The auto groups confounding Wall Street
Two big blow-ups in US debt markets are prompting some soul-searching among debt investors.
In quick succession, subprime car lender Tricolor Holdings and auto parts supplier First Brands Group have unravelled, just months after getting strong credit ratings and winning the support of many debtholders.
Tricolor won triple-A ratings for its bond issuances earlier this year before it collapsed into Chapter 11 bankruptcy at the start of September.
FBG is thought to have accrued as much as $10bn in debt and off-balance sheet financing and was close to raising even more last month. It’s now exploring bankruptcy proceedings.
DD has written previously about the fates of both companies and the concerns they raise over the quality of due diligence that’s being carried out.
Now investors, who were ready to dismiss each incident separately as a one-off, are putting the two together as signs of trouble within credit markets, according to DD’s Eric Platt and Robert Smith.
The twin crises raise questions about the diligence going on in the hottest parts of credit markets such as direct lending and asset-backed finance, which have turbocharged the growth of private capital in recent years.
In both cases, investors are asking questions of whether critical intermediaries had a good grip on the financial situation of their borrowers.
At FBG, Jefferies bankers were just weeks ago marketing a new $6bn loan deal and reassuring investors that the group held nearly $1bn on its balance sheet as recently as March.
That doesn’t look so good now that FBG is negotiating emergency rescue financing from lenders.
Meanwhile, Tricolor counted JPMorgan Chase among its biggest lenders. Together with Ohio-based Fifth Third, America’s biggest bank is now exposed to combined losses that could reach into the hundreds of millions of dollars.
“JPMorgan is one of the most sophisticated lenders in the entire world,” said one Tricolor investor, who’s since sold their position.
“How the hell could they have missed this?”