A report released by Renewed Moody's Investors Service says that competition between US banks and private credit firms to finance leveraged buyouts (LBOs) will impinge upon credit quality.
Moody's analysts in the report said the rise in leveraged buyouts is boosting greater competition for funds between banks and less-regulated and less-transparent private credit firms.
“New sources of risk are on the rise as major lenders jockey for greater capital clout and returns," the report noted. "As public and private lenders compete over pricing and terms, credit quality will erode, increasing defaults," it added.
Moody's forecast the U.S. speculative-grade default rate will be 4.6% in a year versus 4.7% at present and 1.5% a year ago. Direct lenders and other alternative asset managers are now turning to individual investors and their $125 trillion-$150 trillion in assets to fill the gap left by institutional investors, according to the rating agency.
The rating agency said on Thursday that a boosted appetite among banks to lend on such deals and greater competition from the fast-growing private debt sector jeopardized channeling more funding to lower-quality deals, just as general economic conditions are deteriorating.
“We believe large banks in the publicly syndicated loan market — which have lost significant leveraged loan share to private credit rivals in recent years — will be competing aggressively as new leveraged buyouts emerge,” Moody’s analyst Christina Padgett, who leads the agency’s research of risky corporate lending said to Financial Times. “This will cause pricing, terms, and credit quality to erode, fuelling systemic risk.”