Inside the Black Box: What First Brands Teaches Us About CLO Risk
A glimpse into structured finance — and what LPs should know
First Brands, a major privately owned auto parts maker, filed for bankruptcy protection on Sunday with more than $11 billion in liabilities, one of the largest corporate failures of the year.
The company’s balance sheet was a $6B patchwork of loans (plus invoice factoring, supply chain finance, and inventory-backed facilities off balance sheet). A significant share of company’s US-denominated debt (around $2B) ultimately found its way into collateralized loan obligations (CLOs), the structured vehicles that slice and dice corporate loans into tranches with different risk and return profiles.
Beyond CLOs, several private credit funds also appear to be holding First Brands loans directly (including some familiar fund names - more on that below).
The market’s verdict has been swift: First Brands’ first-lien debt now trades at roughly 33 cents on the dollar. Contrast that with Fitch, which only downgraded the debt on September 22, just a few days before the bankruptcy filing, and a full year after another lender began building a short position against the company’s loans (yes, we’ll unpack that, too).
You’ve heard me say this before, and I’ll say it again: the greatest risk in private markets is opacity. Hundreds of private credit funds hold loans across thousands of private companies. These borrowers don’t publish financials, and once a loan is originated and sliced into structures, visibility into its performance all but disappears.
First Brands’ collapse gives us a rare window inside that black box. So let’s pull a few of those threads, and talk about CLOs.
This article dives into the intricacies of collateralized debt in CRE:
📚 You’ll find all sources and additional reading material at the end of the post.
🔎 What ARE CLOs?
Collateralized loan obligations (CLOs) sit within the world of structured finance, a family of investment vehicles that includes mortgage-backed securities (MBS). They share the same DNA: take a pool of loans, bundle them, and carve them into different slices (“tranches”) that cater to investors with varying appetites for risk and return (yes, we’ve seen this movie before).
Where CLOs differ is in the collateral: