Storm subsided? Wall Street verbally stabilizes + PIMCO steps in to support Blue Owl (OWL.US), leading the private credit sector in a counterattack.

High-level executives from Wall Street banks collectively reassured the private credit market, and the move by The Pacific Investment Management Company (PIMCO) to purchase bonds provided a boost, causing Blue Owl Capital Inc. (OWL.US) stock to experience its largest two-day increase since November 2022, leading to a collective rebound in the private credit sector. Data shows that Blue Owl, at the center of the private credit storm, saw its stock price surge by around 17% over the past two trading days, closing at $9.92 on Wednesday. Just last Friday, the stock had hit a historical low due to concerns about the $1.8 trillion private credit market and its exposure to the software industry. Similar institutions like Ares Management Corp. (ARES.US), Apollo Global (APO.US), and KKR (KKR.US) also followed the rebound, but their increases were not as significant as Blue Owl's. The S&P 500 index also hit a new all-time high this week. Bank executives and Treasury Secretary allay fears, private credit sector shows resilience This week, as major U.S. banks such as JPMorgan Chase (JPM.US), Citigroup (C.US), and Wells Fargo & Company (WFC.US) released their financial reports, their executives all released reassurances that the private credit exposures of their banks are manageable, urging the market to remain calm. Treasury Secretary Janet Yellen also publicly stated that there are no signs of systemic issues in the industry. Analyst Michael Kaye pointed out that the banks' positive comments on private credit may have contributed to the recent rally, along with an increase in risk appetite due to developments in the Iran situation. This, combined with the pressure on stocks like Blue Owl, further fueled the upward momentum. Wall Street banks disclose exposures: total over a trillion but not deemed "systemic" Data shows that among the six largest U.S. banks that have reported in their quarterly earnings, three have disclosed their total financing exposures to private credit or related loans, totaling around $108 billion. JPMorgan Chase's private credit exposure is $50 billion, Citigroup's exposure to non-bank Financial Institutions, Inc. is $118 billion (with $22 billion classified as private credit), and Wells Fargo & Company's corporate debt financing (primarily in private credit) balance is $36.2 billion, with a focus on industries like commercial services, software, and healthcare. Despite the substantial exposures, JPMorgan Chase CEO Jamie Dimon explicitly stated during an analyst call that he does not believe the private credit risks are systemic. Goldman Sachs Group, Inc. CEO David Solomon also mentioned that negative sentiment towards private credit has been fueled by media reports, but Goldman Sachs Group, Inc.'s "institutional fundraising structure and wide asset acquisition channels allow it to continue to invest patiently and selectively." BlackRock, Inc. CEO Larry Fink believes that the demand for private credit products is "structural," stemming from banks' market exits after the 2008 financial crisis and the rise in global debt. He noted that while retail investors may be retreating, institutional demand is "accelerating." PIMCO secures $400 million bond offering, breaking the ice in BDC debt financing Another key support for market confidence comes from The Pacific Investment Management Company (PIMCO), one of the largest bond investment firms globally. Reports indicate that on Monday, PIMCO acquired the entire $400 million unsecured bond offering from a publicly listed business development company (BDC) under Blue Owl, Blue Owl Capital Corp. (OBDC.US). This marks the first unsecured bond market financing for BDCs in over a month. The next day, a BDC under Goldman Sachs Group, Inc. issued $750 million in bonds. Market expectations are that more private credit funds will try issuing bonds for financing in the coming days. It is worth noting that the yield offered by OBDC's bond issuance is approximately 20 basis points higher than its existing bonds, showcasing an additional yield known as the "new bond discount," far exceeding the average discount of 4 basis points for corporate bonds this year. This highlights that issuers still need to offer higher premiums to investors amid recent market volatility. Moody's Corporation has rated the bonds as Baa2, and S&P Global, Inc. rated them as BBB-, both being the lowest investment-grade ratings. AI impact on software loans remains a concern, analysts divided between bullish and bearish outlooks Despite the short-term stock rebound, controversy surrounding Blue Owl persists. Since last summer, the company's stock price has halved and has been hovering around the $10 mark recently. The core concern lies in the potential disruptive impact of artificial intelligence (AI) tools on software company borrowers in its private credit portfolio. In the first quarter, one of its large non-traded credit funds even faced redemption requests exceeding 20% of its holdings. Raymond James analyst Wilma Burdis recently conducted an in-depth review of Blue Owl's software loan portfolio, concluding that AI does not pose an immediate credit loss threat. Working in collaboration with Raymond James' software industry analyst, she examined around $12 billion in software company loans from Blue Owl's five funds (accounting for 16% of the total loan amount). The results showed that while around 12% of loans showed widening spreads, indicating some concerns, around 40% of loans showed narrowing spreads, suggesting an improvement in the credit conditions of borrowing companies. After evaluating 10 representative software companies, Burdis identified Smartsheet, a project management software company, and Sitecore, a website marketing software company, as facing higher AI substitution risks. She maintains a "strong buy" rating on Blue Owl with a $20 target price, suggesting a doubling potential from the current price. However, UBS Group AG analyst Michael Brown has consistently believed that market expectations for Blue Owl have been too high since assuming his position last fall. In a report on Monday, he reiterated a "neutral" rating with a $9 target price, foreseeing disappointment for investors as Blue Owl's cost growth increases due to Fed rate cuts and fundraising obstacles. According to a report released by Fitch Ratings last month, the default rate among U.S. private credit borrowers is currently at a record high of 9.2% by 2025. As costs rise for BDCs borrowing from banks, the double-digit high return rates from their loan extensions are shrinking. JPMorgan Chase CFO Jeremy Barnum candidly admitted during a media conference call, "Clearly, if there is a large-scale credit cycle accompanied by a significant rise in default rates, the entire system will suffer some losses." The bank reportedly adjusted some private credit fund collateral values last month in response to the software industry turmoil. Additionally, Michel Khalaf, CEO of MetLife, Inc., stated in Washington this week that cracks are beginning to appear in the private credit sector, although he clarified that this is not a sign of a bursting bubble.