The collapse of auto-parts supplier First Brands and subprime auto lender Tricolor in the US has raised concerns about the private credit market and its opacity. Although the collapse itself highlights key systemic issues, many have also pointed out that it is mainly a bank problem.
Looking at First Brands, the company borrowed through several different instruments, including broadly syndicated loans and supply-chain finance. It is a complex layering of debt and potential fraud, that is now going through the process of being exposed.
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UBS and Jefferies have revealed that they have a $500m (£374.5m) and $715m exposure to First Brands, respectively. Overall, the company had liabilities somewhere between $10bn and $50bn. And although there has been a lot of noise over the problems with direct lending, the bulk of First Brands’ debt was originated in the broadly syndicated loan market (BSL).
“In our research of our own CLOs, feeder notes, BDCs, credit facilities, we found de minimis exposure,” explained William Cox, chief rating officer at KBRA. “And where there was that de minimis exposure, it was through purchases in the public market of traded BSL positions.”
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According to KBRA’s research, in total 14 BDCs had exposure totalling $229m, which is around 4.1 per cent of the First Brands’ outstanding term loan balance.
In a similar vein, iCapital’s research found that out of 166 BDCs, just 15 BDCs – 11 private and four public – have a combined $237m in First Brands exposure, equivalent to 0.05 per cent of the $503bn in total AUM. Some BDCs also had exposure to the loans through their CLO holdings, the iCapital data showed.
But although the private credit exposure seems low, the First Brands saga does point to wider issues within the lending ecosystem – something Moody’s previously warned about. And a look through the company’s ad hoc lenders list, published by Reuters based on filings, shows that there were many private credit firms, including Antares Capital, Alcentra NY, Clearlake Capital Group, Varde Partners and Monroe Capital Management, with a tie to First Brands.
Read more: Fitch: First Brands’ collapse has ‘limited implications’ for direct lending
According to Bayan Uralbayeva, managing director at Risk-Enterprise, a credit risk analytics company, the First Brands collapse highlights three systemic issues. These are the erosion of underwriting discipline in parts of the private credit market, where competition has led to weaker covenant structures and limited transparency; concentration and counterparty risk; and reputational and contagion risk.
Meanwhile Cox noted that lending standards have been “somewhat diminished” in the BSL market but the “covenant adjustments and other changes, like spread reductions in the direct lending space have not diminished credit or security in any ways that we have seen in the thousands of loans that we track”.
