Warning bell for small businesses: Blue Owl freezes $1.7 billion retail credit fund, private lending stress hits $3 trillion market

by

Crypto Rover
@cryptorover
🚨BIG WARNING: THE FIRST MAJOR DOMINO HAS FALLEN.

Today, Blue Owl Capital announced that it permanently halted redemptions for Blue Owl Capital Corp II (OBDC II), its $1.7 billion private credit fund aimed at retail investors.

And this is not a small thing.

Blue Owl Capital is a major alternative asset manager with $307.5 billion in AUM.

The reason they are permanently halting redemptions for Blue Owl Capital Corp II (OBDC II) is to manage a “liquidity mismatch” caused by a surge in withdrawal requests.

But isn’t this issue related to Blue Owl only?

Well, this is certainly not the case.

Blue Owl’s move to permanently restrict redemptions is signalling broader stress in $3 trillion private credit market.

Here are a few warning signs:

Roughly 40% of direct lending companies are generating negative free operating cash flow.
30% of companies with debt maturing before 2027 have negative EBITDA, making them extremely difficult to refinance.
Default rates for middle-market (MM) borrowers have reached 4.55% and are only rising .
Downgrades have outpaced upgrades for seven consecutive quarters.

If the stress continues in the private credit market, it’ll first impact the small businesses for whom the private credit market is a critical funding source.

Additionally, it’ll cause refinancing costs to go up and will result in more defaults, which will create a vicious cycle.

The only way to stop this is by lowering interest rates and providing liquidity.

This is probably why the Fed pumped $18 billion into the economy overnight, as more entities are experiencing a liquidity crunch.

But this amount is too small to stop stress in the private credit market.

The Fed would have to go full dovish here, or the dominos will continue to fall.

https://twitter.com/JohnDoss1/status/2024497393069105497