BlackRock’s Writedown of Small Loan Fuels Private Credit Alarm

BlackRock just proved that in private credit, the distance between “perfectly fine” and “worthless” is roughly 90 days. 

Investors were jolted by the investment giant’s recent writedown of a $25 million loan to an Amazon storefront aggregator from 100 cents on the dollar to nothing. It had marked the loan on par three months ago.

Roaches and Dumb Things 

Concerns about defaults in the massive $2 trillion private credit market were magnified last fall, when auto parts manufacturer First Brands collapsed, leaving many in the industry exposed. Soon after, JPMorgan CEO Jamie Dimon famously quipped, “When you see one cockroach, there are probably more,” implying other bad loans are out there. Private credit’s opaque nature can make it hard to identify. The industry rapidly expanded in the last decade as banks reduced their exposure to leveraged lending. In their place, private equity firms and asset managers began lending to middle-market companies under terms that aren’t publicly disclosed, typically with floating interest rates.

The wider financial system has also taken on exposure over time. Moody’s estimates banks hold roughly $300 billion in loans to private credit issuers and have made hundreds of billions more in commitments. All of this is why some investors are hyper-sensitive to private credit writedowns, even a relatively small $25 million blip like the one BlackRock quietly disclosed in an SEC filing on February 27. Dimon has more recently pointed to the obvious parallels with risky loans made in the lead-up to the 2008 financial crisis, many of which were declared worthless overnight. Last month, he warned of “people doing some dumb things … to create [net interest income].”

Private credit default fears are also mounting because of the industry’s exposure to software businesses whose products could be replaced by “agentic” artificial intelligence tools:

• In January, analysts at UBS estimated 25% to 35% of the private-credit market was exposed to AI disruption, while analysts at iCapital earlier estimated that software companies account for roughly 20% of outstanding private-direct lender loans.
• The iShares Expanded Tech-Software Sector ETF is down 18% this year, reflecting investor pessimism about software businesses.

But Wait, There’s Upside: This week, short sellers have piled on bets against private credit shop Blue Owl Capital, which announced plans to sell $1.4 billion in assets last month to pay down debt and return capital to investors. As for BlackRock, its shares slid 1.4% Thursday amid news reports of the writedown. Still, Eric Clark, a portfolio manager at LOGO ETF, told Barron’s he believes private credit pessimism is “creating a very rare opportunity to enter a high quality business” when it comes to the most sophisticated and diversified asset managers, which he said “do better research, set better terms, and have incredible default work-out capabilities to not lose the money people think they will lose.”