Egan-Jones has defended its ratings track record, stressing that it did not rate Tricolor or First Brands, following the companies’ bankruptcies last year.
The ratings agency said it had no involvement in rating US auto parts supplier First Brands, car dealership Tricolor or luxury retailer Saks, which is reportedly headed for bankruptcy, pushing back against criticism amid growing scrutiny of its practices.
Egan-Jones said the collapse of Tricolor was driven by a fundamentally flawed business model, arguing that “fraud was the symptom, not the underlying problem”. US prosecutors have since charged senior executives at the collapsed subprime auto lender in connection with the systematic defrauding of multiple banks and private credit providers.
The defence comes as Egan-Jones itself has faced increasing scrutiny since last summer. The firm has received criticism focused on systemic risk and inflated ratings in private credit markets, with some market participants arguing that the attention is warranted.
Criticism of Egan-Jones has also focused on the rapid growth of the firm relative to its resources, with attention drawn to the frequency of its ratings compared with rival agencies. The firm says that in 2024 it rated more than 3,000 private debt deals, more than any other ratings agency.
Read more: Insurers and private credit: Ratings under the microscope
In a commentary, the agency identified six “red flags” in Tricolor’s business, including reliance on customers without social security numbers, double pledging of assets, the pledging of dubious collateral, unreconcilable accounts, false accounting and delayed audits.
Egan-Jones outlined several measures that could have mitigated the fraud risk, including stricter control of cash flows through independent lockbox arrangements and reconciliations managed by third parties rather than sponsors.
On collateral, the agency said lenders or independent parties should initiate, or at a minimum verify, asset pledges and, where appropriate, take custody of underlying assets such as leases and loans. It added that collateral reports should be provided to trustees and reconciled across all facilities.
The agency also called for stronger enforcement of representations and warranties, including rapid breach notices, repurchase demands and trigger mechanisms where exceptions exceed defined thresholds.
While mistakes can occur, Egan-Jones said sophisticated institutional investors and risk managers should be wary of accepting failure from fraud.
“As was the case with Enron, WorldCom, Lehman Brothers and many others, fraud was simply masking fundamental problems,” Egan-Jones wrote. “Tricolor probably never should have been accepted into the institutional markets.”
