Private Credit Lending Risks Exposed: Lessons from First Brands Bankruptcy

Jefferies, UBS, BlackRock, and Japanese Financial Giants Grapple with Fallout

The sudden bankruptcy of U.S. auto parts manufacturer First Brands has sent shockwaves through the world of private credit lending, exposing critical vulnerabilities in this rapidly growing segment. As reported by The New York Times on October 10, major players like Jefferies, UBS, BlackRock, and key Japanese financial institutions are deeply entangled in the crisis, raising alarm about widespread repercussions across the private credit market.

The Rise of Private Credit and Its Perils

The bankruptcy of First Brands at the end of September has unearthed troubling cracks in private credit lending practices. The company saw $2.3 billion in assets disappear, according to court filings, but the deeper issue lies within the opaque lending structures prevalent in the industry. Primarily dominated by non-bank financial institutions, private credit has experienced explosive growth over the last decade, drawing trillions from pension funds, hedge funds, and university endowments.

For First Brands, lenders such as UBS, BlackRock, and Jefferies played significant roles in financing its operations. However, these institutions now face substantial losses, compounded by criticism for overlooking red flags during debt restructuring processes.

A Dubious Financial Strategy Fueled by Aggressive Expansion

First Brands, renowned for automotive brands like FRAM and Autolite, expanded aggressively over the past decade, acquiring 15 competitors while growing its annual revenue to $5 billion by 2022. However, its rapid expansion came at a price. Much of its debt was financed through off-balance-sheet arrangements, hiding its true financial obligations.

The bankruptcy filings revealed a particularly troubling issue: duplicate collateral pledges. Bloomberg reports suggest that the company leveraged identical receivables to secure loans from multiple private lenders, vastly inflating its asset base. These funds were allegedly redirected toward covering other debt obligations, leaving creditors exposed with minimal recourse.

Despite reported liabilities in the billions, the remaining collateralized assets amount to less than $30 million—a striking disparity that underscores the fragility of the company's financial foundation.

The Domino Effect Threat and Regulatory Concerns

The broader implications of First Brands’ collapse have raised fears of a domino effect within the private credit market, where numerous companies operate under similarly risky and opaque financial structures. U.S. regulators recently loosened restrictions, allowing 401(k) retirement funds to invest in private credit—a decision that could magnify the fallout if further bankruptcies occur.

Among notable losses, UBS lent approximately $500 million, while Jefferies subsidiary Point Bonita Capital advanced $715 million to First Brands. Jefferies has seen its stock drop by 17% in the wake of the incident, and BlackRock, another key financier, has yet to disclose its losses publicly.

A Blame Game Unfolds

While First Brands has pointed to import tariffs imposed during Donald Trump’s presidency as a significant pressure point, creditors and analysts argue that the company’s convoluted financial practices were the real culprit. Erin Keating, a financial analyst at Cox Automotive, warned that other auto-part suppliers with similarly intricate lending structures may also face insolvency.

Legal representatives for First Brands' creditors have described the company’s setup as a “black box,” obscuring liabilities and exacerbating the fallout. This lack of transparency is emblematic of broader risks in the private credit sector, where unregulated lending practices remain pervasive.

Japanese Financial Institutions Bear the Brunt

The ripple effects extend far beyond U.S. borders. Japanese financial institutions, notably Norinchukin Bank and Katsumi Global (its subsidiary), face significant exposure. Katsumi Global reportedly provided $1.75 billion in trade finance to First Brands, with $1.43 billion secured against receivables from prominent clients such as General Motors, Stellantis, Amazon, and Walmart.

However, investigations in bankruptcy court suggest overlapping collateral pledges, leaving trade finance providers like Katsumi vulnerable to substantial losses. Norinchukin Bank, already reeling from 2 trillion yen in bond-related losses earlier this year, now faces fresh scrutiny over its financial stability. Despite achieving a brief return to profitability earlier this year, the ongoing fallout threatens to destabilize the institution further.

JA Mitsui Leasing, another major entity implicated, holds significant stakes in Katsumi Global alongside Norinchukin (43.4%) and Mitsui (42.3%). The parent companies had recently prioritized expansion in North America following the acquisition of Katsumi Global in 2023. However, connections between Katsumi executives and the parent firms suggest repercussions will reverberate across both organizations, raising questions about their fiscal health.

Calls for Reform in Risk Management

Bloomberg highlights the importance of Japanese financial regulators' recent recommendations, urging institutions like Norinchukin to appoint independent directors with specialized market expertise. Strengthened governance and improved risk management practices are critical as this saga underscores vulnerability in existing systems.

Lessons for the Private Credit Market

The First Brands collapse serves as a cautionary tale for the burgeoning private credit industry. This sector, hailed as an alternative to traditional bank lending, has attracted record amounts of capital over the past decade. Yet, as demonstrated by First Brands, its reliance on non-transparent arrangements, excessive leverage, and duplicate collateralizations poses systemic risks.

Investors, regulators, and institutions must heed the warning from this scandal to avoid further destabilization of the increasingly complex private credit ecosystem.