U.S. loan funds are experiencing substantial outflows this month amid concerns regarding the bankruptcy of First Brands Group. The situation has triggered worries about opaque financing practices and the strength of underwriting standards within the private credit market. Loan exchange-traded funds (ETFs), which invest in syndicated loans frequently packaged into collateralized loan obligations (CLOs), recorded approximately $1.5 billion in outflows during October. According to Lipper data, this marks the first monthly withdrawal in six months.
Jeffrey Rosenkranz, portfolio manager at Shelton Tactical Credit Fund, noted that investors are beginning to scrutinise the loose underwriting standards prevalent in the loan market. He attributed this to significant inflows into both private credit and broadly syndicated loans. Rosenkranz anticipates that initial defaults linked to fraudulent activities will eventually give way to broader distress among weaker businesses and poorly managed firms as the credit cycle progresses.
The collapses of First Brands and subprime auto lender Tricolor have unsettled segments of Wall Street’s multitrillion-dollar credit market, encompassing leveraged loans, CLOs, trade-finance funds and asset-backed auto lending. These bankruptcies have already resulted in losses for major financial institutions.
JPMorgan referred to its $170 million charge related to Tricolor as a regrettable incident, while Jefferies’ CEO stated that the firm was defrauded by First Brands. A spokesperson for First Brands’ CEO communicated on October 10 that he was assessing the optimal strategy to maximize value for its customers, suppliers, employees and lenders.