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.
In contrast, banks’ general lending grew by simply six per cent yearly between 2021 and 2023.
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“Sector and threat are concentrated, with a couple of of the most important non-public credit score managers accounting for important elements of the asset class pool,” the report mentioned. “Banks’ usually prudent threat urge for food means they may usually lend to giant, well-established non-public credit score managers. Correspondingly, banks on common lend to only 20 non-public credit score shoppers.”
Nonetheless, Moody’s additionally famous that sure smaller banks “are pursuing aggressive growth that would elevate credit score dangers”, particularly if they’ve much less established observe information and threat administration processes.
“Bigger banks sometimes have extra established relationships with extremely subtle buyers like non-public credit score market members in addition to extra sturdy infrastructure to manage the related dangers,” the report mentioned. “Moreover, bigger banks could have relationships with non-public credit score members throughout a number of sides 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 principally in asset-based lending (ABL) and subscription credit score amenities. ABL amenities 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 widespread. Final month, Apollo and Citigroup unveiled a $25bn direct lending partnership, designed to “considerably improve entry for company and sponsor shoppers to the non-public lending capital pool, at a scale and measurement which might present funding certainty in strategic transactions”.
However regulators have warned that financial institution/non-public credit score tie-ups may result in unexpected shocks available in the market.
