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HSBC is halting lending to riskier private credit clients, after high-profile bankruptcies cast doubt on underwriting standards in the sector and pushed banks to cut their exposure.
Europe’s biggest lender told clients in recent weeks that it would not renew their facilities after deciding to stop lending to private credit funds that did not provide sufficient returns to justify the risk, according to three people familiar with the matter. Instead, HSBC will focus on lending to less risky private credit funds, the people added.
A person close to the bank said its interest in private credit remained strong but it was “adjusting its risk tolerance to the sector”. The bank would no longer be providing back leverage — the term for bank lending to private credit funds — to a number of clients, this person said, but would continue to provide other services to the funds.
HSBC is the latest bank to cut its exposure to the riskier end of the private credit market, which has been rocked by several corporate collapses. CS Venkatakrishnan, the Barclays chief executive, said in April that the bank was “constraining lending to certain structured finance counterparties”.
People familiar with the matter said Barclays and HSBC’s retreat was forcing private credit funds to find alternative forms of funding on similar terms so that their loans remain profitable.
Banks lend hundreds of billions of dollars a year through back leverage. In theory, this provides lucrative income for banks while allowing private credit firms to fund further lending. However, it also means that banks have indirect exposure to the underlying performance of the loans.
Britain’s two largest banks reconsidered their risk appetite in the wake of the blow-up of the bridging lender Market Financial Solutions, which stung both banks.
MFS collapsed in February amid fraud allegations owing more than £2bn to some of the world’s biggest banks and private credit firms. Barclays provisioned £228mn to cover losses from its loans to MFS, while HSBC took a $400mn charge because of its lending to Apollo’s asset-backed lending unit Atlas SP, which had lent to MFS.
That followed two other larger bankruptcies in the US — of the car loan company Tricolor and the auto parts company First Brands Group — last year, which had already prompted other lenders to review their portfolios in search of vulnerabilities. “We all reviewed our lending and it wasn’t pretty,” said one senior investment banker.
Regulators have increasingly sounded the alarm about the linkages between banks and private credit funds, with the European Central Bank warning that there was the potential for shocks to be “transmitted, amplified and redistributed” across the financial system.
HSBC said it had “an offering that covers every stage of the private credit market” and was focused on “supporting deals globally for our most important clients, in regions where we see the most potential for growth”. Barclays declined to comment.
