Bank of England warns of private credit vulnerability in higher rates environment
The Bank of England said private credit and leveraged lending markets have roughly doubled in size in the last decade.
In its Financial Stability report published today (6 December), the central bank said the adjustment to higher interest rates continues to make it more challenging for households and businesses in advanced economies to service their debts.
The BoE said that riskier corporate borrowing in financial markets, such as private credit and leveraged lending markets, which have roughly doubled in size in the last decade, «appear particularly vulnerable».
Businesses that have borrowed in these markets face greater risk of default given that their debt tends to be floating rate and because they tend to be highly leveraged, the Bank noted.
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«Although there are few signs of stress in these markets so far, a worsening macroeconomic outlook, for example, could cause sharp revaluations of credit risk,» it added.
If losses from defaults to lenders and other financial market participants are significant, the BoE said this could cause «excessive tightening» in risk appetite, which could disrupt the functioning of some markets and tighten credit conditions in the real economy.
«Should growth weaken or other risks crystallise, a reduction in investor risk appetite could trigger a revaluation of assets, particularly since a deterioration in demand or corporate earnings would negatively impact debt servicing capacity,» it said.
The opacity and the lack of frequent re-pricing of private credit assets increases their vulnerability to sharp and correlated falls in value, the report noted.
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