Banking executives in Europe have moved to calm investor concerns over private credit risks, as lenders’ exposure to the troubled sector re-emerged during earnings season.
Barclays revealed a £15 billion ($20.3 billion) exposure to private credit in its first quarter earnings statement on Tuesday. This formed part of an overall structured financing exposure to non-bank financial intermediaries, totaling £66 billion, which also included an additional £1 billion tied to business development companies, a focus of recent stress in the U.S.
The U.K. lender said it took a £228 million credit-related hit during the quarter after the collapse of specialist mortgage provider Market Financial Solutions (MFS) in February.
C.S. Venkatakrishnan, Barclays’ CEO, said the single-name charge, which related to a “well-publicized, sophisticated fraud”, was in its securitized products business. The U.K.’s Financial Conduct Authority opened an investigation into MSF in March. Its collapse was viewed as a potential “cockroach” pointing to wider issues in the space.
Barclays said its broader private credit activity is focused mainly on senior corporate lending, predominantly in closed-end funds involving large established managers, with strict limits on borrower and sector concentrations.
Meanwhile, Santander‘s potential losses arising from its credit exposures, including those tied to Market Financial Solutions, have been “fully covered” in the first quarter, according to CFO José García Cantera.
Speaking with CNBC’s “Squawk Box Europe” on Wednesday, Cantera declined to comment specifically on MFS. But he said Santander’s exposure to the wider private credit space remains “immaterial”, representing less than 1% of its total exposures, with 70% of it comprising subscription facilities.
“For us, the question is not if one particular case attracts attention. It’s whether systems actually work,” he said. “We feel very, very comfortable with our credit systems because they have proven time and time again they work properly.”
Tensions spread
Santander’s exposure to London-based MFS, which focused on bridge loans and buy-to-let mortgages, is believed to be between £200 million and £300 million.
MFS entered insolvency proceedings in a U.K. court in February, leaving debts of some £1.3 billion amid allegations of mismanagement, with its failure reverberating across a range of banks and asset management firms on both sides of the Atlantic.
Its implosion followed the high-profile collapses of First Brands and Tricolor in the U.S. last year, which ignited fears over risky debt underpinning the private credit market — even though those failures related to complex asset-based finance and bank-syndicated debt, rather than traditional private middle-market direct lending.
Anxieties have since spread to U.S. business development companies — investment vehicles managed by private credit firms — amid growing scrutiny over lending to the software sector, which faces disruption from agentic AI.
UBS CEO Sergio Ermotti acknowledged the ongoing stress within private credit this year, particularly in the so-called “semi-liquid” BDC space, where several asset managers have restricted investor redemptions.
“It’s more of a liquidity kind of issue, than necessarily a clear underlying performance issue,” Ermotti told CNBC’s Carolin Roth in an interview on Wednesday.
But UBS, which reported its first-quarter earnings on Wednesday, does “not see any major dislocation or issues” arising from its own private credit investments, according to Ermotti.
The Swiss banking and asset management giant’s exposure to private credit is “well diversified” and “good quality”, amounting to around 0.5% of its balance sheet, he added.
Deutsche Bank, meanwhile, said its private credit exposure has not incurred losses, is “well diversified,” and reflects “strong underwriting standards.”
‘Opaque’
Private credit spillover risks remain a major concern among investment-grade investors, partly due to uncertainty around bank and insurance exposure, according to Bank of America’s latest credit investor survey.
Barnaby Martin, head of European credit strategy at BofA Global Research, said IG investors see the asset exposure of the banks and insurers as “still a bit opaque,” while software loan volatility is also a pressure point.
In contrast, high-yield specialist investors “nearer the fault line” currently appear “a lot more sanguine” on private credit spillover risks, Martin told CNBC’s “Squawk Box Europe”. Instead, they’re more concerned about high energy prices and inflation, according to the BofA survey.
He explained that while credit concerns in the U.S. center around software risk, distress in Europe is emerging in the chemicals sector, and the impact of China exporting goods and raw materials into the continent.
“That’s what we’ve got to worry about,” Martin added. “That’s where your credit loss problem in Europe is more centered.”
