Blackstone borrows to boost lending power of $52bn credit fund

Blackstone is planning to borrow hundreds of millions of dollars to give its flagship private credit fund added investment firepower, as the asset manager taps a new source of leverage that it and rivals aim to increasingly exploit in the years to come.

The private equity behemoth is in the final stages of raising just under $400mn through a so-called collateralised loan obligation secured by the very loans held by its $52bn Blackstone Private Credit Fund, known as BCRED, according to documents obtained by the Financial Times.

Blackstone’s ability to clinch the financing package underscores how big credit investors are comfortable with the risks in this opaque but rapidly growing corner of financial markets, even as higher interest rates heap pressure on companies across the US and portfolio managers pencil in an increasing number of defaults.

The cash will provide BCRED added capital to make the kinds of multibillion-dollar corporate loans that it and rivals such as Ares, Apollo Global Management and Sixth Street now routinely write, complementing fundraising from investors that has drawn in billions of dollars of capital this year.

Blackstone will sell loans that BCRED owns to the CLO as part of the deal, including debt from software maker Zendesk, cyber security business Mimecast and Unified Women’s Healthcare, which provides business services for OB/GYN offices across the US, the documents showed.

BCRED plans to hold the equity of the CLO, which will help avoid potential conflicts over how it decides what loans remain in BCRED and what go into the new CLO, two people said.

In a CLO, dozens or hundreds of risky corporate loans are packaged together into new securities that give investors different exposure to potential losses on the obligations. The top tier is rated triple-A, a grade even blue-chip companies and sovereign borrowers such as the US have struggled to maintain.

While the $1tn CLO market has long been dominated by structures that buy up loans in the publicly traded leveraged loan market, it has — until recently — not included the kinds of multibillion-dollar loans that private credit fund managers have come to underwrite. That has changed in recent months, with two of Blackstone’s largest rivals in the space — HPS Investment Partners and Blue Owl — already issuing CLOs backed by large private loans.

Industry executives said they expected a flurry of other private credit funds to follow as they look for new sources of leverage.

The funds have long received financing from Wall Street banks and used it to turbocharge their investing capacity. But many of these banks have started to pull back on their commitments to the investment industry as they face tighter capital requirements.

One investor who looked at the deal, which is being marketed by Wells Fargo, said it would give Blackstone a more “efficient source of capital” as it looks to broaden the lenders it can tap for financing.

“It is definitively a more stable source of funding,” the investor said. By borrowing from CLOs in addition to banks, “it diversifies your funding and reduces your risk to a bilateral party”.

Blackstone, HPS and Blue Owl — as well as the bankers helping them securitise these loans — are hoping to carve out a relatively new market with these deals, even though similar structures have been used before.

Much smaller loans from private companies have been wrapped into so-called middle-market CLOs for many years, but they have accounted for just a sliver of the overall market. Given the higher risk associated with those loans, investors in the CLOs demand higher returns as compensation.

“They are much smaller credits, harder to trade and wrap your head around,” Dan Ko, a portfolio manager at Eagle Point Credit Management, said of middle-market CLOs. “Typically there are non-disclosure agreements required to even see the portfolio . . . Ultimately, it is less transparency in the middle-market space that causes the additional spread.”

Private credit fund managers hope the CLOs they bring to market will be able to secure lower costs of capital than middle-market CLOs. Blackstone has said the average corporate borrower in its CLO will generate annual earnings before interest, taxes, depreciation and amortisation of $40mn-$460mn, compared with the typical $10mn-$100mn in middle-market deals.

The triple-A tranche of Blackstone’s BCRED CLO is expected to price this week with a yield roughly 2.3 percentage points above the floating interest rate benchmark, people involved in the matter said. That is below the 2.4-2.5 percentage point spread at which traditional middle-market deals are often priced but above the 1.7-1.8 percentage point spread that CLOs buying syndicated loans secure.

It is a sign that would-be investors see greater risks in the CLO, given the loans it will hold have higher leverage and, as a result, lower credit ratings compared with loans in the syndicated market. That speaks to the fact private credit lenders have been willing to take greater risks when lending compared with other investors.

About a fifth of the loans in the BCRED CLO can be rated triple-C or below by Moody’s, far higher than the 7.5 per cent threshold for broadly syndicated CLOs. The private loans are also far less likely to be traded — by definition there are no public markets for them, and they tend to be owned by just a handful of other investment firms.

To compensate, Blackstone signalled the loans would have stronger lender protections to bolster its recoveries if any companies ultimately defaulted.

Additional reporting by Harriet Clarfelt in New York