The U.S. private credit market—once touted by Wall Street as a "safe haven" and stable income source for individual investors—is now facing a dual crisis of deteriorating fundamentals and collapsing confidence. The resulting asset revaluation is bursting the industry's bubble of prosperity.
As the latest sign of this crisis, private credit giant Blue Owl Capital recently withdrew from negotiations to finance Oracle's $10 billion AI data center project due to risk concerns. This move quickly triggered market panic over potential disruptions in large-scale infrastructure financing. The incident not only exposed a fundamental shift in the credit market's attitude toward aggressive capital spending by tech giants but also directly pressured Oracle's stock price, causing volatility among its key partners and the broader tech sector.
This financing setback is not an isolated case but a microcosm of the spreading risks across the private credit industry. With rising default rates and borrower stress under high-interest-rate conditions, business development companies (BDCs) catering to individual investors—including those managed by top asset managers like KKR and BlackRock—are grappling with plunging stock prices, surging bad loans, and mounting redemption pressures.
The turmoil is testing the resilience of the $2 trillion private credit industry, which previously targeted institutional investors and wealthy individuals. The struggles of BDCs highlight the risks when retail investors—who often exit at the wrong time—enter this market.
JPMorgan Chase CEO Jamie Dimon's warning—"when you see a cockroach, there are probably more"—hinted at systemic risks in the $1.7 trillion private credit market. Now, this caution appears to be materializing.
**Blue Owl's Sudden Brake: A $10 Billion Deal Collapses** Blue Owl Capital's decision to abandon financing for Oracle's Michigan-based data center project became the spark igniting market anxiety. Although Oracle insists negotiations are ongoing and alternative partners have been secured, Blue Owl's exit stemmed from lenders demanding stricter lease and debt terms amid shifting sentiment, citing concerns over execution risks and Oracle's rising debt levels.
This incident exposes the fragility of AI infrastructure funding. Private credit firms like Blue Owl typically invest their own capital and raise billions in debt to build facilities leased to tech giants like Oracle. However, the breakdown of negotiations casts doubt on this off-balance-sheet financing model. Analysts warn that if private credit firms reject AI infrastructure projects, the sustainability of the entire AI investment cycle could be in jeopardy. Oracle's five-year credit default swap (CDS) costs have surged to their highest since 2009.
**BDC Meltdown: A Nightmare for Retail Investors** In the broader public market, BDCs serving individual investors are enduring a brutal year.
While the S&P 500 has gained about 16% this year, major BDCs like FS KKR Capital have suffered double-digit declines. A VanEck BDC-focused ETF has dropped nearly 6%, starkly underperforming the broader market.
Wall Street has long pushed to include private credit products in 401(k) plans, democratizing access for retail investors. BDCs, which lend to lower-rated mid-sized firms at high interest rates and distribute income as dividends, have seen assets under management triple since 2020 to around $450 billion.
But this once-popular investment is now punishing investors who exit at the wrong time. As interest rate shifts disrupt income expectations and credit quality deteriorates, these tools—once seen as stable cash generators—face severe revaluation.
**Bad Loans and Scandals: The "Cockroaches" in Earnings Reports** Despite BDC managers claiming most investments remain sound, deteriorating data tells a different story.
FS KKR Capital, a KKR-managed BDC, has seen its stock plunge about 33% this year. Alarmingly, its troubled loans include its largest single holding: a $350 million investment in cleaning firm Kellermeyer Bergensons Services, accounting for over 2% of fund assets.
By September, FS KKR Capital's non-performing loan ratio had risen to 5% from 3.5% in January, with 14.4% of income coming from "payment-in-kind" (PIK)—a red flag for borrower distress.
BlackRock’s $1.8 billion BDC reported a 7% loan default rate in September. It took a loss on an $11 million loan to home repair firm Renovo Home Partners after its collapse—weeks after BlackRock had valued it at par.
Auto parts supplier First Brands' fraud and bankruptcy scandal also hit Great Elm Capital, which held significant debt, leading to massive unrealized losses.
**Liquidity Crunch: Valuation Gaps and Redemption Woes** Beyond credit deterioration, liquidity crises and valuation disputes are accelerating the market’s unraveling.
Blue Owl’s failed attempt to merge its private BDC with a publicly traded one exemplifies the challenge. Public BDCs trade far below net asset value (NAV), while private funds face redemption pressures.
After market skepticism drove shares 14% below NAV, Blue Owl scrapped the merger. This highlights a structural flaw: illiquid private assets are hard to price during downturns, and when valuations diverge from public markets, panic redemptions become inevitable.
For retail investors lured by high dividends, the current turmoil means not just shrinking returns but also grave uncertainty over principal safety.
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