All Hell Breaks Loose In Private Credit

We thought that Blue Owl's recent unprecedented gating of its biggest retail-focused private credit fund would mark peak chaos for the $1.8 trillion industry for at least a few weeks. We were very wrong.

The biggest news of the week is that the private credit crisis has now jumped across the Atlantic, and as we reported overnight UK private credit lender, Market Financial Solutions (MFS) which specializes in housing bridging loans and which is a mutant melange of all the worst traits of both Tricolor and First Brands - last year's Private Credit implosion superstars - collapsed virtually overnight having previously attracted backing from firms such financial giants as Barclays, Apollo’s Atlas SP Partners unit, Jefferies (which is now two for two after its participation in the First Brands bankruptcy) and TPG. This was the latest crisis to hit both banks and direct lenders, and put a fresh spotlight on asset-based financing, although it's not like the spotlight had been off it.

And as more details about the collapse start to emerge, today we learned that a worst-case scenario is unwinding after some MFS creditors warned there may be a £930 million ($1.3 billion) shortfall in collateral backing their loans. In other words, the underlying collateral had been rehypotecated multiple times with different creditors, a practice which first emerged in China a decade ago when debtors were re-pledging commodity collateral such as copper with multiple creditors, setting off the country's first shadow banking crisis. Double pledging also emerged in the collapses last year of US auto parts supplier First Brands Group and sub-prime auto lender Tricolor Holdings.

“‘Double pledging’ meant ‘different funders funded the same asset,’ which I understood to mean the same collateral being pledged to secure more than one financing facility at the same time, without proper disclosure,” an official from AlixPartners said. “So that multiple creditors each believe they have security over the same assets.”

As Bloomberg reported, Zircon Bridging and Amber Bridging, the companies that forced MFS into a UK form of insolvency this week, accused the London-based firm of using the same assets as collateral for multiple loans. This practice, known as double pledging, may have led to an “unaccounted-for deficiency” of more than 80% on £1.2 billion of debts, according to documents from their claim obtained by Bloomberg. 

Angela Gallo, a lecturer in finance at Bayes Business School in London, said collateral in transactions such as those arranged by MFS tends to be worth between 105% and 120% of the loan. “To put it bluntly, having only £230 million against £1.2 billion in debt is catastrophic,” said Gallo. “This definitely looks like a mess.”

Paresh Raja, the owner and chief executive officer of MFS, didn’t respond to Bloomberg requests for comment through his LinkedIn profile. According to unconfirmed reports, Raja has fled to Dubai. 

The MFS news was enough to unleash a fresh wave of risk revulsion across the financial space, and on a day that was very ugly for tech stocks, it was financials that were the worst performers, ending February where they spent much of the month: enduring another dizzying blow as they grappled with signs those cockroaches Jamie Dimon warned about in the world of private credit are starting to scurry.

“More ‘cockroach’ concerns for banks,” Wells Fargo analyst Mike Mayo wrote in a note. “New credit issues give a reminder that credit cycles have not been eliminated. We continue to note that banks have grown loans this decade well below GDP, implying that larger risks lie among unregulated shadow banks.”

Unlike many of the recent private credit selloffs, most of which were prompted by the industry's widespread exposure to software assets (more here "Blue Owl Plunges After Halting Redemptions At Private Credit Retail Fund")  which are now being repriced sharply lower in light of AI disruption risks, which also puts future revenue and cash flows in jeopardy, the latest escalation was broad based. 

As a result, Friday's selloff in shares of banks and asset managers was especially acute and the KBW Bank Index slumped 4.9%, its worst session since April’s trade turmoil, and dragging the group to levels last seen in early December. All 23 members slid at least 1.9%, with Western Alliance Bancorp, Goldman Sachs Group Inc. and Zions Bancorp NA among the worst performers.

But if MFS was today's main event, what is even more concerning is that the cat is now clearly out of the bag when it comes to Private Credit, as events that would have sparked chaos just a few weeks ago, are now taking place every few hours. Here is a snapshot of some of the most concerning developments in just the past 24 hours.

FS KKR Capital Corp

A large credit fund managed by PE giant KKR tumbled on Thursday after reporting a jump in troubled loans and lower investment income. FS KKR Capital Corporation, a publicly traded business development company holding private loans, dropped 15% after saying that it would slash its dividend and the valuation of the assets within its portfolio, the FT reported. 

