(Bloomberg) — In the eye of the private credit storm, outlooks called for the $1.8 trillion market to either bring about the next financial crisis or for the pressure to quickly peter out.
Nearly half a year later, it seems the truth lies somewhere in the middle.
Publicly traded business development companies, which pool direct loans and are listed on stock exchanges, have been reporting their second-quarter results in recent days, providing the clearest state-of-play yet for the industry. That’s because unlike their non-traded peers, which are mired in a multibillion-dollar backlog of redemption requests, these vehicles have set pools of money, putting the focus squarely on their loan valuations and portfolio credit quality.
While each fund is different, BDCs from major managers like Ares Management Corp., Blue Owl Capital Inc. and BlackRock Inc. suggest a renewed focus on getting the house in order, whether by trimming bad investments, reducing the share of non-accruals or lowering leverage. They’re also trying to avoid what some funds had to resort to last quarter: cutting their dividends.
The results have largely buoyed the shares of publicly traded BDCs, virtually all of which saw their prices hit multi-year lows at some point this year. On Thursday, though, BlackRock’s beleaguered fund and Blue Owl’s technology-focused vehicle posted their biggest gains in months.
The market environment in “the second quarter was much more stable than the first,” Blue Owl co-president and head of credit, Craig Packer, said on an earnings call Thursday.
Packer struck an optimistic tone and encouraged investors to think longer-term. “The investment backdrop has improved meaningfully from where we started the year,” he said.
But the firms have yet to point out a clear path toward renewed growth for direct lenders, at a time when some of the major private credit firms have already pivoted away from the space toward higher-rated borrowers and larger deals backstopping the building of AI infrastructure.
Below is a snapshot of the results of some of the largest publicly traded BDCs that reported key second-quarter metrics:
Ares Capital Corp. (ARCC)
Ares’ $29 billion flagship private credit fund reported a rise in troubled investments in the second quarter, as the industry continues to grapple with exposure to businesses vulnerable to advances in AI.
Ares Capital Corp., the largest publicly traded BDC, said loans on non-accrual status — typically meaning the borrower has missed debt payments — rose to $708 million. It was up 15% from the previous quarter and 26% year-over-year. Still, at roughly 2.4% of the portfolio at cost, they remain below the BDC’s historical average of about 3% since the global financial crisis, ARCC added.
ARCC is maintaining its dividend at 48 cents for the third quarter, the same level it has paid for years.
Blackstone Secured Lending Fund (BXSL)
Net asset value at Blackstone’s publicly traded private credit fund fell to $25.53 a share, down from $26.26 in the first quarter. That missed the $26.19 average estimate from analysts tracked by Bloomberg.
The $13.4 billion fund said net investment income was little changed at $174 million from a year earlier. Profit dropped 94% in the second quarter as the value of holdings declined, though the performance of loans steadied.
The fund didn’t move any additional loans to non-accrual status in the period. Loans on non-accrual status amounted to 3.6% of the portfolio at cost, the company said, better than the 4.73% estimated by two analysts.
BlackRock TCP Capital Corp. (TCPC)
BlackRock Inc. decided to take its most aggressive step yet to tackle longstanding problems at its private credit fund. TCP Capital Corp. said it’s selling nearly half of its loan portfolio to a vehicle backed by secondaries specialist Pantheon.
Under the deal, TCPC will shift 48% of its debt portfolio, the fund said Thursday. The continuation vehicle will hold 95% of the equity interests of those investments, while TCPC will keep the remaining 5%. The vehicle will hold $523 million of investments across 78 portfolio companies.
TCPC’s net asset value will drop about 10.4%, or 68 cents per share, following the transaction.
The fund also said that its board hired Keefe, Bruyette & Woods to consider strategic alternatives for its future, including asset sales and combinations in public or private markets.
Blue Owl funds (OBDC, OTF)
Two private credit funds managed by Blue Owl Capital bought back a combined $90 million of shares, marking a consecutive quarter of repurchases as the asset manager sought to steady the vehicles’ value.
The firm also cut the net asset value of its main publicly traded private credit vehicle, Blue Owl Capital Corp., by 1% to $14.26 a share compared with the first three months. The drop reflected markdowns on a small number of names, though those were offset by the repurchase of roughly $35 million of stock in the vehicle known as OBDC, Blue Owl said.
Non-accruals ticked up to 2.8% of the portfolio at cost, compared with 2% in the prior period. The vehicle saw $747 million of repayments, compared with just $319 million of new commitments.
The value of the technology-focused Blue Owl Technology Finance Corp. was little changed at $16.48 a share. The fund repurchased $55 million of stock in the period.
FS KKR Capital Corp. (FSK)
The troubled private credit fund managed by KKR & Co. and Future Standard reported a decline in asset value but better loan performance as efforts to shore up the fund took hold. In its first earnings since KKR announced a $300 million injection and a share repurchase program, FS KKR Capital Corp. showed signs of stabilization.
The $11.4 billion credit fund’s share of non-accruals declined to 3.8% of the portfolio’s fair value from 4.2% three months earlier. Losses narrowed to 13 cents a share, from a $1.57 loss the three months prior and a 75 cent loss a year ago. Net asset value fell to $18.30 a share in the second quarter, shy of Wall Street’s estimates.
Oaktree Specialty Lending (OCSL)
Oaktree Capital Management cut the number of troubled investments in its publicly traded BDC. Oaktree Specialty Lending Corp., which oversees approximately $2.7 billion in assets, reported six investments on non-accrual status at the end of the quarter. Those investments represented 4.2% of the debt portfolio at cost and 1.8% at fair value.
The reduction marked an improvement from the previous period, when the BDC had 10 non-accrual investments, representing 5.9% of the debt portfolio at cost and 2.6% at fair value. The fund declared cash distributions of 33 cents a share, with adjusted net investment income of 37 cents a share.
MidCap Financial Investment Corp. reported a net investment gain of 40 cents a share for the second quarter, up from 39 cents for the same period a year earlier, beating analysts’ estimates. Net asset value for the Apollo Global Management Inc. fund fell to $13.37, from $14.75 a year ago, the fund said in a filing Thursday. Loans marked as non-accrual declined to about 4.6% of the portfolio at cost for the quarter ended June 30, from 5.3% three months earlier.
The fund said its software exposure rose from 11% to 12% at fair value compared with the prior quarter. Dividend was steady at 31 cents.
Sixth Street Specialty Lending (TSLX)
The $3.5 billion fund managed by Sixth Street Partners reported net investment income that edged out Wall Street’s estimates. Net investment income at Sixth Street Specialty Lending fell to 43 cents a share in the second quarter from 54 cents a year ago.
The fund, which cut its dividend in the prior period, said it will keep its dividend at 42 cents a share for the third quarter.
–With assistance from Laura Benitez, Preeti Singh, Silla Brush, Allison McNeely, Silas Brown, Kat Hidalgo and Aaron Weinman.
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