating-rate debt investments accounted for 99.8% of the portfolio at fair value. These figures provide context for the development of investment income, while valuation losses and non-accrual investments continued to weigh on net asset value. The number of companies with non-accrual investments and their share of total investments at cost also highlight some of the credit risks cited by the fund.
UBS tied part of its positive assessment to the fund’s income sensitivity to interest rates, saying a 25-basis-point increase could add about $0.02 per share to quarterly net investment income. The bank estimated that the Capstone project could add between $0.03 and $0.05 per share to quarterly net investment income once it reaches its expected growth by mid-2027. These are estimates cited in Investing.com’s report on UBS, not results already achieved. Separately, the board approved a reduction in the base management fee from 1.00% to 0.75%, and a cut in the incentive fee from 17.5% to 15.0%. Both changes take effect on January 1, 2027, putting the fee impact among the factors the report cited in explaining the upgrade.
The fund announced a regular fourth-quarter distribution of $0.45 per share, payable on or about January 22, 2027. It also announced a supplemental distribution of $0.015 per share, payable on or about December 15, 2026. The two distributions follow third-quarter net investment income of $0.48 per share, while net asset value stood at $18.76 per share at the end of September. The fund’s shares traded lower after the third-quarter results were announced, ahead of the UBS upgrade, according to Investing.com. The shares closed at $13.96 on November 9, 2026, according to EL7 data.