Private Credit News Weekly Issue #86: Redemptions Settle, Defaults Rise to 5.6%, and BDCs Raise $5.3 Billion
The exit rush calms as Blue Owl honors 15% withdrawals, but default rates climb and PIMCO warns buyers are "blind" to risks
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The redemption panic passed. Blue Owl honored 15.4% of net assets in withdrawals from its tech-focused OTIC fund after breaking its 5% gate, and the firm survived. The larger Blue Owl Credit Income Corp saw redemptions of just 5.2%, in line with peers. Blackstone’s BCRED repurchased 4.5%, Ares Strategic Income Fund hit 5.6%, and Cliffwater Enhanced Lending Fund came in at 5.74%. The quarterly reckoning happened, and the funds didn’t break.
But the stress is real. Default rates across 1,200 US private debt borrowers tracked by Fitch ticked up to 5.6% in Q4 from 5.4% the prior quarter on a trailing 12-month basis. For the 300 privately issued loans rated by Fitch, the default rate jumped to 9.2% from 8.4%. Fitch recorded 18 new unique private credit defaulters in Q4, bringing the annual tally to 71 defaulting borrowers.
PIMCO president Christian Stracke isn’t impressed by the resilience. “There’s a lot of additional credit risk that people are often taking in some of these private situations that you kind of turn a blind eye to,” he said on the Bloomberg Intelligence Credit Edge podcast. “It is not a good sign that you have all of these problems emerging in terms of loan performance at a time when the economy is about as good as it gets.”
Meanwhile, BDCs are gorging on cheap debt. Nine BDCs raised $5.3 billion in the investment-grade debt market this month to lock in attractive borrowing costs and build a war chest ahead of reporting Q4 earnings. They’re paying roughly 200 bps over Treasuries, but for funds making loans with spreads often twice as wide, it’s a chance to exploit near-insatiable investor demand for bonds.
The deals keep flowing. Ares led a $1.6 billion debt financing for the merger of Suave Brands and Elida Beauty into Evermark. Covetrus pricing discussions increased to about 6.5 percentage points over benchmark from earlier talks of at least 5 percentage points as CD&R and TPG pursue Cencora’s vet business. BlackRock and Partners Group launched the first joint private-markets separately managed account through Morgan Stanley’s wealth platform combining private equity, private credit, and real assets.
Key Market Themes
1. Blue Owl Survives 15% Redemptions, Proving Liquidity Management Works
Blue Owl Technology Income Corp honored redemption requests totaling $527 million, or 15.4% of net assets, after the firm raised its withdrawal threshold to 17% from the typical 5% cap. The sharp pullback came largely from wealthy individuals in Asia, which account for a significant portion of OTIC’s investor base.
After cashing investors out, the fund had around $1.4 billion in liquidity available including cash, debt, and broadly syndicated loans. The redemptions elevated net leverage to 1.05 times debt-to-equity. Last year, OTIC’s Class I shares delivered a 9% return, bringing annualized inception-to-date returns to 10.8%.
The larger Blue Owl Credit Income Corp saw redemptions of 5.2%, totaling about $1 billion. That compares favorably with other non-traded BDCs: Ares Strategic Income Fund repurchased 5.6% of net asset value, Cliffwater Enhanced Lending Fund repurchased 5.74%, and Blackstone’s BCRED repurchased 4.5%.
Why It Matters
Blue Owl’s decision to honor all 17% of redemption requests rather than prorating at 5% was tactical brilliance or desperation, depending on perspective. The firm has honored all tender requests ever made in OTIC since its 2017 start. Flushing everyone out at once avoids the multi-quarter bleeding that plagued Blackstone’s Breit. But it only works if you have $1.4 billion in liquidity. Once funds start selling illiquid assets to meet redemptions, marks get tested against actual bids.
2. Default Rates Climb to 5.6% as 71 Borrowers Default in 2025
The default rate across 1,200 US private debt borrowers tracked by Fitch ticked up to 5.6% in Q4 from 5.4% the prior quarter on a trailing 12-month basis. For the 300 privately issued loans rated by Fitch, the default rate rose to 9.2% from 8.4% in Q3.
