iCapital Market Pulse: Behind the Recent Private Credit Noise

Key Takeaways:

• What happened: First Brands and Tricolor recently filed for bankruptcy amid allegations of fraud and double-pledging, sparking concerns across private credit markets.
• Why it’s not systemic: Exposure is limited and fundamentals remain stable—these are isolated cases, not signs of broader market contagion.
• What’s the exposure: Based on our analysis of 166 BDCs, just 15 BDCs – 11 private and four public – have a combined $237 million in First Brands exposure.¹  That’s only 0.05% of the $503 billion in total BDC AUM.²
• What we’re watching: BDC and asset manager earnings, credit spread movements, and resolution of First Brands’ off-balance-sheet financing.
• Investment implications: The selloff appears overdone; we see selective opportunities in well-managed public BDCs trading below NAV with strong fundamentals.

Recent high-profile bankruptcies – notably First Brands and Tricolor – have raised fresh questions around the health of credit markets. That’s particularly true for private credit, with investor concerns rising around whether cracks may be forming within one of the most favored asset classes of the past few years. While initial headlines began surfacing in early August, losses have been revealed across a range of funds by mid-September.

Since then, public Business Development Companies (BDCs) have declined by roughly 10-15%, a two-standard-deviation move, and are significantly underperforming the S&P 500 year-to-date (Exhibit 1).³  This selloff has extended beyond BDCs, into publicly-traded alternative asset managers and, more recently, regional banks, reflecting broader investor unease.⁴

While this correction signals investor concern, we believe the move is overdone. Some volatility is justified given shifting rate cut expectations and a moderating earnings outlook for BDCs. However, the magnitude of the broader decline is disproportionate relative to underlying credit fundamentals.

In the cases of First Brands and Tricolor, losses stem largely from isolated incidents involving alleged fraud and opaque business practices – not from a breakdown in underlying demand, which would be far more concerning. Importantly, exposure to these names is limited. While we expect tighter underwriting scrutiny, we view these bankruptcies as idiosyncratic rather than systemic.

For now, we do not see evidence of broader contagion or spillover into core private credit markets. That said, we continue to monitor developments closely. Investors are right to ask tough questions of managers and GPs in light of recent headlines though we believe the fundamentals of private credit remain intact.

What Happened to First Brands and Tricolor?

First Brands, a major aftermarket auto parts supplier, filed for Chapter 11 bankruptcy in late September following multiple credit downgrades and concerns over the lack of transparency around its opaque off-balance-sheet (OBS) financing. About 70% of its revenue was tied to inventory and invoice factoring—financing methods where receivables and inventory are sold or pledged to lenders for upfront cash.⁵  The major turning point came in August when the company paused efforts to refinance its 2027 loans after failing to deliver a “quality of earnings” report – a detailed audit of earnings sustainability – requested by lenders.⁶  Soon after, Apollo reportedly shorted its debt, and several First Brands’ related OBS entities filed for bankruptcy amid allegations of double-pledging receivables to multiple lenders.⁷  The company has over $8 billion⁸  in OBS financing, and hold $5.8 billion⁹  in secured term loans, which is now trading below 15 cents on the dollar compared to ~90 cents in mid-September (Exhibit 2).¹⁰

Tricolor, a subprime auto lender serving primarily lower-income households, filed for Chapter 7 liquidation in early September. It allegedly double-pledged loans using the same collateral to secure financing from multiple lenders. Around 40% of its portfolio showed identical attributes to at least one other loan, meaning Tricolor received multiple financings for the same assets.¹¹  This inflated asset performance and masked rising delinquencies. Tricolor’s troubles highlight vulnerabilities that can be found in the growing asset-based lending (ABL) market particularly where consumer loans are involved.

Despite differing circumstances, both First Brands and Tricolor underscore the growing complexity of credit markets – specifically private credit which now spans beyond traditional direct lending and into specialty finance and asset-based lending.

Mapping The Exposure

Direct exposure to these bankruptcies is limited. Tricolor poses minimal risk, as its subprime consumer ABS and warehouse lines were largely bank-financed¹² , with little to no known exposure across BDCs or private markets as of Q2 2025.¹³

First Brands, however, has broader touchpoints given its $5.8 billion in term loans¹⁴, though still modest in aggregate. Based on our analysis of Q2 2025 data, 15 BDCs – 11 private and four public – held a combined $237 million (at principal) in primary exposure to First Brands (Exhibit 3).¹⁵  This represents just 0.05% of the $503 billion in AUM held across the 166 funds in the public and private BDC universe.¹⁶  For most of these funds, First Brands account for less than 2% of net assets.¹⁷  And while this is indeed modest, it is important to note that prior to First Brands turmoil, many of these exposed BDCs marked the debt to ~90-95 cents on the dollar, meaning net asset values have (or will) adjust to reflect current fair value market pricing.¹⁸

There is also some secondary exposure through collateralized loan obligation (CLOs), as several BDCs hold CLOs that include First Brands loans. Roughly $2.7 billion of First Brands loans are spread across 517 CLO vehicles managed by 69 firms – amounting to just 0.2% of total U.S. and European CLO collateral.¹⁹  Even at the manager level, exposure is minimal, ranging between 0.1 and 180 basis points (bps).²⁰

The more uncertain piece involves the indirect exposure to First Brands’ $8 billion in off-balance-sheet financing.²¹  Reported exposures include Jefferies’ Point Bonita Capital, UBS’s O’Connor hedge-fund unit, Millenium, and Japan’s Norinchukin Bank.²²  Importantly though, many of these OBS financing claims are still being adjudicated – determining which receivables are valid and which lenders hold priority – and will take time to full play out. While this may create some temporary noise, the potential losses appear concentrated in a handful of names and does not signal broader contagion across private credit.

