Barclays PLC (LSE:BARC) is the most exposed UK bank to loans that backed leveraged buyouts and other highly geared transactions, as the sector's exposure faces growing risks, Jefferies analysts warned.
The risk on leveraged loan exposures has increased, they added, due to the rising probability of a recession in Europe and the US, combined with higher debt levels, pressure on corporate margins from higher costs, and fast-rising rates.
In September, European Central Bank supervisory board member Elizabeth McCaul said capital charges may be applied if risks associated with leveraged loan activities are too high, because of very high-risk exposures and/or weaknesses in risk management practices.
This could translate into higher ‘pillar 2’ capital requirements, with each 25-basis-point increase adding 14bps to the minimum CET1 requirement, Jefferies said.
However, while pressure is “mounting” its “remains manageable, in our view”, the analysts stated.
Having peaked at 11% during the global financial crisis and 4% during their Covid peak, default rates on US leveraged loans have risen from a record low to around 1% currently, Jefferies said, and are expected to rise to around 2.5-3% in the next couple of years.
Although it has not disclosed its exact exposure, Jefferies said Barclays is the only European bank with a sizeable foothold in the US LL market as well as being one of the major players in the European market, along with JPMorgan, Goldman Sachs (NYSE:GS) and BNP, each with estimated 5-7% market share, and having been among the lenders that picked up market share given up by others reducing their exposure due to lower risk appetite.