Blackstone, a private credit storm, launches CLO financing in an attempt to ease market panic-related redemptions.

According to informed sources, Blackstone Inc., one of the world's largest alternative asset management firms, is planning to sell a portion of its $82.5 billion assets under management as part of its flagship private credit fund. As concerns about transparency, valuation, and liquidity in the nearly $2 trillion private credit industry continue to rise, Blackstone's move essentially indicates that large private credit platforms are more actively managing debt, liquidity, and diversifying sources of funding. At the same time, this significantly reduces the probability of a catastrophic event akin to the 2008 collapse in the private credit market, but increases the credibility of the industry entering a phase of bubble deflation and vulnerability reduction. Informed sources state that Blackstone's flagship private credit fund, BCRED, a Business Development Company (BDC) and one of the largest in the world, is seeking to complete a collateralized loan obligation (CLO) transaction next week. Due to the involvement of undisclosed information, these sources have requested anonymity. They further added that the proceeds will be used to repay some existing debts. In summary, BCRED intends to select a large portion of loans/credit assets it holds, package them into a structured product, and issue bonds to external investors. This structured product is typically a private credit CLO. The basic logic of a CLO is: a vehicle holds a pool of corporate loans, then issues bonds of varying risk levels to investors; the source of payment for the bonds purchased by investors is the interest and principal cash flow generated by the underlying loans held by BCRED. BCRED, or Blackstone Private Credit Fund, is defined by Blackstone's official website as an unlisted BDC, with at least 80% of its total assets invested in private credit investments, such as private loans, bonds, and other credit instruments. The website also directly states that BCRED is the largest private credit fund in the world. The "large part of the $82.5 billion supported bonds" refers to CLO bonds issued using a large basket of loans held by BCRED as underlying collateral/cash flow source. Blackstone is preparing BCRED to package a large number of private loans it holds into a new CLO, and then sell these CLO bonds to Wall Street investors to raise funds and repay some existing debts. Amid a sluggish private credit market, Blackstone employs an unusual strategy Earlier this month, facing increasing redemption requests, this Blackstone fund took an unconventional approach by requiring some senior management to jointly contribute $150 million to help meet funding needs, instead of imposing limits on investor withdrawals like some private credit peers. Earlier this month, due to a surge in redemption requests, BCRED used over $150 million of funds from about 25 senior executives, in addition to Blackstone's own capital, to meet liquidity needs. However, one source indicated that BCRED is a regular issuer of CLO assets, and this latest sale had been planned several months ago. A Blackstone representative declined to comment. This transaction highlights the increasing trend among BDCs to raise debt funds from Wall Street investors through an increasingly popular method. Last year, at least three BDCs issued private credit CLOs for the first time, including Apollo Debt Solutions BDC, Morgan Stanley Direct Lending Fund, and Kohlberg & Co LLC. CLOs package corporate loans into bonds of different sizes and risk levels. Media reports citing informed sources indicate that the largest bonds in BCRED's transaction were rated AAA with an expected spread of 1.3 percentage points. This is similar to the level seen in a transaction BCRED issued last year. Private credit risks similar to the eve of 2008? Undoubtedly, Blackstone BCRED's issuance of a new private credit CLO at this time is a major signal of cautiousness in the face of fears of a private credit market collapse. If the market is truly on the edge of a financing freeze similar to the eve of the 2008 financial crisis, large BDCs like BCRED will have little room to continue packaging and selling underlying loans to Wall Street institutional investors. This deal being led by Blackstone, planned to be completed early next week, with the largest AAA tranche expected to have a spread of only 130 basis points, indicates that top-tier issuers still retain access to public financing channels and securitization capabilities. Blackstone's move seems to be telling market investors that while liquidity is tight, it has not been cut off. The private credit market has not reached a stage where there are no takers. In the previous quarter, BCRED experienced redemptions equivalent to 7.9% of its shares, and saw panic-like net outflows of $1.7 billion, a clear sign of a reversal in private credit sentiment. Now, by repaying some existing debts through a new CLO, it essentially shows that large private credit platforms are leaning towards actively managing debt, liquidity, and diversifying funding sources, with industry leaders beginning to manage their balance sheets according to "stress scenarios." Wall Street giant Morgan Stanley recently stated that with the rapid development of artificial intelligence disrupting global software industry profit growth prospects, default rates in the direct lending sector will quickly rise to 8%. Morgan Stanley suggested that within major global industries, the software industry's loan credit fundamentals face significant challenges with high leverage and low coverage levels. If the pessimistic narrative of "AI disrupting everything" continues to dominate market risk pricing, the trajectory of private credit default rates is likely to significantly rise overall, but more akin to "structural ascendancy in AI-disrupted sectors like the software industry," rather than a "full-scale meltdown of the entire private credit market." While some market observers compare the current crisis in the private credit market to the signs and signals of the subprime crisis on the eve of the 2008 financial crisis, analysts from Morgan Stanley generally believe that although the wider risks of seepage in the private credit sector are significant, these risks are not systemic major risks. The current market threats that could have spillover effects on the broader market are very limited.