Home Estate Planning Private credit lenders might be storing up future problems, Bank of England official warns

Private credit lenders might be storing up future problems, Bank of England official warns

0 comment

Strategies to “smooth” out the impact of rising interest rates in private credit markets might end up storing up future trouble, a leading official at the Bank of England warned today.

In a speech at a conference, Lee Foulger, the Bank’s director of financial stability, strategy and risk, warned that rising interest rates were putting pressure on participants in the private credit market.

Although firms have seen low default rates, Foulger pointed out highly leveraged borrowers have seen a “significant decline in their interest coverage ratios” in the past year.

Interest coverage ratios measure how well a firm is able to meet its interest payments. Lower ratios suggest a firm is more risky.

Lenders have been taking actions to support firms who are refinancing onto higher rates, but Foulger said some of these actions “delay or mask” vulnerabilities rather than addressing underlying issues.

For example, some lenders agree an ‘amend and extend’ deal, in which a loan’s maturity is pushed back in exchange for higher yields and tighter financial controls.

‘Payment-in-kind’, where borrowers with low liquidity issue new debt to meet interest payments, have also become “increasingly common,” Foulger said.

“While individually rational, they put a premium on robust approaches to risk management and collectively could increase the risk of defaults materialising further down the road,” he warned.

Private credit, also known as direct lending, is traditionally provided by non-bank lenders to medium-sized businesses who struggle to access the bond market.

Partly as a result of tighter banking regulation, the private credit market has grown from around $250bn at the end of 2010 to more than $1.5trn in 2022.

However, the sector has been dealt a blow by the recent increase in interest rates, which has dented valuations and put up the cost of borrowing. Private credit markets are subject to fewer rules and so regulators are concerned about its possible impact on financial stability.

You may also like

Leave a Comment

Are you sure want to unlock this post?
Unlock left : 0
Are you sure want to cancel subscription?