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’ whole 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’ general lending grew by simply six per cent yearly between 2021 and 2023.
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“Sector and danger are concentrated, with just a few of the biggest non-public credit score managers accounting for important components of the asset class pool,” the report stated. “Banks’ typically prudent danger urge for food means they’ll usually lend to massive, well-established non-public credit score managers. Correspondingly, banks on common lend to simply 20 non-public credit score shoppers.”
Nevertheless, 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 data and danger administration processes.
“Bigger banks usually have extra established relationships with extremely refined traders like non-public credit score market contributors in addition to extra sturdy infrastructure to regulate the related dangers,” the report stated. “Moreover, bigger banks could have relationships with non-public credit score contributors 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 whole commitments, whereas subscription traces 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 might result in unexpected shocks available in the market.