Fitch recorded 18 new unique private credit defaulters in Q4, bringing the annual tally to 71 defaulting borrowers. The consumer products sector saw the largest increase in unique defaulters during the period, while healthcare providers’ default rate led all sectors with 12 unique defaults on a trailing 12-month basis.
US middle-market issuance dropped 14% year over year in 2025, despite a doubling in leveraged buyout activity, which climbed to $2.5 billion in Q4 2025 from $1.2 billion in Q4 2024. LBOs’ share of total middle-market issuance increased to 20% in 2025 from 17% in 2024, which “coincided with lower purchase price multiples, narrowing valuation gaps and enabling more transactions.”
Why It Matters
Default rates rising from 5.4% to 5.6% while the economy performs well validates PIMCO’s concern. The 9.2% default rate for privately issued rated loans is nearly double the broader 5.6% rate, suggesting deterioration concentrates in newer, more aggressive vintages. Healthcare providers leading with 12 defaults signals stress in a sector previously considered defensive. The 71 annual defaulters in 2025 establishes a baseline for what “normal” stress looks like before any real downturn.
3. PIMCO President Warns Private Credit Buyers Are “Blind” to Risks
Christian Stracke, president of the $2.3 trillion asset manager PIMCO, said investors underestimate hazards when chasing fat yields in private credit. “There’s a lot of additional credit risk that people are often taking in some of these private situations that you kind of turn a blind eye to,” he said on the Credit Edge podcast.
Private debt traditionally focuses on smaller companies, which tend to have less financial flexibility and more limited disclosure than those accessing public markets. Its higher sector concentration and lack of price transparency are cause for concern, Stracke said. Loans to weaker companies signed earlier this decade when interest rates were near zero are becoming stressed as the debt comes due.
“It is not a good sign that you have all of these problems emerging in terms of loan performance at a time when the economy is about as good as it gets,” Stracke said. “There is a fairly large overhang of problem loans that were made in years earlier this decade that will take years to burn through.”
Why It Matters
PIMCO co-led a $29 billion financing for Meta’s Louisiana data center, one of last year’s biggest private loans, and recently raised $7 billion for asset-based finance. So Stracke’s skepticism about corporate direct lending carries weight. His point about mark-to-market keeping investors honest resonates: “Mark-to-market can keep you honest, and it can flag issues early in a way that is difficult when you don’t have mark-to-market. That is a fundamental concern that many in the market have been missing.” PIMCO expects underwhelming returns in private debt portfolios as losses mount.
4. BDCs Raise $5.3 Billion in Debt Markets to Lock In Cheap Funding
Nine BDCs raised $5.3 billion in the investment-grade debt market this month to lock in attractive borrowing costs and build a war chest ahead of reporting Q4 earnings. They’re paying roughly 200 bps over Treasuries, but for funds making loans with spreads often twice as wide, it presents a chance to exploit near-insatiable investor demand for bonds.
The amount of BDC debt outstanding hit a record high, according to Bloomberg data. As BDC portfolios have grown, firms have been able to raise larger deals and made bond investors more willing to buy in. The average spread on a Bloomberg index of US investment-grade corporate bonds touched 0.71 percentage point this week, matching the lowest level since the 1990s.
Ares Strategic Income Fund priced bonds at 1.95 percentage points over Treasuries this month, less than initial price talk of 2.2 percentage points. Bain Capital’s BDC priced at 2.35 percentage points over benchmark, also tightening from initial talk. Blue Owl Technology Finance Corp priced at a premium of 2.55 percentage points.
Why It Matters
The appetite for BDC bonds contrasts sharply with the mood of fund investors. Many non-traded vehicles saw redemption requests jump in Q4 as concerns over credit quality, interest rates hurting returns, and regulatory scrutiny spurred flight. But debt investors view BDCs less negatively than equity investors. “Debt investors in investment-grade are in a more senior position than equity investors and are being adequately compensated at current spread levels,” said David Del Vecchio at PGIM. The $5.3 billion raised this month finances the next round of lending at compressed spreads.
