Do the Recent Bankruptcies of First Brands and Tricolor Suggest Trouble Ahead in Private Credit?

No, the recent bankruptcies of First Brands Group and Tricolor do not signal systemic problems in private credit. Both cases are idiosyncratic, driven by fraud and unique business practices rather than broad market weakness. Importantly, the impact was felt across both private and traditional credit markets, not just private credit. Fundamentals in private credit remain strong, with no signs of widespread credit deterioration. We continue to see private credit as a compelling source of return and diversification, and we expect commitments to high-quality private credit managers over the next year will continue to outperform comparable public credit opportunities.

Recent headlines have drawn attention to the bankruptcies of First Brands and Tricolor, raising investor concerns about credit quality and fraud risk. Jamie Dimon, CEO of JPMorgan Chase, captured market sentiment by warning, “When you see one cockroach, there are probably more,” which fueled speculation about hidden vulnerabilities in credit markets. The private credit market has grown rapidly, attracting increased scrutiny as the credit cycle matures. These high-profile defaults have prompted questions about whether these events are isolated or indicative of broader risks, particularly in private credit markets, which are inherently more opaque than public markets.

In our view, both First Brands and Tricolor failed due to company-specific frauds rather than broader macroeconomic challenges or poor lending practices indicative of systemic issues. Tricolor operated in a high-risk segment, focusing on subprime auto lending—often to undocumented borrowers—and is alleged to have double-pledged loans across multiple credit lines. First Brands was an aggressive acquirer in the aftermarket auto parts industry, relying heavily on off-balance sheet financing that was poorly disclosed to investors. The company was also accused of double-pledging assets in its supply chain and inventory finance arrangements. Supply chain finance has historically been susceptible to fraud, given the high velocity of relatively small transactions. The fact that both frauds have come to light in a short time frame may reflect late-cycle dynamics, but ultimately they are unrelated events resulting from the actions of a few bad actors.

Importantly, the First Brands and Tricolor frauds were not unique to private credit; they affected a range of investment vehicles, including public asset-backed securities (ABS), broadly syndicated loans (BSL), and large bank warehouse lines. Traditional credit market participants—banks, auditors, and ratings agencies—were exposed and failed to detect the frauds. For example, JPMorgan is facing significant losses from Tricolor, and many collateralized loan obligations (CLOs) are facing losses from First Brands’ BSL. In contrast, most high-quality private credit managers identified warning signs early—such as abnormally high margins, opaque off-balance sheet financings, and management credibility—and largely avoided both situations. The ability of private credit managers to conduct deep, ongoing diligence and maintain close relationships with borrowers provided a clear advantage in risk detection and avoidance. Strong alignment of lenders and the ability to properly conduct due diligence is more important than the specific market segment (public or private) when it comes to avoiding fraud and credit losses.

Private credit markets continue to show solid fundamentals. The Federal Reserve has been cutting interest rates and is expected to make three additional 25-basis point reductions by the end of 2026, which will reduce interest expense for middle-market companies and help alleviate cash flow pressures. According to Kroll Bond Rating Agency (KBRA), the weighted-average interest coverage ratio across middle market loans was 2.3 at the end of third quarter 2025, up from 2.0 a year ago. While loan documentation has weakened in middle-market direct lending—particularly in the upper-middle market segment—the sector has not seen widespread use of liability management exercises (LMEs) that have become common in the BSL market. As a result, default rates in the middle market are expected to remain lower than in the BSL market. As of October 2025, KBRA is forecasting a default rate by volume of 1.5% for the direct lending market in 2025, down from 1.8% in 2024. For comparison, this year’s BSL market default rate may reach 3.8%.

Looking ahead, we believe private credit continues to offer attractive risk-adjusted returns and diversification benefits. In particular, we favor commitments to asset-based finance (ABF) funds in 2026 due to the higher barriers to entry and generally stronger lender protections associated with these strategies. However, as the recent frauds have demonstrated, ABF’s additional complexity is both an opportunity and a risk, requiring more robust due diligence.