AI has had a negative impact on many aspects of the stock market this year. One investment director said it could also cause problems for the bond market.
Over the past few weeks, AI updates from Anthropic and other companies have threatened the business models of many industries, perhaps none other than software. Publicly traded software companies have seen their stock prices plummet, and private companies have postponed their IPOs due to falling valuations.
The debacle has raised concerns that some companies may be unable to repay their debts. Shares in private credit firm Blue Owl Capital are the latest flashpoint for these concerns. The company’s stock price has fallen 32% since the beginning of the year, and more than 16% in the last week alone after it suspended withdrawals from its private bond fund.
“The concern is that there’s a lot of lax underwriting going on, especially in the software community,” said Ben McMillan, chief investment officer at IDX Advisors.
He continued: “They’re not going to the open market to get bonds because they probably couldn’t get them.” “So they have been going to the private market for financing, but the AI SAAS apocalypse and general concerns about the profitability of AI are starting to revalue that price.”
In the private credit sector, leveraged loans are packaged into collateralized loan obligations and sold to investors. McMillan said that while increased risk in the bond market may not directly impact individual investors, it could start to negatively impact pension funds, which tend to rely more on bonds, and funds with exposure to CLOs and private credit.
He said there is currently little risk of the infection spreading throughout the economy.
“This is not a contagious high-yield bond issuance,” McMillan said. “If anything, quality high-yield bonds are actually doing very well given the increasing number of soft-landing stories.”
“For the everyday investor, this is probably not something that would keep me up at night,” he continued. “Many of the institutional investors who accumulated funds through private credit will be judged by them.”
Private credit has made a lot of headlines in recent years due to its rapid growth and efforts to make this asset class more accessible to ordinary investors. While risks in this area are increasingly being pointed out, concerns about private credit have recently reached a climax. Former PIMCO CEO Mohamed El-Erian drew similarities to Blue Owl’s move to suspend redemptions in one of its funds at the beginning of the financial crisis, when BNP Paribas froze withdrawals in some investment vehicles.
“I think it’s kind of the canary in the coal mine right now,” McMillan said. “It feels like the private credit apocalypse may actually be here.”
