Oaktree's Panossian Says Private Credit Correction Not Systemic

Summary

• Armen Panossian frames the private credit market correction as non-systemic, driven by specific loan vintages and sectors rather than broad asset class failure.
• Software sector weakness is central, with AI disruption (especially agentic AI) posing binary risks to legacy SaaS companies, leading to drastic markdowns and credit losses.
• Pre-2022 vintage loans are particularly problematic, originating during ultra-low rates without pricing for AI risk, and now face higher loan-to-values as valuations decline.
• BDCs (Business Development Companies) with tech exposure experience redemption pressures and trade at steep discounts, though asset sales remain orderly for now.
• Oaktree has prepared by avoiding risky loan structures like PIK (paid-in-kind) and recurring revenue loans, maintaining liquidity, and leveraging its distressed debt expertise to capitalize on volatility.
• Spreads are widening outside software but not to stress levels, indicating a recalibration rather than a crisis; the correction is in its early stages.
• Leverage providers (e.g., banks) reducing credit could force capital solutions or fire sales, but systemic distress is unlikely without a confidence crisis.
• Geopolitical events (e.g., war in Iran, Straits of Hormuz closure) and oil prices above $100 pose recession risks that could deepen the correction if sustained.
• Credit selection is paramount as declining rates shift return profiles from rate-driven to spread-driven income.