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Bank of England warns over debt-fuelled private equity takeovers

Bank of England sounds the alarm over spate of debt-fuelled private equity takeovers

Debt-fuelled private equity takeovers pose a growing threat to the UK economy, the Bank of England has warned.

So-called leveraged loans are debts borrowed by companies which already owe a lot – and are often used by businesses or private equity firms to finance buyouts.

This year has seen a record level of takeover activity in the UK, as US private equity firms and other foreign buyers have scavenged Britain for undervalued companies that took a beating during Covid.

Debt fears: The Bank of England (pictured) is concerned how lenders have loosened the conditions attached to leveraged loans used by private equity sharks to near-record levels

Companies from defence giant Ultra Electronics to supermarket chain Morrisons are all in the process of being taken over in debt-fuelled deals.

All of this competition, and demand for leveraged loans, has led lenders to loosen the conditions attached to them to near-record levels, the Bank said. 

This makes the loans even riskier, as lenders are not able to dictate as many terms, control the borrowers’ activities, or demand that certain thresholds be met.

In the Bank’s latest Financial Stability Summary, it said: ‘Risks in leveraged loan markets globally continue to build. 

‘These risks can affect UK financial stability through the direct impact on banks and the indirect impact of losses spreading through other parts of the global financial system.’

The Bank explained that there were now fewer restrictions on companies’ ability to pile on more borrowing, lenders had less control over the collateral which borrowers offered up, and companies’ debt levels compared to their earnings were around historical highs.

Despite its worries, the Bank said that the UK’s core banking system was ‘resilient’ and could handle a severe downturn.