The recent collapse of First Brands Group wasn’t supposed to matter. It’s a company that makes spark plugs and windshield wipers..

And yet, when this quiet $10 billion auto parts company went bankrupt in late September, Wall Street snapped to attention.

That’s not a normal response to an industrial bankruptcy. Something else is going on.

First Brands’ collapse is a warning sign for the entire private credit industry and why the model that thrived on high rates is starting to break down.

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An obscure bankruptcy just rattled Wall Street, but it’s only the beginning.

The recent collapse of First Brands Group wasn’t supposed to matter. It wasn’t a household name. It made spark plugs and windshield wipers.

And yet, when this quiet $10 billion auto parts company went bankrupt in late September, Wall Street snapped to attention.

Jefferies (JEF), its primary investment bank, saw its stock tumble 19% as investors rushed for the exits. Hedge fund clients like BlackRock and GIC tried to pull their money from Jefferies’ trade finance fund.

The fallout hit a surprising number of public business development companies (“BDCs”), including Great Elm Capital and Palmer Square, some of which saw their share prices drop by more than a third.

That’s not a normal response to an industrial bankruptcy. Something else is going on.

First Brands’ collapse is a warning sign for the entire private credit industry and why the model that thrived on high rates is starting to break down.

Private credit—now a $2 trillion lending machine—has been booming for years.

When interest rates began rising sharply in 2022, traditional bank lending slowed to a crawl. That left many borrowers—especially the middle-market companies that make up some of the smallest public stocks—desperate for alternatives.

Enter direct lenders, private credit funds, and BDCs, which were happy to step in and offer capital.

These lenders charge hefty rates compared to banks. But they don’t have to follow the same rules as banks. They can loan money fast and ignore standard loan processes, which made it a fair trade for borrowers.

That setup is starting to crack.

First Brands was exactly the kind of borrower private credit was built for. And its downfall revealed how risky this $2 trillion market has become.

Court filings and restructuring documents show the company had piled on over $12 billion in debt including more than $3 billion in financing that didn’t appear on its balance sheet. These off-balance-sheet loans, marketed as low-risk, turned out to be opaque and complex.

Some lenders had been marking their First Brands positions at full value right until right before the bankruptcy.

Legendary short-seller Jim Chanos, who built his reputation exposing Enron, sees disturbing parallels. He called private credit a “magical machine” that offers equity-like returns on supposedly safe debt. The reality is there are layers of hidden risk between borrowers and investors that are just starting to unfold years later. As he put it, “The opaqueness is part of the process… that’s a feature, not a bug.”

What’s even more dangerous is when this is happening.

The boom in private credit was also about interest rates. Lenders were able to command high interest rates, generating fat margins on every dollar loaned out.

But rates are falling. Borrowers are no longer stuck paying 12% for fast capital.

Traditional banks are getting back in the game, offering cheaper, regulated loans. And private credit firms are being squeezed on both sides: they’re facing tighter spreads on new deals and rising defaults on the old ones.

BDCs, which are the original private lenders, are already showing signs of stress. As many as 15 funds had exposure to First Brands. Great Elm Capital’s shares are down over 33%.

Meanwhile, many private credit funds still haven’t marked down their portfolios

If First Brands is the canary in the coal mine, lenders like Blackstone, Ares, and Blue Owl may be facing more trouble than they’ve let on.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research