SecProbe.io

CORRESP
1
filename1.htm

1900   K Street, NW
   Washington, DC 20006
   Boston, MA 02110-2605

+1   202 261-3300 Main

+1   202 261 3333 Fax

www.dechert.com

MATTHEW   J. CARTER

matthew.carter@dechert.com

+1   202 261 3395 Direct

+1   202 261 3184 Fax

November 4, 2019

VIA EDGAR

United States Securities and Exchange Commission

Division of Investment Management

100 F Street, N.E.

Washington, DC 20549

Attn: Lisa N. Larkin

Re:          Morgan Stanley Direct Lending Fund LLC

Registration Statement on Form 10

File Number: 000-56098

Ladies and Gentlemen:

On behalf of the Morgan Stanley Direct Lending Fund LLC, a Delaware limited liability company (the “Company”), we hereby respond to the comments raised by the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”)  in a letter dated October 23, 2019 from Lisa N. Larkin of the Staff to Matthew J. Carter of Dechert LLP, outside counsel to the Company, regarding the Company’s Registration Statement on Form 10 (Registration No. 000-56098) filed on September 26, 2019 (the “Registration Statement”). For your convenience, the Staff’s comments are included in this letter, and each comment is followed by the applicable response. When reference is made to revisions that will be made in a subsequent amendment to the Registration Statement, such revisions will be reflected in amendment number 1 to the Registration Statement (“Amendment No. 1”), which the Company anticipates filing in mid-November upon finalizing its financial statements as of and for the period ended September 30, 2019. Upon the filing of Amendment No. 1, we will also provide courtesy copies of Amendment No. 1, as filed and marked with the changes from the initial filing of the Registration Statement. Except as provided in this letter, terms used in this letter have the meanings given to them in the Registration Statement.

Page 1 — Explanatory Note

1.              Please add the following:

a.                   The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012. As a result, the Company is eligible to take advantage of certain reduced disclosure and other requirements that are otherwise applicable to public companies including, but not limited to, not being subject to the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. See “Item 1A. Risk Factors — Risks Related to Our Business and Structure — We are an “emerging growth company,” and we do not know if such status will make our shares less attractive to investors.”

b.                   The Commission maintains an Internet Website (http://www.sec.gov) that contains the reports mentioned in this section.

Response:

As requested, the Company will revise the disclosure in Amendment No. 1 to add the requested language.

Page 2 — Item 1. Business

2.              You state, “Prior to the Effective Date and prior to our election to be regulated as a BDC, we will complete a conversion under which Morgan Stanley Direct Lending Fund will succeed to the business of Morgan Stanley Direct Lending Fund LLC, and the member of Morgan Stanley Direct Lending Fund LLC will become the stockholder of Morgan Stanley Direct Lending Fund.” Please tell us whether this conversion is a routine or non-routine matter.

Response:

The Company respectfully submits that the BDC Conversion will be undertaken to comply with certain requirements in order to qualify as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), for its first taxable year as a business development company. The Company respectfully submits that it believes that the BDC Conversion is a standard approach for a business development company seeking to qualify as a RIC for each day of its tax year as a corporation.

3.              The first paragraph of this section states that the Company intends to invest in senior secured or unsecured loans, subordinated loans and mezzanine loans. We are aware that rating agencies as well as the financial media have recently reported that traditional lender protections are being eroded and that so-called “covenant-lite loans” are increasingly common. See, e.g., “Leveraged Loans Not as Safe as They Once Were,” Wall Street Journal (August 16, 2018). If the Company intends to invest in covenant-lite loans, please describe such loans and the extent to which the Company may invest in such loans; also, consider enhancing the disclosure of the risks of such loans.

