Bank Of England Warns Pre-Crisis LBOs Could Trigger Next Crisis

Mar 15 2013 | 12:38am ET

If there's another financial crisis in the next few years, private equity could be to blame, the Bank of England said yesterday.

The British central bank said that leverage in the U.K. corporate sector—much of it stemming from a wave of buyouts before the last financial crisis—poses a serious risk to the stability of the British financial system. Private-equity-owned companies account for about 8% of all U.K. corporate debt, and some £34 billion in leveraged loans mature this year and next.

The warning comes ahead of the dissolution of the Financial Services Authority and the handover of its powers to two new agencies, one of which, the Prudential Regulation Authority, will be a part of the Bank and which will focus on systemic matters. And the bank warns that those loans maturing from pre-crisis leveraged buyouts could be just such a matter.

"It is clear that leverage of the U.K. corporate sector has increased as a result of larger private equity acquisitions," the Bank wrote. "The resulting increase in indebtedness makes those companies more susceptible to default, exposing their lenders to potential losses."

"Such companies pose a risk to the stability of the financial system—a risk that is compounded by the need for companies to refinance debt maturing over the next few years in an environment of much tighter credit conditions."


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