Private credit fund results point to pockets of weakness

From a custom tile maker to a funeral service provider, a number of companies financed by private lenders started showing signs of stress in the first quarter, according to recent results from business development companies. Market watchers say the trend is likely to accelerate as effects of the global trade war weigh on borrowers.

Oaktree Specialty Lending Corp. marked down its position in Mosaic Companies, which makes specialty tiles for floors and walls, by 76%, after a sale of the company stalled.

Similarly, Golub Capital BDC Inc. mentioned two restructurings that happened in the first quarter, for health-care provider Eating Recovery Center and biotech company Reaction Biology. The lender also placed Nivel, an after-market golf cart manufacturer, Implus, a lifestyle brand, and Foundation Partners, a funeral home company, on non-accrual status — which generally means the companies are behind on payments.

“The major trend to come out of BDC earnings so far is softness,” said Finian O’Shea, an analyst at Wells Fargo & Co., adding that he expects to see more stress as the full impact of tariffs make their way through the economy. “It’s a phenomenon of the bad getting worse,” he said, “where valuation declines eventually demand non-accrual.”

BDCs are investment vehicles — many of which are publicly traded — that typically lend to small-to-mid-sized private companies, and are often linked to bigger investment firms with similar names. Those that have reported results so far include Oaktree and Golub as well as Sixth Street Specialty Lending Inc., Ares Capital Corp., FS KKR Capital Corp., Blue Owl Capital Corp. and Blackstone Secured Lending Fund.

Representatives for the firms either declined to comment or did not provide comment in time for publication.

Executives from some funds have said in recent weeks that their borrowers were already facing challenges before US President Donald Trump announced a dramatic ramp up in tariffs on April 2. Interest rates had risen as the Federal Reserve attempted to cool inflation, and consumers dealing with higher prices were also cutting back.

“Middle market lenders have always focused more on Main Street versus Wall Street, but in the macro situation that we’re in today, Main Street is going to be impacted, too,” said Aaron Kless, chief executive officer of Andalusian Credit Partners.

Certain sectors and companies had their own idiosyncratic issues as well.

For instance, consumer-facing firms were among the most prevalent on non-accrual lists, including Ares Capital-backed veterinary hospital operator Thrive Pet Healthcare, which was recently marked down to 65 cents on the dollar.

Armen Panossian, co-chief executive officer of Oaktree, said his firm is seeing increasing demand for rescue financing from borrowers, creating opportunities for lenders with experience investing in distressed credits.

“In this environment, companies that were once supported by easy credit and low interest rates are now grappling with tightening liquidity, rising borrowing costs and disruptive supply chains driven by global trade upheavals,” he said on Oaktree Specialty Lending’s May 1 earnings call.

That said, none of the BDCs reported severe enough measures of troubled credit to ring major alarm bells. And, some are faring better than others.

FS KKR Capital, Ares Capital, Blackstone Secured Lending Fund and Sixth Street Specialty Lending all reported marginal declines in their share of loans on non-accrual status, for example.

After the quarter ended, Mosaic, the tile maker, was able to sell its Opustone subsidiary to Home Depot Inc. That allowed the company to pay down half the debt it owed Oaktree, which wants to relaunch the full sale process when the time is right. 

Still, O’Shea expects to see more signs of stress as the full impact of tariffs make their way through the economy.

“It’s hard to see it getting better while tariff impacts have yet to show,” he said.

Deals

• JPMorgan Chase & Co. led a $400 million private credit loan for Xactus, a credit data provider
• Blackstone Inc. and Golub Capital are in talks to provide a $500 million private credit loan to cookie and dessert chain Crumbl
• Southern Water Ltd. is set to tap new funds from a group of investors led by King Street Capital Management to refinance some of its safer debt and stabilize its finances
• Private credit funds are in talks with Blackstone Inc. and EQT AB to finance their potential joint acquisition of Spanish waste management services business Urbaser
• BNP Paribas SA is offloading some of the credit risk it has from a $2 billion portfolio of loans, shifting the exposure to Dutch pension fund manager PGGM
• Redaptive Inc., which funds and installs energy-efficiency equipment, secured a $650 million private credit facility from institutional investors Nuveen and Caisse de Depot et Placement du Quebec

Fundraising

• Granite Asia, the re-branded Asian business of venture capital firm GGV Capital, has secured over $250 million in anchor commitments for the first close of its private credit strategy

Job Moves

• A private equity firm backed by one of the world’s richest families hired a veteran of direct lender Hayfin as chief financial officer, adding to a series of leadership changes
• Fortress Investment Group co-chief executive officer Josh Pack is moving to London from Dallas as the alternative asset manager ramps up plans to expand in Europe