Bank of England Stress-Tests Private Credit as Oil Shock Hits Floating-Rate Borrowers

The Bank of England is conducting a system-wide exploratory scenario (SWES) to examine how private credit and connected parts of the financial system would respond to an extreme market shock. Speaking at the UK Private Capital Summit in London, Nathanaël Benjamin, the Bank's executive director for financial stability strategy and risk, said the exercise was necessary given how dramatically private credit has expanded since the low-interest-rate era. The Bank is focusing on four principal vulnerabilities: excessive leverage, uncertainty around valuations, liquidity mismatches between investor terms and underlying assets, and linkages between private credit and the broader financial system. Separately, soaring energy costs are adding a fresh pressure point for private credit borrowers already carrying high debt loads: direct lending loans are typically floating-rate, priced at a spread over SOFR, meaning a Fed rate hike raises interest expense at the same time as oil-driven input costs squeeze borrower EBITDA.