Illiquid loans, investor demands: Blue Owl’s software lending triggers another quake in private credit

The most recent tremor in the private credit world concerned a deal that ought to’ve been reassuring to markets.

Blue Owl, a direct lender specializing in loans to the software business, mentioned Wednesday it had offered $1.4 billion of its loans to institutional buyers at 99.7% of par worth.

Which means refined gamers scrutinized the loans and the businesses concerned and felt snug paying practically full value for the debt, a message that Blue Owl co-President Craig Packer sought to convey in interviews a number of instances this week.

However as an alternative of calming markets, it despatched shares of Blue Owl and different various asset managers diving on fears of what might comply with. That is as a result of as a part of the asset sale, Blue Owl introduced it was changing voluntary quarterly redemptions with mandated “capital distributions” funded by future asset gross sales, earnings or different transactions.

“The optics are unhealthy, even when the mortgage ebook is okay,” Brian Finneran of Truist Securities wrote in commentary circulated Thursday. “Most buyers are decoding the gross sales to imply that redemptions accelerated and led to compelled gross sales of upper high quality property to satisfy requests.”

Blue Owl’s transfer was broadly interpreted because the agency halting redemptions from a fund below strain, at the same time as Packer identified buyers would get about 30% of their a reimbursement by March 31, excess of the 5% allowed below its earlier quarterly schedule.

“We’re not halting redemptions, we’re simply altering the shape,” Packer instructed CNBC on Friday. “If something, we’re accelerating redemptions.”

Coming amid a broad tech and software selloff fueled by fears of AI disruption, the episode reveals that even apparently robust mortgage books aren’t resistant to market jitters. This in flip forces various lenders to scramble to fulfill shareholders’ sudden calls for for the return of their cash.

It additionally uncovered a central rigidity in private credit: What occurs when illiquid property collide with calls for for liquidity?

Towards a backdrop that was already fragile for private credit for the reason that collapse of auto corporations Tricolor and First Manufacturers, the concern that this could possibly be an early signal of credit markets cracking took off. Shares of Blue Owl fell Thursday and Friday. They’re down greater than 50% in the previous yr.

Early Thursday, the economist and former Pimco CEO Mohamed El-Erian questioned in social media posts whether or not Blue Owl was a “canary in the coal mine” for a future disaster, just like the failure of a pair of Bear Stearns credit funds in 2007.

On Friday, Treasury Secretary Scott Bessent mentioned that he was “involved” concerning the risk that dangers from Blue Owl had migrated to the regulated monetary system as a result of one of many institutional consumers was an insurance coverage firm.

With skepticism over loans to software corporations working excessive, one query from buyers was whether or not the loans they offered have been a consultant slice of the overall funds, or whether or not Blue Owl cherry-picked the very best loans to promote.

The underlying loans have been to 128 corporations throughout 27 industries, the biggest being software, the agency mentioned.

Blue Owl indicated it was a broad swath of total loans in the funds: “Every funding to be offered represents a partial quantity of every Blue Owl BDC’s publicity to the respective portfolio firm.”

Regardless of its efforts to calm markets, Blue Owl finds itself on the nexus of issues round private credit loans made to software corporations.

A lot of the 200-plus corporations Blue Owl lends to are in software; greater than 70% of its loans are to that class, executives mentioned Wednesday in a fourth-quarter earnings name.

“We stay enthusiastic proponents of software,” Packer mentioned on that decision. “Software is an enabling expertise that may serve each sector and market and firm in the world. It isn’t a monolith.”

The corporate makes loans to corporations “with sturdy moats” and is protected by the seniority of its loans, that means that private fairness homeowners would have to be worn out earlier than Blue Owl noticed losses.

However, for now not less than, the issue Blue Owl faces is considered one of notion bleeding into actuality.

“The market is reacting, and it turns into this self-fulfilling concept, the place they get extra redemptions, so that they must promote extra loans, and that drives the inventory down additional,” mentioned Ben Emmons, founding father of FedWatch Advisors.