Tricolor, First Brands, and the Shadow Credit Problem: Why Two Collapses Signal Deeper Trouble
A Canary in the Debt Mine?
When Texas-based Tricolor Holdings, a subprime auto lender ie(lends money for automobiles for hgiher risk individuals),
filed for bankruptcy earlier this month, the Wall Street Journal wondered if it was a “canary in a subprime debt mine.” Now, just weeks later, First Brands, a debt-loaded auto parts supplier, is also on the edge, leaving Jefferies, UBS , and other creditors exposed by billions.
Two blow-ups in two weeks isn’t could be a warning sign.
How Tricolor Collapsed: The Double Pledging Trap
Tricolor specialized in lending to higher risk lenders and immigrants and thin-credit borrowers at very high interest rates, then packaging those loans into auto Asset backed securities(ABS). On paper, these securities looked safe: rating agencies even stamped “AAA.”
But the real problem was how Tricolor allegedly funded itself. Here’s a simplified example (not the actual figures and what they are accused off double pledging ):
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Step 1: Bundle and Sell (ABS route)
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Tricolor pools $100M worth of car loans ( bundle all the loans they have given ).
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Sells them into an ABS trust arranged by a bank .
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Investors pay $100M upfront. Future borrower payments legally belong to them.
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Step 2: Pledge as Collateral (bank loan route)
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Tricolor also pledges the same $100M loan pool to a bank like Fifth Third.
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The bank lends, say, $80M against that collateral.
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Result: Tricolor gets $180M upfront ($100M from ABS investors + $80M from the bank), but the loans only ever generate $100M + interest in real repayments.
That’s double pledging (something Tricolor was accused off): two creditors claiming the same cashflows. It works for a while if money is flowing smoothly, but the math has to eventually break.
When more borrowers started missing payments — squeezed by high inflation, high 10–15% interest rates, and job and immigration troubles — Tricolor’s setup had problems
. Lenders also realized some of the supposedly safe “AAA” loan bundles had already been promised to others. Trust collapsed, and Tricolor was pushed straight into Chapter 7 liquidation.NINJA Loans, All Over Again
The similarity to 2007 is very much there . Back then, it was NINJA mortgages (No Inco
me, No Job, No Assets): weak underwriting, dodgy collateral records, and securities dressed up as safe. In 2025, it’s cars instead of houses — but the pattern is pretty familiar.
The Macro Backdrop: High Treasury Yields Squeezing Risk
Why does this matter now? Because the current high yield environment makes the system brittle:
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10-year Treasuries >4% (adn 10 yr treasuries havent really dropped much inspite of the 25bp rate cuts )→ investors demand 8–12% for risky ABS/private credit (SOFR + spread).
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Safe assets pay well → why chase subprime risk when T-bills yield 5%?
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Low-income borrowers get crushed → higher car payments mean rising defaults.
High Treasury yields don’t just hurt consumers — they make fragile structures like Tricolor and First Brands impossible to refinance.
The Bigger Problem: Private Credit’s Hidden Linkages
After 2008, banks faced stricter rules against lending to over-leveraged companies. The risk didn’t vanish — it migrated. Banks now fund private credit funds, which then make the loans banks can’t book directly.
Reports from Moody’s, the Fed, and the IMF all highlight the danger:
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Opaque structures → no one really knows where risk sits.
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Bank entanglement → losses in private credit could loop back into banks anyway.
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Rapid growth → U.S. bank lending to non-bank lenders has surged to $1.2T, up 20% in just a year.
Why This Matters
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Two collapses in two weeks show cracks across both securitization and private credit.
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Fraud + opacity + high rates is a scary mix.
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Banks aren’t insulated — JPMorgan, Fifth Third, and Barclays are all exposed.
Closing Thought
In 2008, regulators were caught off guard by a housing-driven credit bubble hidden in plain sight. In 2025, the danger is a web of private credit funds, ABS structures, and hidden leverage.
Tricolor’s double-pledging scheme — where a $100M pool of loans could be used to raise $180M in funding — and First Brands’ $10B off-balance-sheet binge aren’t isolated scandals. They’re symptoms of a financial system stretched by high yields, weak borrowers, and shadow linkages banks don’t control.
If Tricolor was the canary, First Brands might be the second bird. The question is: how many more are perched on this wire?
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