The recent rebound in private credit stocks has stalled, with many names slipping into a local correction as interest rate risks rise. Blue Owl Capital (NYSE:OWL) shares ended the week at $10.50, down 17% from their August high.
Apollo Global (NYSE:APO) fell to $128.9, down 10% from the August high, while Ares Management (NYSE:ARE) fell to $131.6, its lowest level since August 3rd.
Other leading private equity and credit firms, including Blackstone (NYSE:BX), KKR (NYSE:KKR), and Golub Capital (NASDAQ:GBDC), have also slumped. The Invesco Global Listed Private Equity ETF (NYSE:PSP) ended the week at $60, down 7.8% from its August high.
Top private credit stocks have slipped | Source: TradingView
Private Credit Stocks Have Slipped Amid Interest Rate Risks
Top companies like Blue Owl, Ares, Blackstone, and Apollo Global Management have slumped in the past few weeks as investors adjust their interest rate expectations after the recent US macro numbers.
A report released earlier this month showed that the US economy added over 162k jobs in July this year. Another one released on Friday revealed that headline and core inflation remained above the Fed’s 2.0% target in August.
As a result, most analysts believe that the Fed will now hike interest rates in the next meeting. The CME (NYSE:CME) FedWatch tool places the odds of a rate hike at nearly 90%. The same is happening in key prediction platforms like Polymarket and Kalshi.
In theory, private credit companies should benefit from high interest rates since their loans have a floating rate. They are typically priced as the Secured Overnight Financing Rate (SOFR) plus a spread that is reset every one to three months. As such, a higher rate would lead to higher revenues.
However, the challenge is that the longer rates remain high, the more their companies get affected by higher rates. Worse, this is happening at a time when crude oil prices have surged, leading to higher gasoline and diesel prices. Diesel jumped to a record high this week.
These risks mean that there could be a refinancing wall. In this, stronger borrowers will likely refinance normally, while stressed credit are dealt with through amendments and restructurings.
Private Credit Companies Have Seen a Surge in Redemptions
The interest rate shock is coming at a time when private credit companies are seeing substantial redemptions, which has pushed more of them to halt.
For example, Morgan Stanley (NYSE:MS) limited redemptions at its flagship private credit fund, which is known as the North Haven Private Income Fund.
Blue Owl, one of the fastest-growing companies in the industry, ended the last quarter with $158.1 billion in assets, down from $159.2 billion in the previous quarter. The company is now increasing its focus in other areas like private equity and real assets.
Similarly, in June, Apollo Global curbed redemptions in its private credit fund as redemption requests jumped to 17%.
On the positive side, these companies have become bargains. Blue Owl has a forward price-to-earnings ratio of 11, lower than the five-year average of 20. Apollo has a forward multiple of 14, while Ares Management has a multiple of 22, lower than the five-year average of 30.
Image: Shutterstock
Login to comment