KKR’s FSK fund oversees a $13Bn portfolio, mostly of loans made to private-equity-backed midsized companies during a record wave of takeover activity over the past decade. Deal activity hit a peak in 2021 and 2022 at the end of an era of historically low interest rates that quickly reversed the following year, causing an industry-wide crunch.

As with Blue Owl, software companies are at the center of this latest meltdown: FSK’s portfolio was hit by large markdowns in the fourth quarter on debt extended to software companies. The fund’s holdings in debt tied to janitorial services groups, and so-called roll-ups of dental clinics, veterinarians groups and defense contractors also saw markdowns. The vehicle said its net investment income fell to 48 cents a share in the fourth quarter, from 57 cents in the third quarter. 

FSK wrote down the value of Cubic Corporation, the payments software system used by the New York City subway, which was acquired by an affiliate of hedge fund Elliott Management and specialist private equity group Veritas Capital for $3bn in 2021. Other troubled companies in its portfolio include AmeriVet, a network of more than 100 vet hospitals acquired in 2022 by AEA Investors, a PE firm founded with backing from the Rockefeller, Mellon and Harriman families, with past-due interest payments.

But the most prominent writedown at FSK and other listed credit funds was the additional one of Medallia, a customer service software company acquired by software private equity group Thoma Bravo for $6.4bn in 2022. BDCs reporting earnings this week slashed the value of their Medallia loans to below 80 cents on the dollar. The deal was part of a surge in software takeovers struck by Thoma and others in 2021 and 2022 that won financing because of firms’ massive equity investments. Thoma ploughed about $5Bn of investor equity into the deal.

Apollo Private Credit Fund 

Another example of the violent repricing across the sector, is MidCap Financial Investment Corp, a private credit business development company focused on direct lending and overseen by Apollo Global Management, which also cut its dividend and marked down the value of its assets amid signs of strain in parts of its loan book.

MFIC lowered its quarterly payout to 31 cents a share from 38 cents and wrote down its portfolio by about 3%, citing weakness in a handful of older investments and a reassessment of its long-term earnings power as interest rates shift, Bloomberg reported. Net investment income edged up to 39 cents a share from 38 cents in the prior quarter.

Unlike Blue Owl which gated investors under the guise of mandatory asset sales, the Apollo BDC is turning to stock repurchases to boost shareholder returns, authorizing a new $100 million buyback plan. The stock closed at $10.53 Thursday, about 26% below the fund’s $14.18 net asset value per share at quarter-end. “At these trading levels, we continue to believe allocating capital toward stock repurchases is more accretive than deploying capital into new investments,” MFIC Chief Executive Officer Tanner Powell said in a statement.

Like Blue Owl, software represents MFIC’s largest industry concentration, accounting for 11.4% of the portfolio at fair value as of Dec. 31, although the fund has less exposure to the sector than most other BDCs, CIO Ted McNulty said in the statement. He added that the fund is positioned to withstand potential disruption from AI, focusing on businesses with established, long-term customer relationships.

That may prove challenging: during the fourth quarter, MFIC placed investments in scooter company Bird Rides, Banner Solutions and Renovo on non-accrual status, meaning the fund no longer expects to collect interest on them. The lender said losses tied to the restructuring of LendingPoint and valuation declines in Amplity, ChyronHego, Bird Rides and Kauffman resulted in about $29 million of net unrealized losses for the year. It also recorded around $47 million of net realized losses on investments during the period.

Blackstone Secured Lending Fund

KKR's FSK fund was not the only one that saw major losses from software company Medallia. Blackstone's publicly-traded private credit fund, Blackstone Secured Lending Fund, another BDC, has marked the loan to Medallia at around 78 cents on the dollar, said Brad Marshall, the global head of private credit strategies for Blackstone Credit and Insurance. It had already marked the loan to the Thoma Bravo-backed company down to 87 cents in June, Bloomberg reported.

The move “implies over a 70% reduction to its set-up enterprise value due to a slower than expected turnaround,” Marshall said on a conference call with analysts. “The company has been underperforming — not because of anything related to AI, — but due to what we believe to be execution driven issues.” Actually, it has everything to do with AI, which has repriced all core assumptions about future revenue and cash flow. 

