Deputy Governor for Financial Stability Sarah Breeden said high-risk corporate lending is “a business model that has thrived in a low interest rate environment and therefore may be expected to become more difficult as we adapt to higher interest rates.” ” he said. rate environment. Looking to the future, we certainly see some challenges. ”
He warned that the “uncertainty” of private credit, as well as “the slowness of valuation adjustments, the potential for leverage, are all red flags from a risk construction perspective.”
The World Bank is working with financial institutions including bond giant Pimco, private equity firm JC Flowers and credit rating agency Moody’s to warn of the risks posed by the private credit boom at a time when interest rates are expected to continue rising.
Private credit typically involves loans made directly by institutions such as pension funds or insurance companies to companies that have significant debt and do not have the credit ratings to issue tradable bonds.
Investors were tempted to enter riskier markets when safer assets offered lower returns. But with the Bank of England raising its base rate from his 0.1% to 5.25% over the past two years, you can now get healthy rates elsewhere.
“So far, there are few signs of stress in these markets, but a deterioration in the macroeconomic outlook, for example, could trigger a sharp reassessment of credit risks,” the FPC warned.
“A rise in default rates could also reduce investors’ risk appetite in financial markets and reduce access to financing, including for UK businesses.”
There is also the danger that “discharged sales and declining risk appetite” will spread through financial institutions.