Defaults, bad debts, and redemption waves are "rising and falling," and America's "trillion-dollar private credit story" is collapsing

The U.S. private credit market—a trillion-dollar sector once touted by Wall Street as a "safe haven" and stable source of income for individual investors—is facing a dual blow from deteriorating fundamentals and collapsing confidence, leading to asset revaluation that is piercing the industry's prosperity bubble.

As the latest footnote to this crisis, private credit giant Blue Owl Capital recently withdrew from negotiations to finance Oracle's $10 billion AI data center project due to risk considerations. This news quickly triggered market panic over the potential break in the large-scale infrastructure financing chain. The incident not only exposed a fundamental reversal in the credit market's attitude towards the aggressive capital expenditures of tech giants but also directly pressured Oracle's stock price, causing fluctuations in its main partners and the overall tech sector.

This financing setback is not an isolated case but a microcosm of the risk spreading throughout the private credit industry. With rising default rates and borrower pressures in a high-interest-rate environment, top asset management firms, including KKR and BlackRock, are facing a multifaceted onslaught of plummeting stock prices, surging bad debts, and redemption pressures in their business development companies (BDCs) aimed at individual investors.

This turmoil poses a test for the entire private credit industry, which exceeds $2 trillion in scale. Previously, this sector primarily catered to large institutional investors and wealthy individuals, but the plight of BDCs illustrates the potential costs when individual investors—who often exit at the wrong time—enter this market.

Moreover, JPMorgan CEO Jamie Dimon warned that "when you see one cockroach, there may be more," implying systemic risks in the $1.7 trillion private credit market. This warning now seems to be coming true one by one.

$10 Billion Financing Falls Through: Blue Owl's "Emergency Brake"

Wall Street Journal previously mentioned that Blue Owl Capital decided to no longer support Oracle's $10 billion data center project in Michigan, becoming the trigger for market anxiety. According to sources cited by the Financial Times, although Oracle insists that negotiations are proceeding as planned and has selected other partners, the core reason for Blue Owl's withdrawal lies in the changing market sentiment, where lenders began to demand stricter leasing and debt terms, raising concerns about project execution risks and Oracle's rising debt levels.

This incident directly reveals the fragility of the funding chain for AI infrastructure construction. Previously, private equity firms like Blue Owl typically built facilities by investing their own funds and raising billions in debt, leasing them to tech giants like Oracle. However, with the breakdown of negotiations, this reliance on specific private equity capital partners for off-balance-sheet financing is facing severe challenges. Analysts point out that when private credit institutions start to say "no" to AI infrastructure projects, the sustainability of the entire AI investment cycle will face significant questions. As a result, Oracle's five-year credit default swap (CDS) costs have surged to their highest level since 2009

BDC Sector Plummets: A "Nightmare" for Retail Investors

In the broader public market, Business Development Companies (BDCs), which primarily serve individual investors, are experiencing a painful year.

According to The Wall Street Journal, despite the S&P 500 index rising about 16% this year, many large BDC stocks, including FS KKR Capital, have seen double-digit declines in their share prices. An ETF from VanEck that tracks BDC stocks has fallen nearly 6% year-to-date, in stark contrast to the market's rise.

For a long time, Wall Street fund managers have been working to incorporate private credit products into 401(k) plans, promoting the "democratization" of the private market to attract retail investors. BDCs provide high-interest loans to lower-rated mid-sized companies and pay out income as dividends to investors, with assets under management more than doubling since 2020 to approximately $450 billion.

However, this once-popular investment product is now severely punishing investors trying to exit at the wrong time. As interest rate fluctuations affect income expectations and credit quality deteriorates, these tools, once seen as providing stable cash flow, are facing a reassessment of their value.

Bad Debts and Scandals: "Cockroaches" in Giant Financial Reports

Despite BDC managers claiming that most investments remain solid, the deterioration in data cannot be ignored.

According to research from Raymond James, the stock price of FS KKR Capital, a BDC under KKR, has fallen about 33% this year. Most concerning is that its non-performing loans include the fund's largest single holding, a $350 million investment in the clean company Kellermeyer Bergensons Services, which accounts for more than 2% of the fund's assets.

As of September, FS KKR Capital's non-performing loan rate has risen from 3.5% in January to about 5%, with 14.4% of its income coming from "payment-in-kind" (PIK) rather than cash, which is often a signal of cash flow stress for borrowers.

A similar predicament has also emerged at BlackRock. A BDC managing about $1.8 billion in assets reported in September that 7% of its loans were in default. Previously, the fund had recognized losses on its $11 million loan to home repair company Renovo Home Partners after it entered liquidation, even though BlackRock had valued it at face value just weeks before the company's bankruptcy.

Additionally, the scandal involving automotive parts supplier First Brands, which is suspected of fraud and bankruptcy, has also impacted Great Elm Capital, which holds a significant amount of its debt, leading to substantial unrealized losses for the latter.

Liquidity Dilemma: Valuation Inversion and Redemption Issues

In addition to deteriorating credit quality, liquidity crises and valuation disputes are also key factors accelerating the market collapse.

Blue Owl's failed attempt to merge its private BDC aimed at individual investors with publicly traded BDCs is a typical case. According to The Wall Street Journal, due to publicly traded BDCs trading far below their net asset value (NAV) and private funds facing redemption pressures, Blue Owl had hoped to resolve the issue through the merger However, after the market raised strong doubts about the transaction and the stock price further fell to 14% below its net asset value, Blue Owl was forced to cancel the merger deal. This highlights a structural flaw in private credit products: during market downturns, illiquid private assets are difficult to price, and once this pricing becomes disconnected from the public market, panic redemptions by investors become unavoidable.

For retail investors attracted by high dividends, the current situation not only means shrinking returns but also a significant uncertainty regarding the safety of their principal