By Manya Saini
(Reuters) -Auto parts maker First Brands’ bankruptcy has sent ripples through credit markets in recent weeks, casting a spotlight on the exposure of some of the world’s top financial institutions.
The company filed for bankruptcy protection late last month, listing more than $10 billion in liabilities, highlighting the scale of losses facing lenders and investors.
The bankruptcies of First Brands and car dealership Tricolor have prompted soul-searching on Wall Street and stoked worries of weakness in the credit market.
“Although the broader risk of contagion appears contained for now, a loss of confidence could still trigger significant stress,” Morningstar analyst Kenneth Lamont said.
“A broader sell-off in private credit and mass redemptions would expose these vehicles to their first real test, bringing liquidity mismatches to the surface and putting portfolio valuations under pressure.”
The U.S. Department of Justice has launched an inquiry into the collapse of First Brands, Reuters reported earlier this week.
Trade finance firm Raistone, a creditor of First Brands, has asked a court to appoint an independent examiner after claiming that as much as $2.3 billion “simply vanished”, while U.S. investment bank Jefferies and Swiss lender UBS have exposure running into millions of dollars.
Reuters reported on Friday that Morgan Stanley’s asset management unit had asked Jefferies to return some of its investment in a fund exposed to the bankrupt U.S. auto parts maker.
Jefferies said while First Brands’ situation could lead to some financial losses over time, it expects them to be readily absorbable.
The bank said the impact on its stock and credit perception was “meaningfully overdone”.
A joint venture between Norinchukin Bank and Mitsui & Co faces $1.75 billion of exposure to the auto parts supplier, Bloomberg News has reported.
Bank of America Chief Financial Officer Alastair Borthwick said the lender’s syndicated loans to First Brands are asset-backed and secured by collateral.
While the full extent of the fallout is still unclear, here’s a look at how some of the major firms that have exposure could be affected:
The following charts break down the roughly $9.3 billion in debt the company owed before it filed for bankruptcy:
Asset-based lending obligations:
Term loan obligations:
Off-balance sheet and unsecured obligations:
The case, described as idiosyncratic, has underscored the fragility of complex trade finance structures and renewed scrutiny of how off-balance sheet deals are tracked and disclosed.
“This will get attention because of the opaque nature of First Brands’ structural complexities, and that could tighten standards for all lenders,” Brian Mulberry, senior client portfolio manager at Zacks Investment Management, told Reuters.
With major global financial firms now filing unsecured claims, the bankruptcy is shaping up to be a key test of transparency and risk management in a rapidly expanding segment of the private credit market.
CLOs, or collateralized loan obligations, hold a meaningful portion of First Brands’ debt. They are structured financial products that bundle together a collection of corporate loans and sell them to investors in various risk-tiered portions called tranches.
A broad group of ad hoc lenders, acting independently of formal agreements, are also linked to the troubled auto parts maker. These creditors typically come together temporarily to negotiate or safeguard their interests in a borrower’s financial dealings.
MARKET IMPACT
Stocks of several companies with a footprint in private credit have underperformed the broader market over the past two months, weighed down by weak investor sentiment following the bankruptcies of First Brands and Tricolor.
However, not all of these firms have exposure to First Brands or related companies.
“One of the biggest risks in the private credit market is the lack of transparency, with the rise in large public bankruptcies across the board this year,” Mulberry said.
“We simply don’t know the actual financial condition of most of these assets.”
(Reporting by Manya Saini in Bengaluru; Editing by Shilpi Majumdar)
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