The collapses of First Brands and Tricolor are isolated incidents of “corporate fraud” rather than signs of a systemic problem in private credit markets, according to sector professionals pushing back against mounting concerns.
The bankruptcies of US auto parts supplier First Brands and car dealership Tricolor have triggered scrutiny of the private debt sector, with the twin failures unsettling parts of Wall Street’s multitrillion-dollar credit market and prompting some investors to cut exposure to consumer and auto lending.
High-profile figures, including JPMorgan Chase chief executive Jamie Dimon, have warned that the collapses could signal deeper stress within private credit. “When you see one cockroach, there are probably more, and so everyone should be forewarned of this one,” Dimon said.
Bank of England governor Andrew Bailey also struck a cautious tone last week, warning that “alarm bells” were ringing over risky lending practices in private credit. He stopped short of denying that the failures could be “the canary in the coal mine” for a wider problem in the market.
However, Mark Dowding, chief investment officer at BlueBay Asset Management, rejected Dimon’s “cockroach” analogy.
“We would note that issues such as those seen in an ABS issuer like Tricolor represent corporate fraud rather than an underlying symptom of credit market conditions,” Dowding said. “Bull markets can breed complacency and a loss of scrutiny, but we don’t believe fraud is widespread or systemic. Moreover, outside private markets, we see few signs of stress in credit markets when looking at leverage ratios and the broader economic outlook.”
Dowding added that the time to worry about credit markets is when recession risks are high or rising, which he said is not currently the case, with recession fears low and falling.
Solomon Nevins, partner at The Fund Review, echoed Dowding’s view, suggesting that First Brands’ bankruptcy appears to be an isolated case triggered by trade disruption that “undermined” the company’s “highly leveraged and fragile” business model.
“Rumours of First Brands taking multiple loans against single invoices point to serious financial irregularities rather than system-wide problems,” Nevins told Alternative Credit Investor.
He noted that with GDP growth positive in most major economies, markets showing aggregate EBITDA growth, and interest expenses now trending lower, conditions should be “more supportive” for credit markets overall.
However, Nevins cautioned that amid fierce competition among lenders, “some sloppiness” may have crept into underwriting and due-diligence processes, which could ultimately lead to losses.
A recent report by Fitch Ratings also warned that fund-finance terms in private credit are weakening across products due to competition and liquidity pressures, increasing the potential for volatility.
“There will certainly be other casualties from higher tariffs shattering business plans, as is always the case when a major macroeconomic shift undermines long-term expectations,” Nevins added. “Companies in the auto industry are particularly susceptible to this threat.”