Blackstone's repricing comes at a time when private credit is facing heightened scrutiny over credit quality and the potential impact of artificial intelligence on the companies it finances. That’s compounding lingering anxieties about lax underwriting and heavy corporate debt. Strategists at UBS Group AG said this week that private credit could see default rates surge to 15%, citing the impact of “rapid, severe AI disruption” (see "Private Credit Rocked By UBS Shock Outlook: Record "Cascading Defaults" And Widespread Contagion")

Like virtually all other private credit funds, the BDC recorded a dip in its net assets in the final quarter of last year. The fund, which extends loans to private US companies, reported a net asset value per share of $26.92 for 2025, down from $27.39 a year earlier. It shares had closed at $23.84 on Tuesday, indicating a discount of 11.4% to NAV per share. Like Apollo, the Blackstone executives also announced a discretionary share repurchase plan under which it will buy back up to $250 million of its shares. 

Overall, the Blackstone fund’s executives said they were bullish on the firm’s investments in the infrastructure underlying artificial intelligence. The fund ended the year with $1.5 billion of liquidity and expects another $2.8 billion of loan repayments this year.

Invico Capital Management

Like Blue Owel, the Calgary-based Invico Capital Corp, which oversees C$4 billion ($2.9 billion) of assets in Canada and the US, saw a flood of redemption requests in recent days. The fund said it reached out to investors who had asked to pull money from its Invico Diversified Income Fund. It then adopted what it calls a “structured liquidity management plan” this month, which it says allows for withdrawals while protecting the fund’s value for remaining investors.

Invico “reached out to certain larger investors that have submitted redemption requests to understand their liquidity needs,” the company said in a statement. Its plan “balances generating ongoing liquidity for redemptions with preserving the net asset value and yield of the fund, consistent with the fund’s governing documents and investor expectations.”

“We have maintained open and transparent communication with dealers, advisers, and investors throughout this process and continue to work collaboratively with them to manage liquidity prudently and responsibly,” Invico said. The firm has not asked them “to refrain from submitting redemption requests.”

Except it has: according to Bloomberg, some Invico investors were asked to speak with the firm before filing formal notices, and were cautioned that a surge in withdrawals could lead to a gating of the fund. 

Invico’s flagship fund invests in high-yield credit and the energy sector across North America, according to its website. The fund also provides bridge loans and residential and commercial mortgages to companies seeking capital for growth, similar to the UK's MFS. The fund has more than C$500 million under management and has returned 10.1% compounded annually over the past five years. But it hasn’t performed as well in the past year, earning 4.6%.

* * * 

The latest private credit shockwave comes as Wall Street titans including Jamie Dimon and Saba Capital’s Boaz Weinstein have turned increasingly bearish on the sector: Dimon drew parallels with the run-up to the global financial crisis, while Weinstein warned this week that the wheels are coming off private credit funds. 

According to Reuters, some say the private credit industry's size is working against it. State Street estimates the addressable market for private credit has grown to more than $40 trillion, including investment-grade credit.

"Private credit's golden era is not over yet, but the days of generating equity-like returns might be," said Kyle Walters, U.S. private equity analyst at PitchBook. "Moreover, private credit has reached a certain scale in recent years, leading to more players entering the asset class and increasing competition."

Furthermore, while it may not be today's news, Blue Owl's turmoil matters well beyond the firm itself because of its scale, role in private credit markets, and close ties with institutional investors, corporate borrowers and wealthy individuals. The firm, which managed more than $300 billion in assets as of December 31, said last week it would sell $1.4 billion of assets across three funds, return part of the proceeds to some investors and pay down debt. It permanently removed an option for investors in the smallest vehicle, mainly wealthy individuals, to withdraw some funds every quarter.

Credit rating firm Moody's said Blue Owl's latest decision to pivot away from traditional quarterly redemptions has sharpened investor focus on how semi‑liquid private credit vehicles manage redemptions, especially with growing retail participation. This, as the private credit industry has evolved from providing direct loans to middle-market companies to asset-backed finance - loans backed by collateral such as hard assets, receivables and royalties.

"Retail investors tend to be less patient and predictable than institutional investors," said Johannes Moller, vice president for Moody's Ratings, in a report on Tuesday. Moller said rising redemption pressure is showing up across the private credit market - including at perpetual non‑traded loan vehicles, or BDCs, which offer retail and high-net-worth investors access to private credit - amid concerns about valuations and liquidity terms.

As alternative managers push further into the retail channel, Moody's expects liquidity management, disclosure, and fund structure design to become more central to investor decision‑making - and potentially a drag on returns.

Blue Owl shares are down 29% year to date, while other major alternative asset managers are also lower. Shares of Blackstone are down nearly 27%, Apollo Global Management is down over 26% and Ares Management is down almost 31% this year.

