The high-profile collapse of First Brands and Tricolor was due to “lender control”, not the asset class, a new white paper has argued.
US auto parts supplier First Brands and US car dealership Tricolor fell into bankruptcy this year, leaving an array of lenders out of pocket. The company failures ignited questions around the health of the credit space and whether private credit is exposed to systemic risk.
Rithm Capital’s latest white paper, ‘Collateral Control Failures: What First Brands and Tricolor Reveal about ABF Oversight’, found that the failures highlighted a “structural vulnerability” in credit, which is that asset-backed facilities can behave like unsecured risk when lenders rely on borrower data and fragmented infrastructure “rather than real control of collateral and cash flows”.
Read more: Private credit bigwigs hit back at “misinformation” over First brands collapse
The authors of the white paper found that, in both cases, lenders relied upon borrower-produced borrowing base reports, instead of independent, bank-controlled data, and on “imperfect or fragmented” registry systems that do not operate “at the asset-ID level”.
They were also reliant on structures in which the borrower acted as its own servicer and gatekeeper of collections.
Rithm Capital pointed out that both First Brands and Tricolor sat in sectors long considered “understandable” for asset-based lenders.
“The weak point was not complexity of product, but the absence of a consistent control slack around ownership evidence, cash flow control, servicing oversight and continuous verification,” wrote Rithm Capital’s Charles Sorrentino, managing director, head of investments, Satish Mansukhani, managing director, investment strategist and Alan Wynne, senior associate, investment strategist.
“A more resilient approach centers on clear proof of ownership, direct influence over how and where payments are made, independent oversight of servicing, and continuous, asset-level verification of what is actually owned and being paid,” the authors stated.
Read more: Fitch: First Brands’ collapse has ‘limited implications’ for direct lending
First Brands Group started the year with over $10bn (£7.4bn) of total debt and approximately $900m each year in interest obligations and, by late September, had defaulted on a $1.9bn inventory financing facility.
The company filed for Chapter 11 bankruptcy on 29 September.
Tricolor specialised in selling and financing vehicles for borrowers with limited or no credit history, extending retail instalment contracts via its captive lending arm, with lenders including Fifth Third Bank and JPMorgan Chase.
The company filed directly for Chapter 7 liquidation on 10 September, having bypassed a restructuring path.
According to Rithm Capital, First Brands and Tricolor were not “failures of exotic instruments”, given that both involved “familiar” asset types and credit structures.
“The core lesson is that legal form – secured, self-liquidating, asset-based – does not guarantee outcome if lenders do not build and maintain operational control over the ownership, cash flows and verification of their collateral,” the authors concluded.
“Embedding a portable control stack across facilities, and tailoring it to the mechanics of each asset class, can materially reduce the risk that the same cash flow is financed twice or that pledged collateral is missing when stress hits. The operational effort required is significant, but the alternative – relying on trust where control is feasible – carries its own, now very visible, cost.”
