Defaults on loans to risky borrowers, a lifeline for companies owned by private equity, have leapt 250 per cent, the Bank of England said as it warned that the sector was “facing challenges in the higher rate environment”.

Global defaults on leveraged loans jumped 5 percentage points, from about 2 per cent in early 2022 to about 7 per cent, the BoE said on Thursday in its twice-yearly Financial Stability Report. About 73 per cent of these types of loans are extended to companies backed by private equity, according to the central bank. There is still some way to go before defaults on leveraged loans reach the peak of 12 per cent hit during the financial crisis, it added.

The BoE is concerned that risks in private equity — which now supports companies employing 10 per cent of workers in the UK’s private sector, or about 2mn people — could spill over to the rest of the economy.