Response:

The Company respectfully submits that it intends to invest primarily in directly originated senior secured term loans issued by U.S. middle market companies backed by financial sponsors. As disclosed in the Registration Statement, the Company believes that middle market loans tend to

2

garner more meaningful financial covenants and typically contain carefully structured covenant packages that allow lenders to take early action in situations where obligors underperform. In addition, the Company respectfully submits that, as stated in the Registration Statement, one of the key themes of its investment strategy is “[s]tructuring investments focused on providing [the Company] with security, covenant protection and current income while ensuring [its] borrowers have adequate liquidity to operate.” The Company respectfully submits that any so-called “covenant-lite loans” that the Company acquires would not be expected to comprise a material percentage of the Company’s investments and that additional risk disclosure regarding “covenant-lite loans” would be potentially confusing to investors as it would overstate the significance of such risks.

4.              Please disclose in this section the expected credit quality and maturity of the Company’s investments. Please include the term “junk bonds” in describing debt instruments that will be rated below investment grade or which, if unrated, would be rated below investment grade if they were rated.

Response:

As requested, the Company will revise the disclosure in this section in Amendment No. 1 to disclose the expected credit quality and maturity of the Company’s investments.  The Company will also include the term “junk bonds” where appropriate.

Page 5 — Competitive Advantages

5.              In footnote 1, you refer to an exemptive order regarding co-investments with certain accounts managed by the Company’s adviser and its affiliates. Please advise us of the status of the exemptive application. If the application is pending, revise the disclosure throughout the registration statement to clarify that such relief has not yet been granted and may not be granted.

Response:

The Company respectfully submits that the Company’s application for exemptive relief to engage in certain co-investment transactions (File No. 812-15057) was submitted on August 9, 2019 and is currently pending.  As requested, the Company will revise the disclosure in Amendment No. 1 to clarify that the Company’s application for exemptive relief has not yet been granted and may not be granted.

Page 8 — Large and Growing U.S. Middle Market with Favorable Market Trends

6.              In plain English, please describe Refinitiv LPC and Prequin, Ltd. and explain what relevance they have to this section.

3

Response:

As requested, the Company will add a description of Refinitiv LPC and Prequin, Ltd. in plain English in Amendment No. 1 and explain the relevance such entities have to this section.

Page 16 — Examples of Quarterly Incentive Fee Calculation

7.              You state, “For the purpose of computing the incentive fee on capital gains, the calculation methodology will look through derivative financial instruments or swaps as if we owned the reference assets directly.” Based on the disclosure in the registration statement, it is unclear what kind of derivatives the Company will use and, specifically, whether the Company will engage in total return swaps.

a.                   Please add disclosure clarifying the Company’s use of derivatives. If the Company will engage in total return swaps, please tell us whether the Company’s investment advisory agreement addresses the treatment of total return swaps for purposes of the base management fee and the incentive fee calculations.

b.                   Please tell us whether the Company will look through the swap and count the reference assets as investments of the Company for purposes of computing the incentive fee on income.

c.                    Please tell us whether, for purposes of the asset coverage ratio test of section 61(a) under the Investment Company Act, the Company will treat the notional amount of the swap, reduced by the amount of cash collateral required to be posted by the Company, as a senior security for the life of the swap.

d.                   Please tell us whether, for purposes of section 55(a) under the Investment Company Act, the Company will treat each loan underlying the swap as a qualifying asset only if the obligor on the loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company.

Response:

The Company respectfully submits that it does not have a current intention to enter into any derivative financial instruments or swaps and that additional disclosure in the Registration Statement would not be useful to investors.

While the Company respectfully submits that it currently does not intend to enter in to a total return swap, if the Company were to enter in to a total return swap, it would be expected that the terms of the total return swap would provide for the Company to receive all interest and fees payable in respect of the reference assets, which payments would appropriately be treated as interest income for purposes of calculating the income incentive fee payable under the Investment Advisory Agreement, consistent with the explicit terms thereof. Upon the termination of a reference asset in

4

the portfolio underlying a total return swap, the amount paid to the Company in respect of any appreciation of such reference asset would be treated as capital gains for purposes of calculating the capital gain incentive fee under the Investment Advisory Agreement. In addition, the fair value of the total return swap would be included with the investments of the Company on its balance sheet and, as a result, would be included in the determination of the gross assets of the Company for purposes of calculating the base management fee pursuant to the Investment Advisory Agreement.

