Private Credit News Weekly Issue #77: Blue Owl Retreats, CLO Tests Fail, and Gundlach Sees "Garbage Lending"

BDC merger collapses after investor backlash while BlackRock waives fees on troubled CLO and lenders swap $1 billion of 48Forty debt for equity

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Blue Owl Capital scrapped a planned merger of two private credit funds last week after scrutiny over potential investor losses sent shares tumbling to 2023 lows. The reversal marks a rare stumble for a firm long held up as the poster child of the private credit boom.

“There’s no emergency here,” co-founder Craig Packer said on CNBC minutes after markets opened Wednesday, blaming “negative articles” about private credit for the stock decline. The firm had planned to fold its $1.7 billion private Blue Owl Capital Corp. II into its $17.1 billion publicly traded OBDC. But with OBDC trading at a 20% discount to net asset value, investors in the smaller fund would have suffered immediate paper losses on a NAV-for-NAV exchange.

Meanwhile, a BlackRock portfolio of private credit loans performed so poorly that the money manager waived some management fees, a rarity in the credit world. The BlackRock Baker CLO 2021-1 breached its over-collateralization test in October, meaning loan values dropped too low relative to highest-rated bonds. The CLO holds debt to Renovo Home Partners, which BlackRock wrote to zero after marking at par weeks earlier, plus loans to Pluralsight and bankrupt Astra Acquisition Corp.

The stress signals keep multiplying. Private credit lenders including Antares Capital, KKR, BlackRock, and Carlyle are set to take control of pallet company 48Forty Solutions, swapping approximately $1 billion of debt for equity roughly a year after providing $1.75 billion to support Summit Partners’ acquisition. FS KKR marked its 48Forty loan at 46 cents in Q3, down from 86 cents a year ago.

UBS strategists now project private credit defaults could climb as much as 3 percentage points in 2026, outpacing anticipated increases of 1 percentage point for leveraged loans and high-yield bonds. The bank flagged AI exposure as a double-edged sword: if AI falters, as many as 30% of newer private credit-backed firms could be impaired, while “widespread enterprise disruption” from AI success could hit 40% of assets.

DoubleLine’s Jeffrey Gundlach didn’t mince words on the Odd Lots podcast, calling private credit “garbage lending” and recommending a 20% cash position to hedge against a market implosion. “The next big crisis in the financial markets is going to be private credit,” Gundlach said. “It has the same trappings as subprime mortgage repackaging had back in 2006.”

Yet capital keeps flowing. JPMorgan wrote a $20 billion check for the Electronic Arts acquisition, the largest-ever single-bank commitment for a leveraged buyout. Goldman Sachs Private Credit Corp. reopened the BDC bond market with a $500 million offering that priced 17.5 bps inside initial guidance, suggesting appetite remains despite the noise.

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Key Market Themes

1. Blue Owl Scraps BDC Merger After Investor Backlash

Blue Owl abandoned plans to merge its $1.7 billion private Blue Owl Capital Corp. II into its $17.1 billion publicly traded OBDC after scrutiny arose over potential losses for some investors. With OBDC trading at a 20% discount to NAV, investors in the smaller fund would have absorbed immediate paper losses on a NAV-for-NAV exchange.

The reversal represents a rare misstep for Blue Owl, which has pitched itself as a one-stop financing shop competing with banks and the largest alternative asset managers. Co-founders Doug Ostrover, Marc Lipschultz, and Michael Rees are each billionaires according to the Bloomberg Billionaires Index, their wealth growing alongside private credit’s expansion.

The private fund had seen a surge in redemption requests, with approximately $60 million approved in Q3 exceeding preset limits. Blue Owl suspended redemptions when announcing the merger but plans to reinstate the program in Q1 2026. Management now has until April to find a solution or will consider liquidating the vehicle.

Market Signal

According to co-founder Craig Packer, “we’ve never had a period where we didn’t meet every penny” of redemptions. The firm announced a $200 million share repurchase program around the merger announcement. Blue Owl says it will work with the board on alternatives including listing the fund or selling assets.

2. BlackRock CLO Fails Tests as Troubled Loans Mount

A BlackRock portfolio of private credit loans performed poorly enough that the money manager waived some management fees. The BlackRock Baker CLO 2021-1 breached its over-collateralization test in October, meaning loan values dropped too low relative to highest-rated bonds.

The fee deferral, which included cash from the deal’s riskiest tranches, helped cure the October breach. But it’s not the first time senior bonds in this CLO failed OC tests. The higher-rated debt tripped its test in October 2024 and has cured and failed multiple times since. The riskiest bonds have continuously failed OC tests since April 2024, prompting S&P to downgrade the junior D and E tranches in December citing “deteriorated credit quality.”

The CLO holds loans to several troubled companies including Renovo Home Partners, which filed for Chapter 7 earlier this month. BlackRock revised Renovo’s debt value to zero after marking it at 100 cents weeks earlier. The CLO also holds debt to Pluralsight, which lenders took ownership of last year, and Astra Acquisition Corp., which filed for Chapter 11 in September.

