Private credit "trouble" signal? Blue Owl restricts redemptions, sells loans, stock price hits a two-and-a-half-year low

Alternative asset management company Blue Owl Capital previously decided to limit redemptions for one of its private credit funds, raising concerns in the market about the potential risks in the $1.8 trillion private credit market. On Thursday, the company's stock price fell about 10% during the trading session, reaching its lowest level in two and a half years, dragging down the broader U.S. stock market.

Blue Owl Capital stated on Wednesday that investors in Blue Owl Capital Corp II (referred to as OBDC II) will no longer be able to redeem shares on a quarterly basis. Instead, the fund will return capital through periodic distributions, which will be funded by loan recoveries, asset sales, or other transactions. The company indicated that it has sold approximately $1.4 billion in direct loan investments across three funds to provide the promised liquidity to investors.

Media reports suggest that this move highlights the risks faced by retail investors entering the rapidly growing private credit market. Although investors typically can redeem a portion of their funds quarterly, if redemption requests exceed the established limit, the amount paid may be restricted.

This news has also reignited concerns within the industry. In recent months, the private credit sector has come under increasing scrutiny due to market valuation issues and the lending quality to highly leveraged companies with limited performance records. Competitors such as Ares Management Corp., Apollo Global Management Inc., Blackstone Inc., KKR & Co Inc., and TPG Inc. have also seen their stock prices decline.

Mohamed El-Erian, former CEO of Pacific Investment Management Company, questioned whether this news represents a "canary in the coal mine moment" for the private credit sector.

Craig Packer, co-founder of Blue Owl, defended the decision to sell loans, stating that selling loans at a face value of 99.7% "is a strong statement." Packer said in a conference call on Thursday morning:

"The market has doubts about valuations and pricing. We have always said that we are very confident in the quality of our portfolio and the quality of our valuations, but just saying it seems insufficient. So we are proving it with action."

He added that by the end of this year, the fund may return half of the capital to investors. He noted that the fund had already planned to make strategic transactions at this time to return capital to investors.

"We will look for loan recoveries, earnings, and possible additional asset sales to continue returning this portion of capital."

Sale of Direct Loan Investments Across Three Funds

Blue Owl has sold direct loan investments across three funds: Blue Owl Capital Corp II, Blue Owl Capital Corporation, and Blue Owl Technology Income Corp. Buyers include North American public pension funds and insurance companies In recent months, OBDC II has attracted attention, as Blue Owl previously proposed merging it with a publicly listed vehicle. Previously disclosed information indicated that this transaction could result in approximately a 20% loss for some investors. Redemption requests have already exceeded the standard quarterly limit of 5%.

Citizens Financial Group stated in an analyst report that selling loans at face value is a "win-win":

"OBDC II has been exploring options to create liquidity events for investors or gradually wind down this legacy vehicle and ultimately return capital to shareholders. We believe this is an important step forward for the fund, establishing an efficient process for returning funds to these investors."

The company indicated that it initially planned to sell loans within OBDC II, and then expanded to other vehicles driven by demand from institutional buyers. OBDC II sold approximately $600 million in loans, accounting for about 34% of its portfolio. The proceeds will be used to repay the credit line borrowed from Goldman Sachs Group Inc. and to make a special cash distribution, amounting to about 30% of the fund's net asset value.

Typically, funds that allow investors to redeem regularly may face pressure when a large number of investors request redemptions simultaneously. Managers usually retain some more easily sellable assets to meet redemption demands. Loans initiated directly are not frequently traded, so selling such assets is uncommon.

Redemption

In the most recent quarter, redemption requests for both of Blue Owl's unlisted business development companies exceeded 5%. The redemption requests for its technology-focused vehicle OTIC accounted for about 15% of its net asset value.

Blue Owl's largest publicly listed business development company, OBDC, sold approximately $400 million in loans across 74 portfolio companies, priced close to face value, with an average individual holding size of about $5 million. Blue Owl Technology Income Corp sold approximately $400 million in loans and used the proceeds to repay debt.

The company stated that these transactions enhanced the flexibility of the balance sheet, slightly increased diversification, and created more space for future capital deployment.

However, the decline in Blue Owl's stock price has also dragged down structured notes linked to the company and held by retail investors. Media data shows that one security issued by a Citigroup subsidiary was quoted below face value by 50% on Thursday.

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