European bank executives are moving to allay investor concerns about private credit risk as financial institutions’ exposure to bad sectors resurfaces during the financial year.
barclays revealed in its first quarter results on Tuesday that its private credit exposure was 15 billion pounds ($20.3 billion). This formed part of its overall structured finance exposure to non-bank financial intermediaries, totaling £66bn, including an additional £1bn related to business development companies, which have been the focus of recent stress in the US.
The British financial institution announced a £228m credit hit in the quarter following the collapse of mortgage specialist Market Financial Solutions (MFS) in February.
Barclays Chief Executive CS Venkatakrishnan said the single-name charge related to a “well-publicized and sophisticated fraud” was in the company’s securitized products business. The UK’s Financial Conduct Authority launched an investigation into MSF in March. Its collapse was seen as a potential “cockroach” that hinted at broader problems in the universe.
Barclays said its extensive private credit activity is primarily focused on senior corporate lending, with strict limits on borrower and sector concentrations, and predominantly closed-end funds with participation from large existing managers.
meanwhile, SantanderCFO Jose García Cantera said potential losses from credit exposures, including those related to Market Financial Solutions, were “fully covered” in the first quarter.
Cantera declined to comment specifically about MFS in an interview with CNBC’s “Squawk Box Europe” on Wednesday. But he said Santander’s exposure to broader private credit facilities remained “insignificant”, accounting for less than 1% of its total exposure, 70% of which consisted of subscription schemes.
“For us, the question is not whether a particular case will get attention, but whether the system actually works,” he said. “We feel very secure because our credit system has been proven time and time again to work well.”
tension spreads
Santander’s exposure to London-based MFS is believed to be between £200m and £300m, with a focus on bridging loans and purchase mortgages.
MFS entered into insolvency proceedings in British courts in February, leaving it with debts of around £1.3bn due to alleged mismanagement, but its collapse has spread to a range of banks and asset managers on both sides of the Atlantic.
The failures followed the high-profile failures of First Brands and Tricolor in the US last year, raising concerns about the risky debt that underpins private credit markets – even though those failures involved complex asset-based financing and bank syndicated debt rather than traditional private middle market direct lending.
Since then, concerns have spread to U.S. business development companies, investment vehicles managed by private credit companies, as scrutiny increases over lending to the software sector, which is facing disruption from agent-based AI.
UBS CEO Sergio Ermotti acknowledged continued stress in private credit this year, particularly in the so-called “semi-liquid” BDC sector, with several asset managers restricting investor redemptions.
“This is more of a liquidity issue than necessarily an obvious underlying performance issue,” Ermotti told CNBC’s Carolyn Ross in an interview Wednesday.
But Ermotti said UBS, which reported first-quarter results on Wednesday, “does not see any major disruptions or issues” arising from its private credit investments.
He added that the Swiss banking and wealth management giant’s private credit exposure was “well diversified” and of “high quality”, amounting to around 0.5% of its balance sheet.
deutsche bankMeanwhile, the company said its private credit exposures are loss-free, “well diversified” and reflect “strong underwriting standards.”
“opaque”
Private credit spillover risk remains a major concern among investment-grade investors, due in part to uncertainty surrounding bank and insurance exposures, according to Bank of America’s latest Credit Investor Survey.
Barnaby Martin, head of European credit strategy at BofA Global Research, said IG investors saw asset exposure for banks and insurers as “still a bit uncertain” and volatility in software loans was also a point of pressure.
In contrast, high-yield professional investors “closer to the fault line” now appear “much more optimistic” about private credit spillover risks, Martin said on CNBC’s “Squawk Box Europe.” If anything, they’re more concerned about rising energy prices and inflation, according to the BofA survey.
He explained that credit concerns in the United States are centered around software risks, while in Europe, troubles in the chemical sector have surfaced, and China’s exports of goods and raw materials to the continent are having an impact.
“That’s what we have to worry about,” Martin added. “That’s where the credit loss problem in Europe is concentrated.”