Broader Context

The CLO launched in late 2021 at roughly $495 million into a red-hot private credit market where funds were relinquishing key safeguards and piling on leverage. BlackRock has other middle-market CLOs including TCP Waterman and TCP Whitney deals that have been among top performers according to Preqin data.

3. Lenders Swap $1 Billion of 48Forty Debt for Equity

Private credit lenders including Antares Capital, KKR, BlackRock, and Carlyle are set to take control of pallet company 48Forty Solutions roughly a year after providing $1.75 billion to support Summit Partners’ acquisition. The proposed restructuring would shed approximately $1 billion of liabilities from 48Forty’s balance sheet as lenders swap debt for equity stakes.

As part of the proposal, lenders including Antares will inject around $75 million of new debt. The company, which was already paying most interest in kind, stopped paying interest altogether in August. FS KKR Capital Corp. marked down its 48Forty loan to approximately 46 cents in Q3, from around 86 cents a year ago.

Plans to cut costs could include shuttering multiple pallet recycling plants, though no decision on closures has been made. 48Forty currently operates 73 plants across the US and Canada. Lenders are also appointing a new board: Antares and KKR each get two seats, Carlyle and BlackRock jointly agree on one, first-lien lenders collectively agree on another, with the final seat reserved for the CEO.

Industry Pattern

Debt-for-equity swaps are becoming more frequent as borrowers struggle with liabilities. While swaps can produce upside, they offer more unpredictable returns than direct loans designed to provide stable income over time.

4. UBS Projects Defaults to Climb 3 Percentage Points

UBS strategists forecast private credit defaults could rise as much as 3 percentage points in 2026, outpacing anticipated increases of 1 percentage point for leveraged loans and high-yield bonds. Credit stress is expected to rise as borrowers grapple with inflation, higher interest costs, and a weakening consumer.

Payment-in-kind loans are a key indicator of rising strain, according to the report. The rise in PIK suggests “pressure on firms to preserve liquidity amid a higher interest rate and slower growth environment,” strategists led by Matthew Mish wrote. Separately, Moody’s reported that 52% of PIK instruments analyzed were issued as part of LBO funding, enabling more aggressive capital structures and supporting “hidden” leverage.

UBS flagged AI exposure as particularly concerning. If there’s a downturn in AI, as many as 30% of newer firms with private credit could be impaired. Conversely, if AI drives “widespread enterprise disruption,” as much as 40% of private credit assets may take a hit.

Systemic Footprint

Private credit now counts for 11% of GDP and is increasingly tied to banking and insurance systems, UBS noted. Banks with assets over $10 billion have more than $2.2 trillion of exposure to loans to nonbank financial institutions, a figure expected to keep rising.

5. Gundlach Calls Private Credit “Garbage Lending”

DoubleLine Capital founder Jeffrey Gundlach recommended a 20% cash position to hedge against a market implosion he sees brewing in unsafe lending to private companies and overblown AI hopes. On the Odd Lots podcast, Gundlach called out private credit for engaging in “garbage lending” that could tip global markets into their next meltdown.

“The next big crisis in the financial markets is going to be private credit,” Gundlach said. “It has the same trappings as subprime mortgage repackaging had back in 2006.” He drew parallels to “inflated” AAA ratings of subprime mortgages and warned that private managers may have unrealistic assessments of loan values.

Gundlach pointed to BlackRock’s Renovo loans, which went from 100 cents to zero within weeks, as emblematic of the problem. “There’s only two prices for private credit, 100 or zero,” he said. “It looks like it’s safe because you could sell it any day, but it’s not safe because the price at which you sell will be gapping lower day after day.”

Retail Risk

The industry’s push into retail investors has created the “perfect mismatch” between liquidity promises and illiquid assets, according to Gundlach. The risk is that redemption waves could cause spiraling losses if funds can’t sell assets quickly.

6. JPMorgan’s Mega Checks Dominate Buyout Financing

JPMorgan wrote a $20 billion check for the Electronic Arts acquisition, the largest-ever single-bank commitment for a leveraged buyout. The bank also committed $17.5 billion to help Warner Bros. Discovery split in two and led an $8 billion effort for 3G Capital’s Skechers acquisition.

After Silver Lake’s Egon Durban called CEO Jamie Dimon seeking assurance the bank had conviction to commit necessary funds, it took just 11 days to finalize the EA deal. The fee JPMorgan and banks that later joined commanded: approximately $500 million.

JPMorgan is on track to take the top spot on buyout financing league tables this year. With leading investment bankers forecasting a potential record M&A year in 2026, all eyes are on the bank’s next moves. With $4.6 trillion in assets, the firm is about a third larger than closest rival Bank of America and could theoretically have nearly $50 billion of exposure to one entity based on US regulations.