Moody's has projected the industry's size to double to $4 trillion by 2030, but cautioned deepening ties between private credit funds and traditional financial institutions could heighten contagion risk in a downturn.

Indeed, JPMorgan said this week it was watching the private credit market closely. 

"I'm shocked that people are shocked. The reality is in this environment, as the world gets more volatile, as you get towards the end of the cycle, this outcome should be expected," Troy Rohrbaugh, co-CEO of JPMorgan Chase's commercial and investment bank, told investors on Monday, referring to private credit concerns.

Yet many of his peers clearly have not been expected this outcome. A recent Moody's report showed US banks had lent nearly $300 billion to private credit providers as of June 2025. Banks loaned a further $285 billion to private equity funds and had $340 billion in unutilized bank lending commitments available to these borrowers.

Which explains why today's financial selloff was so broad based, and in addition to alternative asset managers, included major banks and financials all of which are now lumped into the general Private Credit bathtub.

Just as importantly, however, the rout wasn't just the result of rapid and violent deterioration inside Private Credit: it was also a continuation of a trend that’s been unfolding over the past few weeks, as AI worries have consumed nearly every part of the financial sector. Wealth managers, insurance brokers, big banks, boutique advisers, financial data providers and even exchanges have all taken a hit. Block Inc. provided the latest jolt, when it cut nearly half its workforce in the latest sign that AI may threaten the livelihoods of a broad swath of professionals.

“The market is selling anything remotely credit‑sensitive this morning,” Truist’s Brian Finneran wrote in a note to clients. “Specialists are more focused on AXP given the cleaner read‑through to potential white‑collar unemployment.” At the same time, Goldman's basket of rate-sensitive financials just suffered its biggest drop since Liberation Day, and is back to where it traded last August. 

While the contagion within private credit is certainly concerning, what is even worse is that as we reported earlier today, the contagion from private to public market has begun and investment-grade bond markets, which had long been seen as a safe haven during the recent AI-driven swings in equities, have cracked under relentless strain. Globally, premiums on comparable debt have already widened by nearly 4 basis points this week, the largest move since early November. 

As for junk bonds, the wheels have truly come off the bus, with tech spreads blowing out beyond April 2025 wides and rising to levels not seen since late 2023.

Still, while public markets are finally getting hit, the neutron bomb epicenter of the next credit crisis will almost certainly originate within Private Credit. At that point, the public market cracks observed in the credit metrics above will transform into a full blown disaster.

As we discussed earlier this week, once the contagion begins, it won't stop until it infects the broader credit space. As UBS credit strategist Matthew Mish wrote, "private credit stress is unlikely to remain contained. Borrowers increasingly tap both private and syndicated loan markets, with overlapping issuer and sector exposures and shared sponsors. Services and tech represent 15–20% of leveraged loan portfolios, mirroring private credit."

Meanwhile, on the lender side, the top 20 direct lenders not only dominate private credit AUM but also hold significant stakes in BDCs (45%), leveraged loans (20%), and high-yield bonds (25%).  These are the same lenders that Jamie Dimon was raging against yesterday. This interconnectedness, UBS wrote, "means that a spike in private defaults could ripple across public markets, widening spreads and impairing liquidity."

To the UBS strategist, all this "raises concerns about capital adequacy and loss absorption in a downturn, particularly if defaults spike and valuations collapse." In short, once the private credit trigger hits, the contagion will be fast, brutal and will culminate with yet another Fed bailout . 

Mish concluded his latest note with the caveat that the private credit market is not in crisis - yet - but the ingredients are present for a severe credit cycle. The key trigger is a shock to one of the key sectors, like - for example - software. Meanwhile, size, leverage, sector concentration, and opacity all raise potential systemic risk, but limited transparency and disclosure make a proper calibration of macro risk challenging. That's why investors must monitor leading indicators - defaults, PIKs, covenant breaches, and valuation marks at market and sector levels -while demanding better disclosure and underwriting discipline. Which they won't as most investors still rely on other investors to do their homework for them..

For their part, policymakers and regulators should assess the implications of bank and insurer exposures, especially as private credit increasingly becomes a core funding source for high-growth sectors. Which they also won't, as they rely on corrupt and coopted rating agencies to do their homework for then.

UBS' bottom line "Our analysis across banks, insurers, and BDCs globally suggests a wide range of private and alternative exposures could be impacted if we enter a private credit downturn."

Much more from UBS in Matthew Mish's latest note, and January note, available to pro subscribers.