Fitch: First Brands’ collapse has ‘limited implications’ for direct lending

Fitch Ratings has said the “rapid descent” of First Brands into default has limited implications for direct lending.

First Brands hit the headlines last month when it emerged that the US car parts supplier was facing bankruptcy. It filed for Chapter 11 protection on 29 September.

A wide variety of lenders are exposed to First Brands’ debt, including UBS funds, Jefferies and some private credit firms.

“First Brands’ troubles appear to stem from billions of dollars in off-balance sheet financing, including receivables factoring and inventory reverse-factoring arrangements,” said Fitch Ratings. 

“These off-balance sheet financings may fall under the ‘private credit’ umbrella as the liabilities were incurred privately between First Brands and its various lenders. However, they are distinct from the traditional direct lending, which is typically on balance sheet and supported by first-ranking, all assets security over the borrower group.”

While the ratings agency sees most of the embattled company’s issues coming from its off-balance sheet financing, it also noted that the company’s on-balance sheet lending is largely comprised of BSLs, rather than traditional direct loans.

While BSLs have “significantly greater exposure” to First Brands’ restructuring, Fitch noted that the impact on BSL collateral loan obligations (CLOs) is “limited”.

Fitch found that median exposure across 330 Fitch-rated reinvesting US BSL CLOs of 48 managers was 0.4 per cent and 0.9 per cent across 48 CLOs post-reinvestment.

Read more: The race is on in the direct lending market

On 25 September, Fitch downgraded First Brands’ long-term issuer default rating to CCC from B and, subsequently, withdrew its ratings for the company. 

At the time, it stated that the downgrade reflected its view that “the company’s options for addressing its debt have become increasingly limited to off-market options and it faces a higher risk of a distressed debt exchange or bankruptcy”.

According to Fitch, at its bankruptcy filing, First Brands’ debt included nearly $5bn (£3.7bn) of first-lien term loans and over $500m of second-lien term loans underwritten and syndicated by investment banks to a broad range of investors.

The ratings agency also noted that First Brands’ debt portfolio reportedly includes a $250m loan issued earlier this year to a small group of lenders.

However, Fitch has said it considers this as a private placement of a broadly syndicated loan, rather than a traditional “private credit” instrument and that the loan was issued under the same credit agreement as the BSL loans, and not privately negotiated “like most direct lending deals”.

Read more: US senator writes to ratings agencies after reports of ‘inflating’ private credit ratings

Read more: US private credit default rate dips to 5.2pc in July