5. Barron’s Reports Exit Rush Is Over, Cash Keeps Coming In
Recent securities filings show investors may be calming down after publicized failures of some borrowers. Most good-sized BDCs have diverse portfolios and credit loss histories as good or better than other debt categories. Publicly traded BDCs are trading at a median of 83% of net asset value, though some like Ares Capital Corp trade at about 105% of NAV.
Blue Owl has become a lightning rod for private credit anxieties. At OTIC, redemptions totaled $527 million, or 15.4% of shares outstanding, even though the fund delivered annualized returns of nearly 11% without any non-accruals and a loss rate of 0.04%. The majority of investors came through private wealth banks in Asia.
Raymond James analyst Wilma Burdis said the tolerable level of redemptions at Blue Owl Credit Income should remove one overhang from Blue Owl Capital’s stock. The company has a profit margin of nearly 60% and has been increasing its fee earnings at a 20% annual rate, yet trades at a price-earnings ratio of 15 compared with 20 to 30 times for peers.
Why It Matters
As private credit funds deliver returns several percentage points above the high-yield fixed-income market, they’re seeing strong inflows, especially from institutional investors. “We continue to see a compelling buying opportunity for Owl,” Burdis wrote. The narrative is shifting from redemption crisis to normalization. Blue Owl honored 15.4% redemptions at OTIC and the fund didn’t break. The larger fund saw 5.2% redemptions in line with industry norms. If this represents peak stress, the model holds.
6. Pricing Pressure Builds as Covetrus Spread Widens to 650 Bps
Covetrus pricing discussions for roughly $3 billion of financing increased to about 6.5 percentage points over benchmark from earlier talks of at least 5 percentage points. CD&R and TPG are in preliminary discussions for Covetrus to buy the veterinary business of Cencora. The financing would refinance Covetrus’ $2 billion of existing debt and help fund the potential acquisition.
AC Milan owner RedBird Capital Partners struck a deal for new debt totaling around $700 million to refinance a vendor loan provided by Elliott Management. The financing was arranged by Comvest Credit Partners, a Florida-based private credit asset manager recently acquired by Manulife. As part of the transaction, Elliott’s managing partner Gordon Singer and portfolio manager Dominic Mitchell will leave AC Milan’s board.
Global private equity deal value hit an estimated $2.21 trillion in 2025, the highest level since 2021, according to PitchBook. Large private equity deals drove much of the rebound, particularly in the second half of the year.
Why It Matters
Covetrus pricing widening from 500 bps to 650 bps signals lenders demanding more compensation as leverage stacks up and credit quality questions mount. CD&R and TPG took Covetrus private in 2022 at about $4 billion valuation. Now they’re looking at $3 billion in new debt to refinance $2 billion existing and fund an acquisition. Blue Owl is already invested in the second lien, marked down to around 93 cents on the dollar as of September 30. The 150 bps spread widening reflects lender skepticism about adding more leverage to an already stretched capital structure.
7. Wealth Distribution Push Intensifies with New Product Launches
BlackRock and Partners Group launched the first joint private-markets investment of their partnership, a new separately managed account through Morgan Stanley’s wealth platform. The account combines a mix of private equity, private credit, and real asset funds. Investors can choose from three variations depending on risk preference: income-oriented, balanced portfolio, or growth-focused allocation.
The separately managed account invests in seven existing funds from BlackRock, its credit unit HPS Investment Partners, and Partners Group. The product charges fees on the underlying funds but not on the separately managed account itself. It’s the first US product allowing clients to invest across a range of private markets in one account.
Partners Group has about $56 billion of assets under management for evergreen funds. BlackRock manages about $250 billion of assets across its entire separate-account business. Traditional and alternative asset managers have raced to form partnerships and launch products to sell to wealthy individuals as many institutional backers such as pensions and endowments shun new private investments.
Why It Matters
The BlackRock-Partners Group separately managed account represents the product evolution managers need to access wealth channels. Combining private equity, private credit, and real assets in one wrapper with three risk profiles simplifies adviser adoption. BlackRock providing separately managed account expertise while Partners brings evergreen fund experience creates distribution infrastructure institutional money can’t match. The $250 billion BlackRock manages across separate accounts and $56 billion Partners manages in evergreens shows the scale opportunity as institutional allocations slow.
