Banks are more and more funding non-public credit score, with most of their lending going to the sector’s largest managers, Moody’s analysis has discovered.
Banks’ publicity to the sector grew by 18 per cent yearly, on common, from 2021 to 2023, reaching $525bn (£401.1bn) in mortgage commitments by the top of 2023.
Whereas this publicity solely equates to three.8 per cent of banks’ complete loans, Moody’s famous that banks’ funding of personal credit score is rising at a tempo that surpasses their different lending actions.
Against this, banks’ total lending grew by simply six per cent yearly between 2021 and 2023.
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“Sector and threat are concentrated, with just a few of the most important non-public credit score managers accounting for vital elements of the asset class pool,” the report stated. “Banks’ usually prudent threat urge for food means they are going to usually lend to giant, well-established non-public credit score managers. Correspondingly, banks on common lend to simply 20 non-public credit score purchasers.”
Nevertheless, Moody’s additionally famous that sure smaller banks “are pursuing aggressive growth that would increase credit score dangers”, particularly if they’ve much less established monitor information and threat administration processes.
“Bigger banks sometimes have extra established relationships with extremely refined traders like non-public credit score market individuals in addition to extra strong infrastructure to manage the related dangers,” the report stated. “Moreover, bigger banks could have relationships with non-public credit score individuals throughout a number of aspects of their operations, offering a extra full view of their counterparties’ actions and exposures.”
The report discovered that banks’ non-public credit score publicity is especially in asset-based lending (ABL) and subscription credit score services. ABL services make up round $350bn of complete commitments, whereas subscription strains account for round $115bn.
Partnerships between banks and personal credit score fund managers are more and more frequent. Final month, Apollo and Citigroup unveiled a $25bn direct lending partnership, designed to “considerably improve entry for company and sponsor purchasers to the non-public lending capital pool, at a scale and dimension which might present funding certainty in strategic transactions”.
However regulators have warned that financial institution/non-public credit score tie-ups might result in unexpected shocks available in the market.
