Although there are "few signs of stress in these markets so far," the FPC warned that a worsening macroeconomic outlook could "cause sharp revaluations of credit risk," with higher default rates potentially reducing risk appetite from investors in financial markets and also limiting access to financing.
A downward revision of asset prices "could further tighten financial conditions, especially for riskier borrowers when they refinance their debts and if signs of a slowdown in private markets (such as private credit and private equity) persist," the report said. Such a move could impair businesses' ability to raise finance by increasing the cost of bond and equity issuance.
The FPC also noted that the "opacity and … lack of frequent repricing of private credit assets increases their vulnerability to sharp and correlated falls in value."
Since the floating rate nature of lending and links to private equity activity are common features of private credit and leveraged loans, the FPC said there is also a "risk of correlated stresses in these and other interconnected markets, such as private equity." The committee warned that fire sales and reductions in risk appetite could also be amplified by nonbank financial institutions "with liquidity mismatches and leveraged positions."
