As several major companies have declared bankruptcy in succession, the market has begun to question the risk control and approval standards within the private credit industry, leading numerous banks to scale back their related risk exposures. HSBC Holdings PLC has now ceased providing financing to high-risk private credit clients.
Three individuals with knowledge of the matter revealed that the largest European bank by assets has notified clients in recent weeks that it will not renew certain credit facilities. The bank has decided to stop lending to private credit funds where the returns do not justify the level of risk. These sources added that HSBC will subsequently concentrate its credit resources on private credit funds with lower risk profiles.
A person close to HSBC indicated that the bank's overall strategic intent for the private credit sector remains strong, but it is "lowering its risk tolerance for this business." This person stated that HSBC will no longer provide back-end leverage financing (i.e., matching leverage loans issued by banks to private credit funds) for several clients but will continue to offer other financial services to these funds.
With a series of corporate collapses in the private credit market, HSBC is the latest bank to reduce its exposure to high-risk segments. Barclays CEO CS Venkatakrishnan also stated in April of this year that the bank was "limiting lending to some structured finance counterparties."
Informed sources said that the simultaneous credit tightening by Barclays and HSBC is forcing private credit funds to seek alternative financing channels with similar terms to maintain the profitability of their existing loan portfolios.
Globally, banks extend hundreds of billions of dollars annually through back-end leverage operations. In theory, this business can generate substantial interest income for banks while helping private credit firms expand their lending scale. However, banks also indirectly bear the credit volatility risk of the underlying loan assets.
The catalyst for the two major UK banks tightening their risk appetite was the collapse of bridging loan provider Market Financial Solutions (MFS), which resulted in significant losses for both institutions.
In February of this year, MFS, embroiled in fraud allegations, declared bankruptcy, owing over £20 billion to several major global banks and private credit institutions. Barclays set aside £228 million in bad loan provisions for this, while HSBC incurred a $400 million impairment loss due to lending to Atlas SP, a platform owned by Apollo, which in turn had lent to MFS.
Prior to this, the United States witnessed two larger corporate bankruptcies last year—auto loan company Tricolor and auto parts group First Brands Group—which had already prompted other banks to comprehensively review risk exposures within their credit portfolios. A senior investment banker admitted, "We all re-examined our own lending businesses, and the results were not encouraging."
Regulatory bodies in various countries are increasingly warning about the interconnected risk between banks and private credit funds. The European Central Bank has cautioned that financial shocks could transmit, amplify, and spread throughout the financial system.
HSBC responded that its product line covers the entire private credit value chain, and the current focus is on "supporting transactions for global core clients in regions with strong growth potential." Barclays declined to comment.
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