BoE: Private credit vulnerable to macroeconomic shifts

The Bank of England (BoE) has warned that the private credit market is particularly vulnerable to macroeconomic challenges in the year ahead.

The BoE’s latest Financial Stability Report noted that the outlook for global growth remains subdued and long-term interest rates have risen further, adding that geopolitical risks have increased following events in the Middle East. These pressures could lead to higher risk for private credit investors.

“Higher interest rates in advanced economies continue to pose challenges to UK financial stability through their impact on households, businesses, sovereigns and financial institutions,” the report said.

“Riskier corporate borrowing, such as private credit and leverage lending appears particularly vulnerable.”

The Bank noted that while there are few signs of stress in the private credit market to date, economic instability “could cause sharp revaluations of credit risk.”

“Higher defaults could also reduce investor risk appetite in financial markets and reduce access to financing, including for UK businesses,” the report added.

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“Should growth weaken or additional risks crystallise, a reduction in investor risk appetite could further impact riskier borrowers in advanced economies when they refinance their debts, especially if signs of a slowdown in private credit and private equity financing persist.”

The central bank said that strong earnings growth has helped UK businesses manage their debts, which has allowed them to remain resilient to high interest rates. However, the bank added that corporate insolvency rates – while still low – have risen over the past year.

Many of these more vulnerable businesses are reliant on funding from the private credit, leveraged loan and high-yield bond markets, said the BoE report.

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According to BoE data, leveraged lending, high-yield bonds and the private credit markets account for around a quarter of all market-based debt globally.

“Combined, private credit and leveraged lending have roughly doubled in size over the past decade,” the report said.

“Within that, although it remains relatively small, estimates suggest that private credit has grown much faster, picking up volumes from private equity sponsors and lower-rated companies looking to access financing more quickly.”

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