Defaults, bad debts, and waves of redemptions are happening one after another—the "trillion-dollar private credit story" in the United States is collapsing.

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The U.S. private credit market—a trillion-dollar sector once touted by Wall Street as a “safe haven” and stable source of returns for individual investors—is now facing a dual shock of deteriorating fundamentals and collapsing confidence, leading to asset repricing that is piercing the industry’s bubble of prosperity.

A recent sign of crisis: private credit giant Blue Owl Capital has withdrawn from talks to finance Oracle’s $10 billion AI data center project due to risk concerns, sparking market panic over the potential breakdown of large-scale infrastructure financing chains. The move not only exposes a fundamental shift in credit markets‘ attitude toward tech giants’ aggressive capital spending, but also has put pressure on Oracle’s share price, causing volatility among its main partners and the broader technology sector.

This failed financing is not an isolated incident, but a microcosm of risks spreading across the private credit industry. As default rates rise and borrowers feel the pinch of high interest rates, top asset managers like KKR and BlackRock are seeing their Business Development Companies (BDCs) facing plunging share prices, soaring bad debts, and redemption pressures from individual investors.

This turmoil is a test for the entire private credit industry, which is worth over $2 trillion. Previously focused on large institutions and wealthy individuals, the troubles in BDCs show the potentially heavy cost when individual investors—who often exit at the wrong time—enter this market.

In addition, JPMorgan CEO Jamie Dimon warned that “if you see one cockroach, there may be more,” hinting at systemic risks in the $1.7 trillion private credit market. That warning now seems to be coming true.

$10 Billion Financing Falls Through: Blue Owl’s “Sudden Brake”

Wall Street News previously mentioned that Blue Owl Capital decided not to support Oracle’s $10 billion Michigan data center project, triggering market anxiety. According to the Financial Times, although Oracle claims negotiations are still going as planned and other partners have been chosen, Blue Owl’s exit was mainly due to changing market sentiment, with lenders now demanding stricter leasing and debt terms, worried about execution risks and Oracle’s rising debt levels.

This incident directly shows the fragility of the funding chain for AI infrastructure. Previously, private firms like Blue Owl built facilities by injecting their own capital and raising tens of billions in debt, then leasing them to tech giants like Oracle. But now, with negotiations breaking down, this off-balance-sheet financing model that relies on certain private capital partners is under severe test. Analysts point out that when private credit firms start saying “no” to AI infrastructure projects, the sustainability of the entire AI investment cycle comes into question. As a result, Oracle’s five-year credit default swaps (CDS) costs have soared to their highest since 2009.

BDC Sector Plunge: A “Nightmare” for Retail Investors

In the broader public market, Business Development Companies (BDCs) serving individual investors are having a painful year.

According to the Wall Street Journal, while the S&P 500 has risen about 16% this year, many large BDCs, including FS KKR Capital, have seen their stock prices plunge by double digits. VanEck’s ETF tracking BDC stocks has dropped nearly 6% this year, in sharp contrast to the broader market’s gains.

For years, Wall Street fund managers have pushed to include private credit products in 401(k) plans, promoting the “democratization” of private markets and attracting retail investors’ participation. By making high-yield loans to lower-rated mid-sized firms and distributing revenues as dividends, BDCs have grown assets more than twofold since 2020 to around $450 billion.

But now this popular investment product is punishing investors trying to exit at the wrong time. With changes in interest rates affecting expected income, and deteriorating credit quality, tools once seen as stable cash flow providers are now facing a major repricing.

Bad Debt and Scandals: “Cockroaches” in Giants’ Earnings Reports

Although BDC managers claim most investments remain sound, the data clearly shows deterioration.

Raymond James research shows that KKR’s BDC—FS KKR Capital—has seen its share price drop by about 33% this year. Most worryingly, its bad loans include its largest single holding: a $350 million investment in cleaning company Kellermeyer Bergensons Services, which makes up over 2% of fund assets.

As of September, FS KKR Capital’s bad loan rate had risen from 3.5% in January to about 5%. 14.4% of its income comes from “payment in kind” (PIK) rather than cash, usually a signal of tight borrower cash flow.

Similar trouble has affected BlackRock. Its BDC managing about $1.8 billion reported that 7% of loans were in default as of September. After home repair company Renovo Home Partners went into liquidation, the fund wrote off its $11 million loan, even though BlackRock was valuing it at par shortly before bankruptcy.

Additionally, fraud and bankruptcy allegations at auto parts supplier First Brands hit Great Elm Capital, which holds a large amount of its debt, causing major unrealized losses.

Liquidity Crunch: Inverted Valuations and Redemption Troubles

Beyond worsening credit quality, liquidity crises and valuation disputes are also accelerating the market collapse.

Blue Owl’s failed attempt to merge its private BDC for retail investors with a publicly traded BDC is a classic case. According to the Wall Street Journal, with public BDC prices far below net asset value (NAV) and private funds facing redemption pressure, Blue Owl hoped to solve the issue through a merger.

But after the market strongly questioned the deal and share prices sank to 14% below NAV, Blue Owl was forced to cancel the merger. This highlights a structural defect of private credit products: in downturns, illiquid private assets are tough to price, and when this pricing disconnects from public markets, panic selling by investors is inevitable.

For retail investors lured by high dividends, today’s situation means not only shrinking returns, but also massive uncertainty over principal safety.

Risk Warning and DisclaimerThe market involves risks, and investments require caution. This article does not constitute personal investment advice and does not consider the specific investment goals, financial situation or needs of any individual user. Users should consider whether any opinions, views, or conclusions in this article are suitable for their own circumstance. Investing based on this is at your own risk. ```