The Company respectfully submits that it is aware of the Staff’s position regarding the treatment of a total return swap for purposes of (i) the asset coverage requirements of Section 18 of the Investment Company Act of 1940, as amended (the “Investment Company Act”), which will be applicable to it as a business development company under Section 61 of the Investment Company Act, and (ii) determination of qualifying assets for purposes of Section 55(a) of the Investment Company Act. If the Company were to enter into a total return swap, the Company expects that it would treat the outstanding notional amount of the total return swap, less the amount of any cash collateral or other liquid assets posted or segregated by it under the total return swap, as a senior security for the life of that instrument and would treat the assets underlying a total return swap as assets of the Company for such regulatory purposes. The Company respectfully reserves its right in the future to treat any total return swap for regulatory purposes in accordance with any then current Staff or Commission rule, guidance or interpretation regarding the regulatory treatment of total return swaps or similar derivative instruments that differs from such proposed treatment.

8.              Please add, adjacent to this section, a fee table that conforms to requirements of Item 3 of Form N-2. Such disclosure will be helpful to investors.

Response:

The Company respectfully submits that it is not aware of any affirmative requirement to include a fee table that conforms to the requirements of Item 3 of Form N-2 in a registration statement on Form 10.  The Company believes that such disclosure was omitted from Form 10 for good reason, in that such disclosure would be inappropriate and potentially misleading to a Company that is not undertaking a public securities offering and remains at an early stage of development.  The Company respectfully submits that the disclosure requirements of Item 3 of Form N-2 are intended to apply to a prospectus that is or will be used in connection with an offering of securities by a registrant; the Registration Statement is not a prospectus and is not part of the materials on which any investor would rely in connection with a decision to invest in the Company’s securities.  Consequently, any information included in the Registration Statements and tending to suggest such an offering of securities could be construed as a general solicitation that would impede or void the Company’s contemplated private placement of common stock.  The Company further submits that the fees and expenses to be borne by stockholders through the investment advisory agreement and other contractual arrangements are fully described in several places throughout the Registration Statement and would not, in any case, include disclosure related to sales load or offering expenses as required by Item 3 of Form N-2, which are not applicable to the Company at this time.

5

With respect to disclosure related to possible financing facilities called for by Item 3 of Form N-2, the Company respectfully submits that it has not yet negotiated such a facility and that any such fee table disclosure would be speculative at this time, as would disclosure regarding the amount of capital that the Company may be raise and invest during its first year of operations. Furthermore, the Company respectfully submits that any public disclosure regarding the cost of leverage it may incur could negatively impact its negotiations with prospective third parties lenders.

Finally, the Company respectfully submits that fees and expenses actually incurred by the Company, and indirectly incurred by the stockholders of the Company, will be disclosed in the Company’s quarterly reports on Form 10-Q and its annual report on Form 10-K and that this ongoing reporting information would be of greater utility to investors than the requested table.

9.              Please add an example that conforms to the requirements of Instruction 11 to Item 3.1 of Form N-2. We further request that you include, in the explanatory paragraph following the example, a second example where the five percent return results entirely from net realized capital gains and which uses language substantially the same as the following: “You would pay the following expenses on a $1,000 investment, assuming a 5.0% annual return resulting entirely from net realized capital gains (all of which is subject to our incentive fee on capital gains): $    $     $     $    .” Such disclosure will be helpful to investors.

Response:

The Company respectfully submits that it is not aware of any affirmative requirement to include an example that conforms to the requirements of Instruction 11 to Item 3.1 of Form N-2 in the Registration Statement. For the reasons described above in response to comment 8, the Company respectfully submits that it would not be appropriate to include the requested example in the Registration Statement.

Page 19 — Administration Agreement

10.       Please disclose how the board of directors, including the independent directors, will review the compensation that the Company pays to the administrator and determine that such payments are reasonable in light of the services provided.

Response:

As requested, the Company will revise the disclosure in Amendment No. 1