Blue Owl Capital’s business development company (BDC) issues stem from liquidity pressures rather than asset quality concerns, with ratings agencies noting that the underlying fundamentals of the fund remain “stable” despite negative headlines.
Last week, Blue Owl restricted investor redemptions from one of its retail debt funds as it sold $1.4bn (£1.04bn) of direct lending investments to boost liquidity. The move spotlighting liquidity risk in private credit funds with growing retail exposure and the timing of redemptions.
The redemption pressure also comes amid heightened scrutiny of the credit quality of BDCs, with “SaaS-apocalypse” adding further pressure and uncertainty over the future of private credit.
However, a report by S&P Global Ratings on Blue Owl Capital Corporation II (OBDC II), whose redemption structure was changed, said that despite recent headlines involving the software sector, the credit fundamentals of BDC remain stable. S&P added that, from a credit perspective, it fully expects OBDC II to repay its upcoming $350m unsecured debt maturity in November.
Moody’s echoed this view, stating that OBDC II has adequate liquidity to meet this maturity and comfortably service its day-to-day operations.
Moody’s said the change in quarterly redemptions was driven by liquidity requirements rather than asset quality. The successful sale of roughly a third of the investment portfolio at fair value to institutional investors was credit positive, as it reflects solid asset quality and underscores strong credit fundamentals, the firm said.
Blue Owl has permanently restricted traditional redemptions in OBDC II in favour of returning 30 per cent of capital to all shareholders on a pro rata basis by the end of March, with plans to continue capital returns on a quarterly basis thereafter.
However, Moody’s said the move away from traditional quarterly redemptions has sharpened investor focus on how semi-liquid private credit vehicles manage redemptions as retail participation expands, with general partners needing to rethink their approach to liquidity.
As alternative managers push further into the retail channel, Moody’s expects liquidity management, disclosure and fund structure design to become more central to investor decision-making, and potentially a drag on returns.
“Funds will need to hold a larger proportion of more liquid and lower-yielding investments to account for a growing retail presence,” said Marc Pinto, global head of private credit. “As retailisation reshapes private credit markets, strong governance, enhanced disclosure, and vigilant liquidity management will be essential to safeguard both investors and overall market stability.”
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