Amidst significant pressure on private credit, a halving of its stock price, and intensified investor redemptions, Blue Owl Capital Inc. (OWL.US) has moved to rebuild market confidence through a bond issuance facilitated by Morgan Stanley. Although the financing was completed at a premium, the full subscription by Pacific Investment Management Company (Pimco) has led to a notable recovery in the company's share price and credit spreads. This transaction not only provides essential liquidity but is also viewed as an indicator of a potential, albeit tentative, recovery phase for the private credit market. However, underlying structural pressures within the industry—including valuation concerns, liquidity issues, and the disruptive impact of AI—remain unresolved.
Few companies on Wall Street have been in more need of a positive development than Blue Owl Capital recently. Within just a few weeks, as the private credit sector came under increasing strain, the firm became a central focus for investor scrutiny. Its stock plummeted by nearly 50%, clients sought to withdraw unprecedented amounts of capital from its funds, and activist investors and short-sellers amplified the selling pressure.
In this context, Morgan Stanley presented a potential solution. According to informed sources, the bank's bankers conducted market soundings with asset managers to gauge demand for a potential bond issuance, concluding that a viable transaction was possible. This approach was seen not merely as a way to raise cash but as a means to reaffirm Blue Owl's access to capital markets, solidify its investment-grade status, and associate it with respected institutional investors. The critical condition, however, was that the company had to offer the bonds at a premium to complete the deal. Ultimately, management deemed this a minor cost worth bearing to help restore investor confidence.
So far, the strategy appears to be yielding results. Since the bond issuance, Blue Owl's stock has surged by 17%, while the share price of its publicly traded business development company, Blue Owl Capital Corp. (OBDC.US), has risen by 5.3%. Data indicates that the spread on its bonds maturing in 2028 has tightened by approximately 25 basis points. This positive momentum was further reinforced when Pimco emerged as the buyer of the entire $400 million bond offering.
Andrew Wiles, Chief Investment Officer at SanJac Alpha, described it as a "fairly robust transaction," particularly given widespread market concerns about lending standards in private credit and exposure to software companies vulnerable to disruption by artificial intelligence. "When Pimco underwrites this deal, I think it's actually a significant positive," Wiles stated. "They are astute at pricing for the market, and the fact the deal got done is a good sign."
Following a period where the business development company bond market had nearly stalled in recent weeks, Morgan Stanley assembled bankers from its credit, capital markets, structured finance, and other teams to devise a strategy for reigniting investor interest. The focus was on convincing buyers to accept the associated risks and finding a price point that suited the market. As part of this effort, Morgan Stanley reached out to asset managers and successfully generated interest in the Blue Owl transaction, according to sources.
Blue Owl's management accepted the terms, viewing the two-and-a-half-year tenor as providing flexibility to refinance quickly at a lower cost should market sentiment improve. This arrangement was particularly attractive given that OBDC's spreads had widened considerably in preceding months. Morgan Stanley provided a shortlist of potential buyers for a more typical syndicated offering, but one name stood out: Pimco.
**A Potent Signal**
Blue Owl had previously collaborated with the asset management giant last year to finance a major data center project for Meta Platforms Inc. Shortly thereafter, Pimco directly approached Blue Owl to discuss the possibility of taking the entire bond issue. Blue Owl executives quickly recognized that this would send a powerful signal to the market, making the premium paid a worthwhile expense. According to debt documentation, the company plans to use the proceeds to repay upcoming maturities.
This issuance marked the first bond sale by a private credit fund in over six weeks. While a moderation in geopolitical tensions and strong bank earnings have helped stabilize market sentiment surrounding private credit exposure, observers note that this deal is seen as a vote of confidence for an industry grappling with concerns over valuations, liquidity, and transparency. A day later, Morgan Stanley assisted in arranging a similar transaction for a direct lending fund affiliated with Goldman Sachs Group Inc. Although Goldman's plans were already in motion, the consecutive deals suggest capital markets are reopening for the sector's major players.
This is welcome news for Wall Street, as arranging financing for private credit funds had become a reliable revenue stream prior to the recent market correction. Data shows that business development companies issued a record $38 billion in bonds last year, up from $5 billion six years ago. In the first eight weeks of this year, over a dozen issuers came to market before activity cooled.
**Surge in Private Credit Fund Bond Sales**
Despite the stabilizing effect of these two bond deals, they do not alleviate the fundamental pressures facing private credit funds, according to Zachary Griffiths, Head of Investment Grade and Macro Strategy at credit research firm CreditSights. "We don't view this as necessarily signaling that concerns about private credit are completely behind us," he commented via email. "Future returns could face challenges, as private credit (along with the leveraged loan market) has significant exposure to industries vulnerable to ongoing AI disruption."
Nonetheless, the Goldman Sachs private credit transaction attracted nearly $3 billion in orders, allowing it to raise $750 million, exceeding an initial target of $500 million. Bankers have indicated they expect more business development companies to follow suit in the coming weeks.
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