Blue Owl Halt Signals Rising Pressure in Private Credit

Private credit markets were rocked by news in the industry that Blue Owl had stopped investors from withdrawing their funds from one of its credit funds.

The lockup occurred on the eve of a merger between two debt credit funds managed by Blue Owl, a deal the firm has now canceled due to market pressure. 

These events occurred at a time when the market was under pressure due to companies filing for bankruptcy and allegations surrounding fraudulent activity.

Subprime loan providers that require constant capital to offer loans have also been affected. They monitor private credit for any sign of distress and now expect an increase in costs due to frozen withdrawal amounts from big money funds.

They’re also preparing to face stricter restrictions on their use of money for lending purposes.

Blue Owl suffered a sharp drop in its share price after the freeze. Investors worried about the value of the larger credit fund, which trades below its asset value. Even without the merger, the continuing price drop adds more pressure to an already weak market.

Funding Pressures

Recent events show the strain more clearly. The fall of auto lender Tricolor stands out. J.P. Morgan swallowed a $170 million charge for Tricolor. Problems with private credit can wallop subprime lenders. It turns funding strain into actual losses for major players.

The Blue Owl freeze is the latest blow to private credit, underscoring deepening market pressures.

Private credit now sits in the trillions. It plays a major role in supporting lenders outside banks. The private credit market now stands at about $3 trillion. That’s up from about $2 trillion in 2020. This growth makes any freeze a big problem. 

The model for private credit offers speed and flexibility, which works well in calm markets. It also can rapidly fail when stress occurs. A freeze pulls money out of the system, slows funding and increases costs.

Subprime lenders depend upon warehouse credit and private funding partners. Costs rise when private credit tightens. This causes lenders to decrease the number of loans they make. They also increase prices for subprime borrowers.

These lenders respond quickly — small shifts in funding can change their margins. The shock also affects loan buyers and banks. A freeze in one part of the system increases caution. It shows pressure on lenders and loan buyers. They need cash to continue lending.

Risk Signals

Blue Owl’s plan for a merger added more pressure, but the firm later canceled the deal due to market stress. It means that the smaller fund’s investors no longer have to wait for completion. They could have ended up losing money due to the large fund’s market prices being below its asset value.

For lenders with iffy cash flows, the merger was a danger signal.

The larger fund trades at about a 20% discount to its asset value. Investors in the smaller fund may have faced losses. They would have had to swap into something the market values at only 80 cents on the dollar.

Some loans are complex — firms may have to answer questions concerning collateral. As an example, take the case of bogus receivables from certain telecom companies. The companies borrowed more than $400 million from HPS Investment Partners, the private credit arm of BlackRock.

U.S. prosecutors are now checking into the case. These problems cause subprime lenders to be more cautious about loan approvals. Even giant leaders understand the risks.

Jamie Dimon said, “When you see one cockroach, there are probably more.” No wonder lenders want to take fewer risks.

Subprime lenders watch investor trust closely. Fear causes them to decrease lending. They may ask for more checks before approving a loan. They may tighten rules for subprime borrowers. 

They may raise prices to avoid losing money.

Bottom Line

The Blue Owl freeze and cancellation show how fast confidence can head south. It also shows how private credit problems spread into subprime lending. Lenders need steady funding. They may have to be ready for more pressure down the road.