BoE scenario: Severe global recession hits private markets

The Bank of England's hypothetical scenario begins with a severe global aggregate supply and geopolitical shock, leading to a deep global recession.

Supply chains are disrupted, particularly for tech hardware, and energy prices rise sharply.

Advanced economies experience high inflation and falling output, prompting central banks to raise policy rates.

Financial conditions tighten sharply, and borrowing costs increase.

This environment causes corporate revenues to decline, especially for leveraged companies and the private market ecosystem.

Increased uncertainty drives risk-off behavior, with major equity indices experiencing sharp falls; the FTSE All-Share index drops by around 30% and the S&P 500 by about 35% in the first year.

Sectors like technology, consumer discretionary, and industrials are severely impacted, while energy and utilities benefit from higher prices.

Monetary policymakers continue quantitative tightening, reducing gilts by £70 billion annually.

Credit spreads widen significantly, with sterling and US dollar high-yield corporate bond spreads increasing by 390 and 490 basis points respectively, reaching around 800 basis points.

Private market fundraising becomes challenging, and some companies with near-maturity debt show signs of stress.

Banks begin taking management actions to preserve capital, such as restricting remuneration and adjusting risk-weighted assets.

In Year 2, macroeconomic and financial conditions deteriorate further, intensifying stress across private markets.

Geopolitical tensions remain high, and oil prices peak.

Inflation stays significantly above target, leading to initial monetary tightening before easing in the second half.

UK real GDP falls to its trough, 4% lower than its starting point, and unemployment climbs.

Elevated sovereign debt levels in advanced economies lead to weakening fiscal positions.

Public and corporate funding markets tighten further, with equities and leveraged lending prices falling.

Sterling and US dollar high-yield corporate bond spreads peak at around 1200 basis points, bringing total sterling borrowing costs to approximately 1800 basis points, comparable to GFC levels.

This pressure leads to materially increased corporate defaults, particularly among cyclicals and the technology sector, including high-profile PE-sponsored companies.

Banks are forced to take more significant actions, such as dividend reductions or suspensions.

Private markets funds realize material losses, and providers of fund financing reassess risk appetite.