First Brands Group

This has been coming ever since last September.

That's tricolor and first brands, not interest rates.

That's credit cycle stuff.

So you've got a credit cycle that has been since tricolor and first brands slowly progressing toward the downside.

And we see that pretty clearly here in the riskiest parts of the junk public credit market.

And we've been talking about private credit, you know, tricolor and first brands kicking all that off, the cockroaches, the latest stuff with all the, you know, the private credit funds experiencing liquidity withdrawals, that kind of stuff.

Here we are, the public marketplace that is pricing out the same type of thing, which also goes along with, we've talked about the public stock prices of these BDCs and credit, but you put all of it together and it is credit market, credit market signal.

It's not just a one-time volatile spike.

The collapse of these companies has drawn attention to the near $2 trillion private credit market that has fueled Wall Street's recent boom.

The short seller, Jim Chanos, who earned his reputation from exposing fraud at Enron in the late 1990s, a firm that used off-balance sheet financing to hide substantial losses, told the Financial Times yesterday that First Brands Group's chaotic bankruptcy could augur a new wave of corporate collapses.

Policymakers have spent the past decade shifting risk away from banks and into the hands of non-bank lenders.

That strategy will have reduced systemic exposure, but it also made it harder to track where the pressure in the economy is building.

And that's before accounting for fees leverage and the time value of money.

The collapse of First Brands, which I covered a few weeks ago and which is becoming a bigger and bigger story, illustrates the fragility of the system.

First Brands borrowed heavily, pledged the same collateral multiple times and relied on opaque invoice financing structures.

When it failed, $2.3bn in assets simply vanished.

Creditors are still trying to trace the money.

And for private equity, that means actual exits, actual distributions, and fewer PowerPoint slides about transformational value creation.

Until then, the industry may look smooth on paper, but it's starting to sound like a bedtime story told by someone who's already spent your retirement.

If you found this video interesting, you should watch my recent video on the sudden collapse of First Brands Group and what it might mean for the $2 trillion leveraged loans market.

Yes.

If you go from war stories to the present, there has been a lot of writing in general about discipline in generally credit underwriting, given some of the reasons high profile blowups, let's say, first brands, Amazon aggregators, Medallia, also Tricolor.

What is your view on that whole swath, which is more direct lending than real capital markets business?

Yeah, look, I've talked about this a lot.

Some are fine, but there were a lot of deals that you had to scratch your head and say, why is anyone doing this deal? The risk relative to the reward is completely...

opposite of what you want.

And I did this on Bloomberg, and then First Brands blew up.

This was not private credit.

Because look at where we're all at right now.

That's why I actually dedicated the first episode to the economics, to talking about the bankruptcy of First Brands, the financial troubles of Group One and Asbury, and the pending or looming issues around Crash Champions, CCC, and their market evaluations and where they were heading.

I wasn't randomly grabbing the bad financial stories from around the automotive industry for attention.

I wanted to show you the consequences of a market reset.

They were selling receivables that were fake, completely manufactured.

In other words, kind of the same thing First Brands was doing.

Well, it turns out an executive from Glencore, who lost hundreds of millions of dollars when Radiant World went under, or as they're going under, they haven't actually gone under yet, But Glencore, apparently a high-ranking executive at that company, was controlling them.

That's a biggie.

And Radiant World has denied any wrongdoing.

This is basically receivables fraud, guys.

This is almost identical to what First Brands got caught doing.

And apparently this senior executive, Peter Hill at Glencore, was either the kingpin of the whole thing or secretly pulling the strings, pulling the levers of power at Radiant World.

So that is kind of what's happened in the backdrop of a lot of direct lending, which, you know, private credit is the overarching bucket, but direct lending is where I think a lot of the news has been.

One other thing that happened in private credit recently was, I don't know if you've heard of Tricolor and First Brands, but there's been a lot of fraud in private credit because...

As I said, there's not a lot of infrastructure.

There's not a lot of tracking.

So I'm gonna take you the case of one of our top clients in the U.S.

So they contacted us after, you know, the, the two collapses here in the U.S., the First Brands and also the MFS in, in, in London, because they were worried that they were partnering with an invoice trading and tra-- and, and receivables type of originator, which was very good in terms of credit risk quality and the type of operations that they were handling.

But they couldn't assess the anomaly or fraud risk of those receivables.

So...