By Mike Dolan LONDON (Reuters) - The expanding shadows of private credit seem an odd place to lurk if central banks' 'higher-for-longer' mantra on ...
STORY CONTINUES BELOW THESE SALTWIRE VIDEOSLONDON - The expanding shadows of private credit seem an odd place to lurk if central banks' 'higher-for-longer' mantra on interest rates suggests they keep things tight until something breaks.
Right now, the noise is deafening and nerve is in short supply in the seemingly safest part of the debt market as longer-term government bonds that set base borrowing costs get whacked anew on rising uncertainty about where inflation and policy rates settle in the coming years and as debt piles rise.
The deeply inverted 2-to-10-year yield curve gap that many has assumed was a harbinger of recession is narrowing sharply. The prospect of 'higher-for-longer' rates seems scary for fragile companies on floating-rate loans or who will be forced to refinance at much higher rates over that prolonged period - just as bank credit shrinks, lending standards tighten and bond markets gyrate.
With a lack of transparent data, especially in Europe, the sheer size of this debt pool hasn't really been tested in a major downturn or period of prolonged high interest rates. And regulators have fretted about system risks - even if investors are typically pension, insurance and sovereign wealth funds that can better deal with illiquidity over long periods.
It also spotlighted data from the Lincoln International Senior Debt Index tracking 4,500 private borrowers that showed 425 loan terms were amended successfully in the first half of 2023 due largely to higher interest expenses. This meant loan covenant default rates actually fell during the second quarter.
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