The recent default of automotive parts supplier First Brands Group following its downgrade from ‘B+’ does not signal increased risk for the traditional direct lending market, according to Fitch Ratings.
The agency said First Brands’ debt exposure was primarily tied to broadly syndicated loans (BSL), rather than direct lending. Fitch noted that “the BSL market has significantly greater exposure” to the company’s restructuring, though it described the overall impact on collateralised loan obligations (CLOs) as “limited”. Median exposure across 330 Fitch-rated reinvesting U.S. BSL CLOs of 48 managers was 0.4%, rising to 0.9% across 48 CLOs that had completed their reinvestment periods, based on the most recent trustee data.
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At the time of its bankruptcy filing, First Brands’ liabilities included nearly USD 5 billion in first-lien term loans and more than USD 500 million in second-lien term loans. These were underwritten and syndicated by investment banks to a broad range of institutional investors. In contrast, traditional direct lending typically involves privately negotiated transactions between borrowers and alternative investment managers without intermediaries.
Fitch said a USD 250 million loan issued earlier this year to a small group of lenders should be viewed as “a private placement of a broadly syndicated loan” rather than a private credit facility. The loan was issued under the same credit agreement as First Brands’ BSL debt and “was not privately negotiated like most direct lending deals.”
The agency added that First Brands’ status as a private company did not affect the classification of its debt as syndicated. “Private companies very often issue debt into the syndicated market just as public companies sometimes issue debt in the private market,” Fitch noted.
Fitch attributed the company’s financial strain to extensive off-balance sheet financing, including receivables factoring and inventory reverse-factoring arrangements. While such liabilities may be privately arranged, the agency said they differ from traditional direct lending, which is usually on-balance sheet and secured by first-ranking claims over borrower assets.
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By GlobalDataFitch’s latest data show the private credit default rate at 5.2% in August, unchanged from the previous month but up from 4.6% in December 2024. The agency said it expects easing interest rates to alleviate some of the cash flow pressure facing private issuers, potentially leading to lower default rates in future reporting periods.