Deals of Note
Evermark - Ares leads $1.6B debt financing for merger of Suave Brands and Elida Beauty (Q-tips, ChapStick, Pond’s, Noxzema) backed by Yellow Wood Partners
Covetrus - CD&R and TPG in preliminary talks to buy Cencora’s vet business, pricing discussions for roughly $3B financing increased to 6.5 percentage points over benchmark from at least 5 points
AC Milan - RedBird refinances Elliott vendor loan with roughly $700M arranged by Comvest Credit Partners (Manulife), Elliott’s Gordon Singer and Dominic Mitchell leaving board
Databricks - Lined up $1.8B of new financing from private credit lenders and BSL investors
Loparex - Sounding out private credit investors for as much as $1.5B of debt to refinance first and second-lien loans
Neuraxpharm - Permira kicked off sale of German pharmaceutical company, banks and private credit firms competing to provide up to €1.5B in debt financing
Teleport - HPS invested $50M in Malaysian logistics firm, marking firm’s first Asia deal after BlackRock acquisition
The Reality Check
Blue Owl honoring 15.4% redemptions at OTIC demonstrates liquidity management executed as designed. The firm maintained $1.4 billion in available liquidity after redemptions, with net leverage at 1.05 times debt-to-equity. The larger fund seeing 5.2% redemptions aligned with peers: BCRED at 4.5%, Ares at 5.6%, Cliffwater at 5.74%. The quarterly test validated the semi-liquid structure under stress conditions.
Default rates rising from 5.4% to 5.6% with 71 borrowers defaulting in 2025 reflects credit normalization as pandemic-era lending seasons. The 9.2% default rate for privately issued rated loans compares to 5.6% across the broader 1,200-borrower universe Fitch tracks. Healthcare providers leading with 12 defaults shows sector-specific stress rather than systemic deterioration. The 18 new Q4 defaulters establishes the pace of credit events in the current environment.
PIMCO’s Stracke noting that “problems emerging at a time when the economy is about as good as it gets” highlights the importance of underwriting discipline in vintage selection. His observation about mark-to-market flagging issues early applies across credit markets, not uniquely to private debt. PIMCO’s $7 billion asset-backed finance raise and $29 billion Meta data center financing show the firm differentiating between corporate direct lending and asset-backed strategies.
BDCs raising $5.3 billion in investment-grade debt at 200 bps over Treasuries demonstrates funding arbitrage opportunities as the vehicle structure matures. Bond investor appetite remains robust despite equity market concerns, with deals from Ares, Bain, and Blue Owl tightening from initial price talk. Debt investors viewing themselves as senior and adequately compensated reflects accurate risk assessment of the capital structure.
Covetrus pricing widening from 500 bps to 650 bps as sponsors pursue acquisition financing alongside refinancing $2 billion existing debt shows lenders adjusting returns for incremental leverage. The 150 bps spread increase reflects transaction-specific dynamics rather than broader market repricing. Blue Owl’s second-lien position marked at 93 cents predated the new financing discussions.
The BlackRock-Partners Group separately managed account launch through Morgan Stanley combining private equity, private credit, and real assets addresses wealth channel demand for simplified access. BlackRock’s $250 billion in separate accounts and Partners’ $56 billion in evergreens provides operational infrastructure for multi-asset private market investing. The three risk-profile options allow customization within a unified wrapper.
Private credit navigated Q4 redemptions within established structural parameters. Funds honored withdrawals without forced asset sales, BDCs accessed funding markets efficiently, and deal activity continued across consumer products, veterinary services, and infrastructure. Default rates reflect credit cycle dynamics rather than structural failures. The asset class demonstrates resilience while markets adjust to normalized credit conditions and compressed spreads.
NICHX has applied redemption gates for several quarters now and had more than 40% of AUM requesting redemption last quarter.
Fantastic breakdown of the Blue Owl stress test, super detailed. Stracke's point about problems emerging when the economy is "as good as it gets" really underscores the vintage risk issue. I saw something similiar in 2007 when defaults started ticking up right before things got messy. The 9.2% rate on privately issued loans vs 5.6% overall is kinda the canary here.