Market Tremors After Major Corporate Failure
Investors in the $2 trillion leveraged loan market are sounding alarms after the abrupt collapse of First Brands Group, with sources indicating this could signal broader troubles in credit markets. According to reports, the manufacturer’s rapid bankruptcy just weeks after subprime auto lender Tricolor’s failure has raised concerns that these may not be isolated incidents.
CLO Structures Under Pressure
First Brands was among the largest issuers of loans purchased by collateralised loan obligations (CLOs), investment vehicles that have provided nearly unquenchable demand for leveraged loans. Analysis from Morgan Stanley reportedly showed the company had issued more than $5 billion in senior and junior loans held by dozens of CLOs from major asset managers including PGIM, Franklin Templeton, and Blackstone.
The report states that most CLO vehicles have already realized their losses, with loans now trading at just cents on the dollar, implying losses exceeding $4 billion. These losses primarily impact CLO equity holders, who typically absorb the first losses to protect higher-rated investment grade tranches.
Due Diligence Concerns Mount
Market participants have expressed growing concern about due diligence practices in what analysts describe as a frothy market. “You’re not paid to do due diligence in this market,” an executive at a former lender to First Brands reportedly stated, highlighting what sources indicate has become a systemic issue.
One investor who decided against investing in First Brands debt told reporters that the company’s financial reporting made proper analysis “virtually impossible,” with everything appearing to be “adjusted” and nothing tying directly to cash flows. This comes as due diligence processes have reportedly been compressed, with deals that previously took weeks now being rushed through in days.
Broader Market Implications
The sell-off in First Brands debt has reportedly started weighing on the broader market, with PitchBook LCD data showing the US leveraged loan market heading for its largest monthly loss since 2022. Bank of America strategist Pratik Gupta suggested that “the market has started to take a dim view of credit fundamentals” following the successive defaults.
Andrew Milgram, chief investment officer of Marblegate Asset Management, told reporters that “problems of the credit market are starting to percolate into the general Wall Street psyche,” raising questions about whether the CLO market’s fundamental assumptions will be tested.
Persistent Demand Despite Warning Signs
Despite the troubles at First Brands and emerging weaknesses in the US economy, strong demand for higher-yielding investments has kept spreads on risky corporate debt at near-record lows. Leveraged loan issuance reportedly hit a record $404 billion in the third quarter, according to PitchBook LCD data.
This persistent demand has occurred alongside what Covenant Review describes as some of the worst investor protections on record. Lawyers for the industry reportedly say they have little power to push back against weak protections when willing buyers remain numerous.
Industry Response and Broader Context
The situation echoes concerns in other market sectors, similar to what analysts have observed in technology markets where rapid growth can mask underlying vulnerabilities. The current stress in credit markets coincides with other financial sector challenges, including those affecting midsized banking institutions.
Internationally, market observers note that credit stress emerges amid broader geopolitical tensions, including ongoing trade and diplomatic disputes that could further impact global economic stability. The current situation shares characteristics with other industry restructurings, such as major corporate workforce reductions that often signal underlying operational challenges.
Risk Management Adjustments
Some asset managers are already adjusting their marketing approaches in response to the First Brands collapse. Asset manager Silver Point reportedly began marketing its first euro CLO this month by explicitly highlighting its lack of First Brands exposure, according to materials seen by the Financial Times.
Josh Easterly of Sixth Street pointed to structural challenges in the industry, noting that many CLO investment firms have just a handful of analysts covering hundreds of different investments. Moody’s estimates approximately 2,000 companies issue debt purchased by CLOs in the US, creating what analysts suggest could be significant coverage gaps.
The current market conditions reflect patterns seen in other technology-driven sectors where supply and demand imbalances can create vulnerability, or in industries experiencing rapid technological transformation that outpaces risk assessment capabilities. Like the distinct but related groupings in celestial bodies, market participants appear to be clustering around different risk assessment methodologies as the credit cycle evolves.
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