First Brands bankruptcy sparks sharp outflow from US loan funds

By Patturaja Murugaboopathy

(Reuters) -U.S. loan funds are seeing sharp outflows this month as the bankruptcy of First Brands Group raises concerns over opaque financing and the robustness of underwriting standards in the private credit market.

Loan exchange-traded funds, which invest in syndicated loans that are often bundled into collateralized loan obligations (CLOs), saw about $1.5 billion in outflows in October — their first monthly withdrawal in six months, according to Lipper data.

"Investors are finally starting to question the loose underwriting in the loan market, driven by massive inflows into both private credit and broadly syndicated loans," Jeffrey Rosenkranz, portfolio manager at Shelton Tactical Credit Fund, said.

He said he expected early defaults tied to fraud would give way to broader distress among weaker businesses and poorly managed firms as the credit cycle progressed.

The collapse of First Brands and subprime auto lender Tricolor has unsettled parts of Wall Street’s multitrillion-dollar credit market, which includes leveraged loans, CLOs, trade-finance funds and asset-backed auto lending.

The bankruptcies have already triggered losses at major financial firms. JPMorgan called its $170 million charge tied to Tricolor “not our finest moment,” while Jefferies’ CEO said the firm was defrauded by First Brands.

A spokesperson for First Brands' CEO said on October 10 he was evaluating the best path forward to help maximize value for its customers, suppliers, employees and lenders.

(Reporting by Patturaja Murugaboopathy; Editing by Alison Williams)

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