RPT-BREAKINGVIEWS-Blue Owl previews private credit’s pain trade

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Jonathan Guilford

NEW YORK, Nov 18 (Reuters Breakingviews) - It turns out that Blue Owl OWL.N prowlers fly at dusk. Private credit’s post-pandemic boom stoked fears about loose underwriting standards and whiplash once interest rates fell. Some recent collapses and renewed exuberance have focused minds on other early trailblazers, and the latest squawking at the $20 billion shadow bank led by Marc Lipschultz and Doug Ostrover will only ruffle more feathers.

From Blackstone BX.N to Apollo Global Management APO.N, publicly traded non-bank lenders have suffered as U.S. tariffs rocked markets and a more accommodating Federal Reserve augured an end to higher borrowing costs. Blue Owl’s downward swoop has accelerated beyond the flock. Its shares are now down more than 40% this year.

Part of the issue is that Blue Owl leans into using listed investment funds known as business development companies to house bulging loan books. Investors are migrating away: Blue Owl Capital Corporation OBDC.N, or OBDC, trades at 0.79 times its stated net asset value, or NAV. Blue Owl Technology Finance Corporation OTF.N, or OTF, trades at 0.77 times.

This opens a costly arbitrage. Blue Owl has been tidying up a complicated morass of private and public funds by merger. One problem remains: OBDC II, 98% of whose loans overlap with sister vehicle OBDC. Because OBDC II is unlisted, investors can redeem at the fund's NAV. The obvious trade is to withdraw from OBDC II, buy OBDC, and capture the roughly 20% discount.

To close the gap, Blue Owl unveileda plan earlier this month to merge the BDCs. As CFO Jonathan Lamm toldthe Financial Times, OBDC II redemptions will be gated. After the deal, selling the sagging public shares also will be costly. An OBDC buyback plan and fatter dividend should help, but the timing is terrible.

Stabilizing the funds is nevertheless important for parent Blue Owl Capital, since its two public BDCs paid the equivalent of over 20% of its management fees last year. There are signs of stress: payment-in-kind, or non-cash interest outlays, was 9.5% of OBDC's total income in the most recent quarter, and 13.8% at OTF. These are, to be fair, lower than the respective 13.5% and 21% a year earlier.

What is remarkable is that this has little to do with the blowups at First Brands and Tricolor, to which Blue Owl was not exposed. Recent fears of overheating revolve around artificial intelligence, where Blue Owl is a prime mover and recently sealed a $30 billion data-center partnership with Meta Platforms META.O. With yesterday's problems clipping the firm's wings, it's increasingly reasonable to fret about what private credit flaps will come tomorrow.

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CONTEXT NEWS

Blue Owl Capital Corporation, a listed business development company known as OBDC and operated by its eponymous parent, said on November 5 that it would merge with Blue Owl Capital Corporation II, or OBDC II, a non-listed sibling.

During the pendency of the merger, investors in OBDC II will be restricted from withdrawing money, the Financial Times reported on November 16. Under the norms of private BDCs, investors can withdraw a limited sum from funds on a regular basis at their stated net asset per share. OBDC instead trades on the open market, where it is currently valued at a discount to its NAV.

In a securities filing, Blue Owl said that OBDC II shareholders will have the right to vote on the merger, and that a liquidity event was planned within a period that runs through 2026. Blue Owl has completed other mergers as part of a plan to simplify its BDC complex.

(Editing by Jeffrey Goldfarb; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on GUILFORD/ Jonathan.Guilford@thomsonreuters.com))