BoE warns of future trouble for private credit

A Bank of England official has warned that there could be trouble ahead for the private credit markets.

In a speech delivered at the Deal Catalyst/AFME Direct Lending and Middle Market Finance Conference, Lee Foulger, director of financial stability, strategy and risk at the central bank, warned that rising interest rates create issues for private credit lenders in the future.

Foulger noted that while private credit firms have maintained low default rates to date, highly leveraged borrowers have seen a “significant decline in their interest coverage ratios” over the past year.

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This could lead many borrowers to enter into refinancing agreements at a higher rate.

However, Foulger added that refinancing deals could “delay or mask” any borrower vulnerabilities rather than addressing the underlying issues.

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He also said that some of the tools used by private credit lenders to smooth out the impact of fiscal tightening could also add to the risk of rising defaults.

For example, issuing payment-in-kind notes which enable the borrower to make interest payments with additional debt, or amend and extends, in which lenders push back the maturity of a loan.

“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 said.

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