Traditional direct lenders and BDCs have limited exposure to OBS financing, however, private credit managers active in factoring and trade finance (a form of ABL – see our ABL primer here) may have a bit more exposure. Still, given the relative nascency of private ABL, we do not view this as a broad-based concern for private credit.

Credit Fundamentals Remain Sound and Don’t Point to Systemic Risk

Both First Brands and Tricolor issues stem from alleged fraud, not operational failures. While we expect tighter underwriting and more idiosyncratic credit developments ahead, aggregate fundamentals across private credit and leveraged loans remain stable (Exhibit 4) and may improve as rate cuts ease interest burdens.

• Upgrades outpacing downgrades: The downgrade-to-upgrade ratio in leveraged loans for September just hit its best level since April 2024 – signaling stabilization in credit quality.²³
• Distress levels at relative lows: Only 2.4% of BDC loans²⁴  and 0.9% of private credit CLOs²⁵  trade below 80 cents on the dollar (a common indicator of stress). Leveraged loans overall sit near 2.9% vs. greater than 8% during broader credit stress events.²⁶
• Leverage stable: Median gross leverage ratios across private credit portfolios has remained stable around 5.3x over the past few quarters²⁷  – signaling companies have managed to preserve margin and remained conservative in balance sheet management.
• Coverage ratios improving: EBITDA coverage has risen to 1.8x from 1.5x in late 2023, with expectations for further gradual improvements as rates decline.²⁸

Drawing on other recent private credit events – Peraton (May 2025) and Pluralsight (2024) – BDC exposure to those names was ~$600 million and ~$800 million, respectively, far larger than First Brands’ $237 million.²⁹  Both Peraton and Pluralsight were contained credit events, with no broader market contagion, reinforcing the view that First Brands is similarly idiosyncratic, and not systemic events.

Private Credit Is Not Without Headwinds

Forward base rates (3-month SOFR) have declined, with markets pricing in ~125 (bps) cuts through 2026.³⁰  Lower rates could reduce net interest income (NII), pressuring BDC earnings and dividend sustainability. During the 2019 rate cuts, public BDC NII fell ~5-10% QoQ initially, leading to dividend cuts in some cases.³¹  While we expect dividend coverage to remain relatively steady as managers have different levers to pull on, early Q3 earnings previews suggest similar pressures are in place.

Spread compression is also a concern, driven by increased bank competition. New issue spreads are running at 2017 levels³² – lower yields on new deals mean weaker future income, but current net asset values (NAV) look stronger.

Most current distress is tied to cyclical pressures in consumer-facing sectors like retail and auto (~11% of direct lending exposure³³ ), not fraud. While the broader consumer remains resilient, we’re monitoring signs of strain in lower-income cohorts as the labor market softens which could lead to a further cooling in consumption.

What We’re Watching

As the situation continues to evolve, we’re closely monitoring several key developments:

• Public BDC Earnings: Over 65% of public BDCs report earnings the week of November 7, which should provide a clearer window into portfolio health and manager sentiment.³⁴
• Publicly-traded Alternative Asset Managers: Earnings calls will offer insight into how GPs view stress in illiquid private credit and ABL.
• Credit Spread Movements: A widening could signal rising risk aversion or deteriorating fundamentals.
• First Brands OBS Financing Resolution: Adjudication outcomes will shape recovery values and potential ripple effects.

Investment Implications: Selectively Looking At Opportunities Within Public BDCs

Investor sentiment has turned cautious. Bank of America’s October Fund Manager Survey flagged private credit as the most likely source of systemic stress.³⁵  Our own iCapital Flow-of-Funds data shows a slight pullback in investor interest in private credit in the first week of October.³⁶  And the median public BDC now trades at a 19% discount to NAV, which is in the 32%-tile over a ten-year lookback (Exhibit 5).³⁷

However, given these bankruptcies are idiosyncratic, the selloff is overdone relative to fundamentals, in our view. Many public BDCs with no First Brands exposure now trade >20% below NAV – well below pre-turmoil levels and their longer-run averages.³⁸  While we would still be cautious in stepping back, we see opportunities in well-managed public BDCs with strong dividend coverage (>100%), high first-lien exposure (>75%), disciplined capital management, and a long track record.

Bottom Line

The headlines around First Brands and Tricolor have sparked concern, but the foundation of private credit remains intact. We believe these bankruptcies are isolated single-name events, not systemic. While tighter underwriting and more scrutiny are ahead, credit fundamentals are stable, and exposure is contained. We remain constructive on private credit’s resilience – even as the market evolves.