Private credit ties to banks deepen in Europe as default risk rises

 Europe's private credit funds are increasingly borrowing from banks to boost their performance, fuelling concerns about the wider risks posed by this interconnectedness.

A record 80% of new European private credit funds borrowed from banks via 'subscription lines' in 2023, funding that allows them to lend before tapping their investors for cash, MSCI Private Capital Solutions research shared with Reuters shows.

Subscription lines are used by some credit funds to enhance returns, a separate MSCI study found. MSCI studied pools that were set up recently because funds are most likely to use subscription lines when they start operating.

Regulators including the Bank of England (BoE) are already probing potential risks posed by lenders' exposure to credit funds, which are loosely regulated and typically finance firms that struggle to borrow directly from banks or in bond markets.

The boom in so-called shadow banks has also raised the alarm among some financiers, who point to the possibility of new asset bubbles that could undermine financial stability.

"Increasing engagement in the private credit domain ... brings them (banks) closer to the sector's inherent risks," said Chris Naghibi, Chief Operating Officer of First Foundation Bank.

Some private credit funds are also adding leverage to their loans, maximising returns but at the same time magnifying potential losses, more than 20 industry sources told Reuters and some fund filings showed.

These moves come as corporate distress in Europe has reached its highest level since the start of the COVID-19 pandemic.

FLEXIBILITY

European private credit funds, while a fraction of the size of bank lending, now have $460 billion under management, UBS estimates. Their growth coincides with an economic slowdown that is adding to concerns that private lending may be delaying decisions to restructure businesses.

Since such funds are not obliged to publish detailed information on their loans or the bank leverage they deploy, beyond informing their own investors, it is hard for regulators and bank investors to know if credit fund lending is going sour.

https://finance.yahoo.com/news/private-credit-ties-banks-deepen-060808622.html