Moody's Ratings has revised Blue Owl Capital's (NYSE:OWL) flagship private credit fund rating to negative, a sign of continued strain on the private credit space.

The firm cut Blue Owl Credit Income Corp's (OCIC) rating to negative from stable in response to "significantly higher-than-peer redemption requests in the first quarter," Moody's stated.

Last week, it was reported that Blue Owl Capital capped redemptions in both its funds at 5% after investors requested withdrawals of 22% and 41% in its private credit and technology-focused funds, respectively.

The firm attributed the above-average number of requests to “heightened market concerns around AI-related disruption to software companies.”

“We continue to observe a meaningful disconnect between the public dialogue on private credit and the underlying trends in our portfolio,” Blue Owl wrote in a letter to shareholders and reported by CNBC.

 Moody's noted that while Blue Owl kept net outflows contained during the first quarter, they expect to see "elevated redemptions to persist in the coming quarters with inflows slowing from already reduced levels."

Moody's previously upgraded the fund to a Baa2 rating in January, but high redemptions have led to a weaker position.

"We could return OCIC’s outlook to stable if net-flow trends improve and we gain greater comfort around shareholder concentrations; asset quality performance continues to be solid, supporting earnings performance; the company maintains below-peer leverage with strong liquidity; and secured to assets is sustained below 30%," Moody's stated in the rating action.

In February, Deutsche Bank downgraded Blue Owl Capital from buy to hold and cut its price target from $15 to $10.

Other firms such as Morgan Stanley (NYSE:MS), JPMorgan Chase (NYSE:JPM) and BlackRock (NYSE:BLK) have capped redemptions as the private credit market has come under growing pressure in recent weeks.

Meanwhile, Oaktree Capital Management elected to fully satisfy all redemption requests, representing 8.5% in its private credit fund for the first quarter.

Congress is pressing major private equity firms — including Apollo Global Management, KKR & Co., Carlyle Group, BlackRock and Blue Owl Capital — for detailed disclosures on their private credit operations.

Federal Reserve Chair Jerome Powell noted during a talk at Harvard University that the turbulence in the private credit sector is not indicative of a broader risk to the financial system.

Powell added that the $3 trillion private credit industry is a "relatively small slice” of the asset pool and is something that the Fed is watching “super carefully,” MSN reported.

JPMorgan CEO and chairman Jamie Dimon is warning that the next downturn could expose weaker lenders—though regulators say the fallout is unlikely to threaten the broader financial system.

In the grand scheme of things, private credit probably does not present a systemic risk, Dimon continued.

Photo: T. Schneider via Shutterstock