A portfolio of private credit loans managed by BlackRock has performed so poorly that the money manager has waived some management fees – a rarity in the credit world. The asset manager funded the loans by selling bonds known as collateralised loan obligations, which means the portfolio has to perform well enough to regularly pass a series of tests. Failing to clear those hurdles can spur BlackRock to take steps to right the ship, though, for example, automatically diverting interest income away from riskier tranches and toward safer securities. In October, the portfolio value declined enough to breach an over-collateralisation test, which means the value of the vehicle’s loans was too low compared to the highest-rated bonds. The fee deferral, which included cash from the deal’s riskiest tranches, helped rectify the October breach, according to a person familiar with the matter who asked not to be identified discussing private information. A representative for BlackRock declined to comment. Failing the OC test is unusual for the higher-rated tranches of CLOs, which have long touted resilience because of their self-correcting nature. While bondholders in the BlackRock CLO may not lose money, the performance of the portfolio raises questions about the outlook for the broader private credit market, which has mushroomed in recent years but is now showing signs of weakness. In the latest casualty, Blue Owl Capital called off a merger of two of its private-credit funds on Wednesday, after scrutiny over potential investor losses from the move sent its shares tumbling. The BlackRock CLO in question, named BlackRock Baker CLO 2021-1, contains loans to a slew of troubled companies. One of those is Renovo Home Partners, which filed for bankruptcy earlier this month. BlackRock drastically revised to zero the value of private debt it had extended to the home improvement company after deeming it worth 100 cents on the dollar just some weeks before, Bloomberg earlier reported. Another loan is to educational-software provider Pluralsight, which private credit lenders took ownership of last year. The CLO also holds debt provided to Astra Acquisition Corp, which filed for Chapter 11 bankruptcy in September, according to a report from the deal’s trustee — Wilmington Trust — seen by Bloomberg News. It’s not the first time that senior bonds in the BlackRock CLO have failed their OC tests. The higher-rated debt tripped its OC test in October last year and has cured and failed the test a few times since, according to data compiled by Bloomberg. The riskiest bonds of the CLO have continuously failed their OC tests since April 2024, prompting S&P Global Ratings to downgrade the deal’s junior D and E tranches in December, citing the “deteriorated credit quality of the underlying portfolio.” The CLO, which BlackRock priced at roughly $495mn in late 2021, launched into a red-hot private credit market. Funds, flush with cash and competing more intensely to win lending business, were relinquishing key safeguards and piling on leverage — riskier behaviour that can amplify problems if companies run into trouble. It remains to be seen if the CLO’s woes are emblematic of deeper pain in credit markets, which have been rocked by the collapses of subprime auto lender Tricolor Holdings and car-parts supplier First Brands Group. They’ve also sparked a public blame game among Wall Street executives over lax underwriting in deals. BlackRock is also grappling with another soured investment. The firm’s recently acquired HPS Investment Partners has zeroed out roughly $150mn in debt to companies run by little-known businessman Bankim Brahmbhatt, some of which are now facing allegations of fraud as well as federal probes. To be sure, BlackRock has other middle-market CLOs including its TCP Waterman and TCP Whitney deals which have been among the top performers, according to Preqin data. In the market for CLOs backed by broadly syndicated loans BlackRock has about 29 deals, according to data compiled by Bloomberg. More broadly, CLOs backed by either bank loans or direct lenders are on track for another record year. More than 1,000 US CLOs worth more than $470bn have priced this year, up from last year’s record, when 947 vehicles printed about $424bn, research from JPMorgan Chase & Co revealed this week. While most CLOs are backed by loans that banks give companies, private credit firms have muscled into the space with the loans they extend to smaller firms also being securitised and sold. So far this year, private credit CLO issuance has reached about $34bn, putting it on track to eclipse the $39bn record set in 2024, according to research from Bank of America Corp. About a quarter of direct loans could be held by CLOs in the long run, the bank said.
