Saba Capital, the scourge of UK investment companies, has joined efforts to throw a lifeline to investors stuck in three US listed private credit funds run by Blue Owl which have been hit by the recent sell-off in software companies.
Saba, the New York-based activist hedge fund, has joined with Cox Capital Partners, a provider of liquidity to distressed investment funds, to offer cash exits to investors in the Blue Owl Capital Corporation II (OBDC II), Blue Owl Technology Income Corp (OTIC) and Blue Owl Credit Income (OCIC).
On Friday they said they had given the business development companies (BDCs) 10 days’ notice last Tuesday of their intention to offer tender offers to shareholders in the loan funds.
These would be priced at a discount of 25%-30% discount to net asset value and enable shareholders to get out more of their money from funds that have suffered several quarters of net outflows, forcing Blue Owl to restrict sales by remaining investors.
Last week Blue Owl, which is also based in New York, agreed to sell $1.4bn of direct company loans at 99.7% of par value to four North American pension funds and insurers.
OBDC II intends to use the proceeds to return around 30% of net assets to shareholders through a payment of $2.35 per share before 31 March.
These sales included debts and lending commitments of $600m from OBDC II, $400m OTIC and $400m from OBDC accounting for 34%, 6% and 2% of their total commitments respectively.
Blue Owl said these sales consisted of 97% senior secured debt investments with an average size of $5m in 128 portfolio companies across 27 industries, the largest sector exposure being internet software and services at 13%.
Blue Owl is one of several leading private credit lenders, including Apollo, Ares, Blackstone and KKR, which have enjoyed rapid growth in lending to medium-sized unlisted businesses that are underserved by banks.
Tapping long-term capital from pension funds and insurance companies, specialist lenders like these have advanced $2trn to US companies and $3.5trn globally at high interest rates, surpassing both US high yield bonds and leveraged loans. The loans are often linked to private equity backed management buyouts.
The sector has been under scrutiny since last September when First Brands, a group of auto parts supply companies, went bust with liabilities estimated between $10bn and $50bn. Tricolor, a US subprime auto lender, also filed for bankruptcy following allegations of a $900m fraud.
In a paper on private credit last month, Troy multi-asset fund manager Fergus McCorkell noted the growing reliance on the IT sector on private credit to fund the roll-out of data centres supporting the boom in artificial intelligence. He estimated debt markets would need to fill half of the $3trn capital expenditure Morgan Stanley thought was required, saying “private credit is expected to produce the majority”.
McCorkell said this fed into the cautious market view of Troy, which manages the defensive Personal Assets (PNL) investment trust, as “we see potential for sentiment and liquidity risks to spill over to wider markets”. He said “if investors do start to worry about AI, or private credit, or something else, it is their more liquid assets, such as listed equities, that they may rush to sell first.
“We would highlight that the few parts of the private credit market offering semi-liquid or publicly traded vehicles have recently seen selling pressure rise notably,” he said in reference to the problems at Blue Owl.
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