" Given the suggestion that fraud may have played a role in both the First Brands and Tricolor bankruptcies, and given that both companies had borrowed in the private credit market, people saw a connection. Is this the beginning of a problem?

As I mentioned in my memo Gimme Credit in March, the thing people have asked me about most often over the last few years is private credit. The sector took root around 2011, when banks were limited in making loans following the Global Financial Crisis and money managers stepped in to fill the void, primarily lending to leverage-hungry private equity sponsors. Because lenders were few, those who would put out money were able to demand high interest rates and a high level of safety. These loans looked good to investors in the low-rate environment that prevailed. Thus, private credit was anointed as a magic investment solution, with perhaps $2 trillion flowing into the sector in the subsequent years. The arrival of new entrants and a great deal of incremental capital created more competition to lend and inevitably reduced some of the lenders’ advantages.

When asked about private credit, I answered that the investment environment had been mostly benign over the years since 2011, meaning – to echo Warren Buffett – the tide had never gone out on private credit (i.e., it hadn’t been tested). Now, with two high-profile bankruptcies in short order, people thought they might be starting to see cracks.

The tone turned more serious when it became clear that not only were there failures, but also there might be something sinister behind them. There are allegations that First Brands – which had both public and private debt outstanding – used the same receivables as collateral for multiple loans. Tricolor turns out to have made loans to buyers lacking credit scores or driver’s licenses and had been previously cited by regulators for practices such as selling cars for which it lacked titles."

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