Pimco buys $400 million of private credit bonds amid stress

Pacific Investment Management Co. is stepping in as a buyer in the stressed private credit market, a move that signals confidence from the asset manager even as borrowing costs for fund issuers climb.

Pacific Investment Management Co. purchased the entire $400 million bond offering from Blue Owl Capital’s private credit fund this week, a significant vote of confidence in a sector facing liquidity pressures and mounting investor redemptions. The deal came as Pimco’s chief investment officer dismissed concerns that the asset class represents a threat to the financial system.

"We see disappointment, we see lower-than-expected returns, but we don't see systemic risk," Daniel Ivascyn, Pimco's chief investment officer, said Wednesday in London.

The details of the transaction highlight the pressures facing issuers. The five-year bonds from Blue Owl's fund (OBDC) were priced to yield 6.5%, a spread of about 2.7 percentage points over equivalent government debt. According to Bloomberg calculations, this represents a "new issuance concession" of roughly 0.2 percentage points above Blue Owl's existing debt, far higher than the 0.04 percentage point average for corporate bonds this year.

The move comes as the $3.5 trillion private credit industry grapples with record redemption requests and increased scrutiny from regulators. While major players are publicly downplaying the risks, the high yields required to attract capital suggest underlying stress, creating what Ivascyn sees as a prime entry point for investors with ample liquidity.

Wall Street Downplays Systemic Risk

Pimco is not alone in its assessment. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon stated plainly on an analyst call that he does not view private credit as a systemic risk. This view is echoed by other industry leaders who argue the current environment is fundamentally different from the highly leveraged system that triggered the 2008 financial crisis.

"The risk of a full-blown systemic shock from a deterioration in borrowers' financial health is, in my view, extremely low," said Lotfi Karoui, a multi-asset strategist at Goldman Sachs. He noted that private credit as an asset class is not leveraged in the same way banks were, limiting the potential for contagion.

Still, financial authorities are paying close attention. The Bank of England has warned that liquidity mismatches and a lack of transparency in private markets could create vulnerabilities. The head of the US Securities and Exchange Commission, while defending efforts to broaden retail access to the asset class, recently argued that investors uncomfortable with potential losses should avoid the sector. "If you cannot take the heat, get out of the kitchen," SEC Chair Paul Atkins said at the IMF spring meetings.

Ivascyn predicted that liquidity pressures will force more asset sales throughout the year, providing "great opportunities" for firms like Pimco to acquire assets with stronger investor protections and at lower costs.

This article is for informational purposes only and does not constitute investment advice.