Blue Owl lending creates another earthquake in private credit

The latest jolt in the world of private credit included a deal that should have been reassuring for markets.

Blue owlThe direct lending company that specializes in loans to the software industry said Wednesday that it sold $1.4 billion of its loans to institutional investors at 99.7% of face value.

That means seasoned players scrutinized the loans and companies involved and felt comfortable paying almost the full price for the debt, a message that Blue Owl co-president Craig Packer has sought to convey in interviews several times this week.

But instead of calming markets, it sent shares of Blue Owl and other alternative asset managers lower on fears of what could follow. That’s because as part of the asset sale, Blue Owl announced that it would replace voluntary quarterly redemptions with mandatory “capital distributions” funded by future asset sales, earnings or other transactions.

““The optics are bad, even if the loan book is OK,” Truist Securities’ Brian Finneran wrote in a commentary distributed Thursday. “Most investors interpret the sales to mean that redemptions have accelerated and led to forced selling of high-quality assets to meet demands.”

Blue Owl’s move was widely interpreted as the firm halting redemptions from a fund under pressure, even as Packer indicated that investors would receive about 30% of their money by March 31, far more than the 5% allowed under its previous quarterly schedule.

“We’re not stopping recalls, we’re just changing the format,” Packer told CNBC on Friday. “If anything, we are working to speed up recoveries.”

The episode comes amid a widespread sell-off in technology and software fueled by fears of AI disruption, and shows that even seemingly strong loan books are not immune to market jitters. This in turn forces alternative lenders to scramble to meet sudden shareholder demands to return their money.

It also revealed a central tension in private credit: what happens when illiquid assets collide with the demand for liquidity?

Against an already fragile backdrop for private credit since the collapse of car companies Tricolor and First Brands, fear arose that this could be an early sign of a collapse in credit markets. Blue Owl shares fell on Thursday and Friday. They are down more than 50% in the past year.

Early Thursday, economist and former Pimco CEO Mohamed El-Erian wondered in his social media posts whether the Blue Owl was a “canary in the coal mine” for a future crisis, such as the failure of a pair of Bear Stearns credit funds in 2007.

Treasurer Scott Besent said on Friday he was “concerned” about the potential for risk to move from Blue Owl into the regulated financial system because one of the institutional buyers was an insurance company.

As skepticism grew about loans to software companies, one of the questions investors asked was whether the loans they sold represented a representative slice of the total money, or whether Blue Owl had selected the best loans to sell.

The company said the core loans were made to 128 companies in 27 industries, the largest of which was software.

Blue Owl noted that it was a broad range of the funds’ total borrowings: “Each investment to be sold represents a fractional amount of each Blue Owl BDC’s exposure to the respective portfolio company.”

Despite its efforts to calm markets, Blue Owl finds itself at the center of concerns over private credit loans to software companies.

Most of the more than 200 companies Blue Owl lends to are in the software business; More than 70% of its loans are in this category, executives said Wednesday on a fourth-quarter earnings call.

“We remain an enthusiastic supporter of software,” Packer said on that call. “Software is an enabling technology that can serve every sector, market and company in the world. It is not a monolith.”

The company makes loans to companies with “permanent moats” and is protected by the seniority of its loans, meaning private equity owners would need to be wiped out before Blue Owl saw losses.

But the problem that the Blue Owl faces, at least for the time being, is the problem of bleeding perceptions into tangible reality.

“The market is reacting, and this idea becomes self-fulfilling, they get more redemptions, so they have to sell more loans, and that pushes the stock further down,” said Ben Emmons, founder of FedWatch Advisors.