Global auto parts manufacturer First Brands Group declared bankruptcy in late September, surprising the fixed income market. Coming on the heels of the failure of Tricolor Auto Group, an auto retail/finance company, the news contributed to fears about the health of the secured lending market and credit quality overall. Rather than reflecting broader weakness, we think these are one-off stories. That said, they reinforce the importance of fundamental research in assessing credits. Some further details may be instructive.
First Brands: Heavy Debt, High Risk
A major leveraged loan issuer based in Michigan, First Brands develops, markets and sells parts primarily in the automotive aftermarket. Over the years, the company pursued a strategy of acquiring multiple auto parts companies, where it would seek to cut costs and drive profit margins higher. From 2018 – 2025, it completed more than 20 acquisitions for approximately $4 billion, funded with incremental term loans and supply chain financing facilities. Its total debt increased by over $5 billion.1
In prior research, we found that the market and rating agencies were likely underestimating risks from its aggressive M&A strategy, heavy use of supply chain financing and growing debt burden. Its use of off-balance sheet working capital facilities was significant, and lacked appropriate transparency. Additionally, the company’s reporting metrics, including working capital days and EBITDA margins, were almost implausibly better than its peers.
Now under federal investigation as it seeks Chapter 11 reorganization, First Brands had minimal governance around its capital structure and no independent directors. The bankruptcy came after creditors balked at its refinancing efforts earlier in the year.
Tricolor: Lack of Accountability
Dallas-based Tricolor Acceptance is a smaller issuer, with about $945 million in asset-backed securities outstanding.2 It operated a subprime auto sales platform, combining dealerships with financing, that served “underbanked” borrowers, two-thirds of which lack credit scores. In early September, the company initiated mass layoffs, and its warehouse lenders pulled their credit lines, worried about rising charge‑offs and potential fraud. It later entered Chapter 7 (liquidation) bankruptcy, and the U.S. government is now investigating its practices as well, which allegedly included “double‑pledging” loans across multiple lenders and duplicating vehicle identity numbers to generate multiple loans per vehicle.
Other red flags were more apparent from our analyses, including its combination of dealerships with financing, which hampered visibility; unusually high recovery rates on loan defaults; and its closely held ownership and sponsorship, which provided limited oversight.
Watching for Risk
There are always going to be some bad apples, but the question can sometimes be whether the whole bunch is in danger of going bad. As mentioned, we believe that the drivers of issues at these two companies were idiosyncratic in nature. At the same time, it’s important to note that issuance has increased across the credit markets, with the asset-backed securities sector in particular growing from an average outstanding balance of $702 billion in 2013 – 2020 to nearly $900 billion in August 2025, according to Bank of America.
In a period of ready capital, it’s inevitable that greater risk will enter the system in the form of more aggressive and sometimes unscrupulous operators. As the cycle progresses, more questionable credits tend to multiply, especially if the economy softens and credit conditions tighten. At such times, we believe thorough research and analysis of issuer fundamentals has the potential to help surface potential issues. First Brands’s aggressive approach, lack of oversight and closely held operation were all potential indicators, as were Tricolor’s integration of financing and its stellar recovery rates, along with its narrow and economically vulnerable business.
All told, while the defaults picture remains moderate, credit risk is on the rise. Keeping a focus on quality and understanding the individual dynamics of issuers should go a long way toward shielding capital while laying the groundwork for opportunity.
