NEW YORK: Inside Blue Owl Capital Inc’s retail private credit fund, Loparex looked like most other investments at the end of last year.
Its highest-priority loans were valued at 100 US cents on the dollar, while its second-lien debt was marked a bit below 90.
It only took a matter of months for all of it to look more like a zero.
The latest blow came last week from Moody’s Ratings, which deemed the maker of adhesive liners in default and said it sees a Chapter 11 bankruptcy potentially in the cards.
Blue Owl’s flagship public business development company (BDC), known as OBDC, put the Pamplona Capital Management-backed company on “non-accrual” status, which is required when full repayment is in doubt, after the second quarter.
While OBDC’s non-accruals overall remain low by about any measure, at 0.8% of fair value, the speed at which Loparex’s debt deteriorated brings to the fore doubts about marks in the US$1.8 trillion private credit market. BDCs are generally allowed to value loans where they see fit, often leading to wide gaps when a company becomes distressed.
What’s more, Loparex has for years been struggling with its debt burden, with only a narrow path to get out from under it.
S&P Global Ratings said in 2024, after the company did a distressed exchange that it considered tantamount to default, that its capital structure remained “unsustainable”.
It skipped paying interest in June on its second-lien debt and is under forbearance through September.
Representatives for Pamplona and Loparex could not be reached for comment. A Blue Owl spokesperson referred to comments from OBDC President Logan Nicholson during its recent earnings call.
“The company had been pursuing a transformative merger and acquisition transaction, which would have recapitalised the business with fresh equity, improving the balance sheet and liquidity,” Nicholson said about Loparex in the Aug 6 call.
“However, the transaction fell apart in the end, which led to the markdown of our position during the quarter.”
Blue Owl’s revaluation was swift. OBDC now marks Loparex’s second-lien debt at about five cents on the dollar, compared with around 63 cents as of March 31, according to regulatory filings.
At the end of last year, that portion of its loan had been marked at around 88 US cents. One of the first-lien loans to the company, marked around par at year-end, is now valued at 22 US cents.
Private credit sceptics have focused on valuations and what can be a lag between where the loans are marked and the performance of the underlying business.
In one now-infamous example, Zips Car Wash was valued near par by its lenders just months before it filed for bankruptcy.
Lenders often remark that valuations can be more of an art than a science.
The value doesn’t necessarily reflect Blue Owl’s ultimate recovery. — Bloomberg