Competitive Dynamics

According to Kevin Foley, JPMorgan’s global head of capital markets, “if we’re in for a penny, we’re in for a pound. We either feel good about a deal or we do not.” The bank dialed back leveraged finance underwriting in 2022, sidestepping hundreds of millions in losses peers took on mega buyouts like Citrix and Nielsen.

7. Fortress: Stress Will Separate Winners from Losers

Fortress Investment Group’s co-CEOs expect more volatility and higher default rates to differentiate good from bad in an industry that hasn’t been fully tested by the economic cycle. “It’s really hard to differentiate yourself when there’s no defaults,” co-CEO Drew McKnight said. “When you start to have some failures in a typical economic cycle, you’re going to start to see some variance in returns.”

Credit blowups like Tricolor and First Brands indicate some competitors are getting ahead of themselves and not doing enough due diligence, McKnight added. He expects more volatility amid economic, geopolitical, and interest rate uncertainty.

The firm isn’t eager to lend to data centers despite the trend sweeping private credit markets. “When we write huge checks, they have to be our highest conviction ideas,” McKnight said, flagging worries about large spending needs and uncertainty about how long the technology will endure. Instead, Fortress focuses on companies providing services to the AI industry, including 30 mobile gas-powered turbines acquired in January that can be made available to customers building data centers.

European Expansion

Fortress is looking to expand its European non-performing loan business in Germany and France, where it sees real estate borrowers coming under strain. The firm is considering opening a Frankfurt office and may explore acquiring a German loan servicer. European NPL ratios currently stand at approximately 2%, though Germany and France are grappling with ratios above the EU average.

Deals of Note

• Quirch Foods - Ares and Regions Bank lead $800M private credit refinancing ($725M term loan plus $75M delayed draw) for Palladium-backed food distributor. Moody’s recently downgraded the company deeper into junk citing “persistent reduced operating performance” with leverage at approximately 7.2x EBITDA

• Key Group - Goldman Sachs Asset Management, Macquarie, and Apax Credit provide approximately £335M to Permira-backed education software provider at 450 bps over Sonia, among the tightest financing ever seen in European direct lending

• 48Forty Solutions - Antares, KKR, BlackRock, and Carlyle swap approximately $1B of debt for equity and inject $75M new debt into pallet company roughly a year after providing $1.75B for Summit Partners’ acquisition

• Overseas Adventure Travel - Fortress provides $220M loan as part of $240M credit facility

• Chandra Asri - KKR provides $750M financing to support Indonesian company’s growth strategy and $1B acquisition of Esso-branded fuel stations from ExxonMobil in Singapore

• Goldman Sachs Private Credit Corp. - Issues $500M senior unsecured five-year notes at 245 bps over Treasuries, first BDC dollar offering in a month following First Brands and Tricolor concerns

• Forgent Power / Central Moloney - Jefferies shopping up to $1.2B combined in leveraged loans to refinance private credit debt for power infrastructure companies at 300-375 bps over SOFR

What It Means

Blue Owl scrapping its BDC merger after investor backlash demonstrates what happens when market stress meets structural complexity. The math wasn’t complex: merging a private fund into a vehicle trading at 20% discount to NAV meant immediate losses for one set of investors. That Blue Owl thought it could execute the deal until “negative articles” intervened suggests management misjudged how closely the market is watching.

The BlackRock Baker CLO failing its OC test and requiring fee waivers shows stress manifesting through structures designed to be self-correcting. When a CLO holds Renovo debt that went from 100 cents to zero in weeks, plus loans to bankrupt Astra and lender-owned Pluralsight, the self-correction mechanism kicks in by redirecting cash from risky tranches to safer ones. The junior bonds have continuously failed OC tests since April 2024. That’s not a one-time breach. That’s a portfolio under sustained pressure.

The 48Forty situation, where lenders swap $1 billion of debt for equity roughly a year after providing $1.75 billion for an acquisition, captures the current cycle’s dynamics. Summit Partners bought the business in 2022 with private credit financing. By 2025, the company stopped paying interest entirely and lenders are taking the keys. FS KKR marking the loan at 46 cents from 86 cents a year ago shows how quickly valuations move once performance deteriorates.

UBS projecting private credit defaults to rise 3 percentage points versus 1 percentage point for leveraged loans and high-yield provides a quantified outlook for relative stress. The bank’s AI analysis is particularly notable: 30% impairment risk if AI falters, 40% if AI succeeds too disruptively. Either scenario creates problems.

Gundlach calling private credit “garbage lending” with “only two prices, 100 or zero” echoes what the Renovo and 48Forty marks demonstrate: valuations hold until they don’t, then move violently. His comparison to 2006 subprime is provocative but the mechanics he describes, illiquid assets backing liquidity promises, are real.

JPMorgan writing $20 billion checks for EA while private credit CLOs fail OC tests captures the bifurcation. Banks are competing aggressively for credits they want while avoiding those they don’t. Private credit holds what’s left. Fortress’s McKnight is right that stress will separate winners from losers. The separation is already underway.