Britain’s Financial Conduct Authority (FCA) said it is closely monitoring the fallout from the collapse of US auto parts maker First Brands Group, warning that the case underlines growing risks in the rapidly expanding private credit market and its potential implications for the UK financial system.
The FCA described the implosion of First Brands, along with the bankruptcy of subprime car lender Tricolor, as “interesting case studies” in how unregulated private markets can amplify financial instability.
Both companies filed for Chapter 11 bankruptcy protection in recent weeks, rattling investors and raising fresh concerns about opaque lending structures in the U.S. auto sector.
First Brands, which makes spark plugs, brake calipers, wiper blades and other auto components, listed more than $10 billion in liabilities in its bankruptcy filings, according to Reuters.
The company’s downfall came after revelations about its use of off-balance sheet financing, including invoices and inventory-backed debt, that masked the true extent of its borrowings.
Founded by Malaysian-born entrepreneur Patrick James, First Brands grew rapidly through a series of debt-fueled acquisitions in the United States and Europe, eventually controlling more than two dozen auto parts brands. But how the guardian The company’s “opaque off-balance sheet financing” reportedly spooked creditors, revealing a mountain of debt that extended far beyond what had appeared in its accounts.
The crisis has made Wall Street nervous, with the guardian pointing out that “as always in finance, what scares investors the most is what they don’t know.” The collapse has drawn comparisons to the 2021 collapse of Greensill Capital, which exposed widespread weaknesses in supply chain and accounts receivable financing, and to the 2018 implosion of Carillion in the UK.
The BBC reported that private credit, sometimes called shadow bankinghas skyrocketed since the 2008 financial crisis, when traditional banks stopped making loans. “The private credit market is now roughly the same size as the entire GDP of the UK,” according to Edi Truell, president of Disruptive Capital, in an interview with the broadcaster. “My concern is that there will be an explosion like First Brands, which is in many ways the US equivalent of Greensill: opaque, under-disclosed and over-leveraged.”
Private credit funds, investment vehicles that lend directly to companies outside the regulated banking system, are at the center of the current debate. These funds have grown to manage more than $2 trillion worldwide, and are often promoted as flexible alternatives to bank loans.
However, as the guardian As reported, these markets lack transparency. “When there’s not as much disclosure, there’s more risk and there’s fear of contagion,” said Ben Lourie, an accounting professor at the University of California, Irvine. “Someone will have to take these losses and eventually it will hit the banks.”
Wall Street banks Jefferies and UBS are among those exposed to First Brands, with Jefferies alone admitting $715 million in related exposure. It is currently being investigated whether the company’s credits were pledged more than once.
Speaking after the FCA’s annual public meeting, Simon Walls, the regulator’s executive director of markets, said it was “too early to say” whether the failures of First Brands and Tricolor signaled a broader systemic threat.
“We don’t know at this point whether they were idiosyncratic or whether there will be issues with underwriting in those particular markets that are concentrated,” Walls told reporters.
While the FCA highlighted that UK institutions appear isolated for now, the regulator acknowledged that cross-border exposure through global private credit pools deserves attention.
The FCA’s intervention comes just days after it was estimated that the UK car finance industry could pay around £11 billion in compensation for mis-sold car loans, following a major consultation. FCA chief executive Nikhil Rathi said new consumer rights rules, introduced in 2023, should help prevent similar misconduct and opacity in the future.
“We don’t see anything like (the mis-selling scandal) on the radar,” Rathi said. “The consumer duty has given us a very powerful tool to avoid this in the future.”
Market watchers warn that the lessons from First Brands may extend beyond the U.S. auto sector. The extent of the private credit market, including European asset managers and insurers exposed through high-yield funds, could mean that the UK and EU financial systems are not fully immune.
“The problem is the lack of transparency,” Truell told the BBC. “If the FCA has anything else to do, it could say: you must provide proper and clear accounts. Forget 50 pages of carbon metrics, just tell us what the cash is on the balance sheet and how many liabilities.”
For now, the FCA and the Bank of England are watching closely. While neither see immediate contagion risks, both have signaled that the rapid expansion and light regulation of private credit will continue to come under scrutiny, especially if more “idiosyncratic” collapses like the one in the First Brands emerge.
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“FCA on alert after US auto parts giant’s collapse exposes cracks in private credit” was created and originally published by Leasing Life, a brand owned by GlobalData.
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