Transcription
Welcome everyone. Thank you so much for joining me and a special thank you to every single one of you who has become a subscriber on Substack, Patreon, here on YouTube or who has otherwise supported my work. I appreciate every single one of you.
Today we're going to discuss quite shocking news that was recently shared by Financial Times. The article here describes what started quietly but within weeks has shaken the confidence of debt investors across the United States. This should make everyone very, very concerned and maybe if you're investing in companies, take another look at their financials and definitely keep a close eye on them.
So, two companies, two US companies, Triricirricolor Holdings and First Brands Group collapsed under the weight of their own financial structures and in both cases, the speed of their unraveling has exposed deep flaws in the way credit is being extended in today's financial markets. In other words, these two companies may be a sign that there are many more just like them, rated as healthy today and gone tomorrow. If this starts to unravel, imagine the impact that it may have on the United States economy that is already slowing, inflation is increasing, and unemployment is going up.
Financial Times writes that just weeks ago, these two businesses were viewed as strong, stable companies. Triricolor, a subprime auto lender, had even secured AAA ratings on its debt. It had the best possible rating. And First Brands, a major car part supplier, was shopping for a $6 billion loan deal in the open market. So, these are large, well-established organizations with great ratings. Today, Triricolor is being investigated for fraud. First Brands is actually on the edge of bankruptcy. Investors are asking, "How did we get here?" And most importantly, "Who's next?"
The story of these two companies offers more than just isolated failures. Together, they signal broader concerns in a $1.5 trillion US credit market that has become a lifeline for consumers and businesses alike. So, let's break down what happened and we will look at the specifics and discuss why this is so important, why this is a major, major red flag. The real concern here is, of course, isn't just these two companies, not their failures. It's how few warning signs there were before they collapsed. How many more companies are out there just like these two? That is the real concern.
The first company, Triricirricolar, was known for bundling risky subprime car loans into asset-backed securities. More specifically, these were bonds sold to investors. These are often marked as relatively safe, especially when backed by high credit ratings such as AAA. They had AAA rating and stable underlying payments. But Tririccolar missed a key interest payment in September. Now, lenders who extended nearly $2 billion in funding to this company against those auto loans are now struggling to recover their money. Some are even attempting to seize vehicles tied to those loans. That's how bad the situation is. Meaning, of course, that they don't believe that they will be able to recover their invested funds. So, they're now going after the asset.
Well, worse, Triricricolor is now under investigation by the US Department of Justice over fraud allegations and large banks, including JP Morgan Chase and Fifth Third, are on the hook for hundreds of millions of dollars in related exposure. So, those two banks and other US banks are exposed to the loans that were extended to this particular company and the next company that we're going to discuss in this video. So, you see how it got really bad, really quickly. This multi-million dollar company had a great rating, AAA. You can't get better than that. And it used credit from the largest US banks that are heavily regulated and should issue credit with caution. But at the end of the day, none of that mattered. It collapsed.
One investor who held Tririccolor debt called the collapse "one of the worst things that they've ever seen in the asset-backed securities market," according to Financial Times. How could this happen under the nose of some of the most sophisticated financial institutions in the world and regulators? That is the question that is haunting many people today.
Then there is the second company, First Brands Group. Until recently, the company was uh very busy marketing a new $6 billion loan, claiming that it had nearly $1 billion in cash reserves. But investors now believe that First Brands may have racked up as much as $10 billion in both debt and off-balance sheet financing, much of it hidden through opaque invoice-backed lending. Junior debt tied to the company is now trading for pennies on the dollar and First Brands is scrambling to secure emergency rescue funding with bankruptcy a likely outcome. According to Financial Times, several finance specialists now admit that red flags were systemically overlooked, largely because the yields were too good to pass up. Great. So now we know that banks are chasing yields when dealing with risky clients and that's a major red flag. Again, how many more similar companies are out there just like these two? And the bigger question is, who's next?
At the core of both stories is a growing reliance on asset-backed finance. This isn't a new concept, of course. It's a way to lend money against real or financial assets like car loans, credit card uh balances, aircraft leases, even music royalties, anything. What's changed is who's doing the lending. That is the big "if" here and how aggressively they're doing that lending. Since the 2008 financial crisis, traditional banks have pulled back from many forms of direct lending because it was deemed to be too risky, just not worth it. Due to the strong demand, however, in their place, non-bank lenders and asset managers have stepped in, looking for yields and willing to take on more risk.
Financial Times explains that Wall Street giants like Apollo and KKR have fueled the shift, structuring increasingly complex, very risky deals to meet investor demand. For companies like Triricolor, this was a gold mine. Demand for high-yield bonds backed by auto loans allowed it to rapidly expand its lending. But now, that same model is being questioned. Both companies used forms of asset-backed debt that were supposed to offer transparency and control. So, the form of lending wasn't uh regarded as a very risky one. Investors, however, are now re-evaluating their portfolios after these two cases and demanding more visibility into the deals that they're funding. Some are actually combing through existing exposure, writes Financial Times, trying to ensure that they're not sitting on another ticking time bomb.
Triricolor and First Brands are unlikely to be outliers, to be honest. They exposed deeper concerns about the lending standards across the credit market and also raised a red flag that cannot be ignored due to the sheer magnitude. We're talking about billions of dollars here, due to the sheer magnitude tied to these financial deals. Even this week, Goldman is preparing to sell to dump $300 million worth in subprime credit card receivables from a fintech firm named Mission Lane. And of course, it appears that they know things may actually go south and get ugly pretty, pretty soon. So now they're just selling it off.
In the weeks to come, eyes will be on the regulators and how they respond, because there should be a response. Um, we are actually looking to see whether investors tighten their standards, whether they're going to uh impose new regulations or adjust existing ones, and how other firms with similar exposure hold up. Triricolor and First Brands may be just the beginning. It may be the tip of an iceberg.
Thanks so much for watching. I hope that this quick update was interesting. If that's the case, remember to give this video a thumbs up, subscribe to my channel, and follow me on Substack on Patreon. Support my work. I would appreciate it very much. Have a great rest of your day. Take care.