OK, I have seen some sites that rank solely on their inbound links. These sites have a keyword density of 0%. Which makes me wonder if perhaps they have a new penalty for higher keyword density.

Not really, it just means those sites rank well due to their links.
How do they rank in MSN? My guess would be not so well since MSN doesnt rely so much on IBLs

I think it is just the opposite for MSN. They love inbound links, and lots of them. It's all about quantity not quality. Some sites are ranking in the top 5 using only inbound links to do so as the pages have a keyword density of 0%.