Insight | Capital Markets | Credit Fragility | Structured Finance | Regulatory Risk | Call for Action
Just weeks ago, the credit markets signaled stability. Tricolor Holdings, a subprime auto lender, was issuing Asset-Backed Securities (ABS) with tranches proudly wearing the coveted Triple-A (AAA) rating. First Brands Group was a major automotive parts company with billions in revolving debt facilities.
Now, the façade has shattered:
- Tricolor Holdings filed for Chapter 7 liquidation in September 2025, with liabilities estimated between $1 billion and $10 billion. Its recently issued AAA-rated ABS tranches are now reportedly trading at deeply distressed, “cents on the dollar” levels.
- First Brands Group filed for Chapter 11 bankruptcy with reported liabilities exceeding $10 billion (some filings suggest up to $50 billion). The filing was hastened by concerns over $2.3 billion in opaque, off-balance sheet financing like factoring and supply-chain finance.
The speed of the twin collapses has rattled private credit and structured finance investors. This wasn’t a sudden storm; it was a predictable unmasking of engineered confidence. The structural failure lies not with the companies, but with the architects of market trust: the Credit Rating Agencies (CRAs).
I. The Anatomy of an Illusion: Why Ratings Missed the Signal
The failure to predict or properly warn investors about the risks at Tricolor and First Brands reveals deep, structural flaws in the modern rating process—flaws eerily similar to those that caused the 2008 crisis. The following flaws with the rating system could be the reasons:
1. Structural Failure: Complexity as Camouflage
Tricolor’s core business was bundling high-interest, high-default subprime auto loans. The AAA rating was not based on the quality of the underlying loans, but on financial engineering—specifically, slicing the ABS into senior tranches with supposedly sufficient collateral (overcollateralization) to absorb defaults. This complexity camouflaged the risk, enabling subprime exposure to masquerade as safe, investment-grade debt. When defaults accelerated, even the senior, “protected” tranches buckled.
2. Operational Blind Spot: Off-Balance Sheet Opacity
First Brands’ sudden collapse was accelerated by its heavy reliance on factoring and supply-chain finance (SCF). These techniques allowed the company to raise billions in capital that were often classified as trade payables rather than debt—keeping them off the main balance sheet. Rating agencies, relying heavily on presented financial statements, underestimated or failed to demand clarity on this massive liquidity vulnerability. When collection stalled or lenders demanded repayment, the company’s financial foundation evaporated overnight.
3. The Incentives Trap: Issuer-Pays Model
The fundamental conflict of interest—issuers pay the rating agencies—remains the primary driver of rating inflation. Agencies compete for business not necessarily on analytical rigor, but on permissiveness. In the hunt for yield, structured finance firms demand high ratings for complex products, and CRAs have a powerful incentive to deliver. This is a classic example of “ratings shopping” where the seller of risk essentially chooses their own auditor.
II. The Systemic Threat: When Prop Failure Becomes Trust Failure
The market rewarded the illusion of safety until the illusion finally broke.
These two failures are not isolated incidents. They are a signal that lending standards have become props—polished facades masking fragility across new, opaque asset classes like subprime auto debt and the private credit market.
The Tricolor Parallel to 2008
The narrative that AAA-rated debt backed by subprime assets is once again failing so quickly and spectacularly is a potent and correct parallel to the 2008 Mortgage-Backed Securities (MBS) crisis. While the auto loan market is smaller than the housing market, the mechanism of failure is identical: a systemic misrepresentation of risk enabled by structural complexity and insufficient rating agency diligence. The fact that the highest-rated debt can lose value within months of issuance is a catastrophic failure of the credit architecture itself.
The First Brands Lesson: The Rise of Shadow Debt
The issues at First Brands are a stark warning about the rapid growth of private debt and shadow banking. When financial activity moves off the public balance sheet, visibility is curated, not earned. Investors are left trading on a narrative—the company’s brand strength—rather than verifiable financial truth. The opacity is the liability, and the CRAs have proven ill-equipped to police this emerging dark pool of capital.
III. The Call to Action: Demand for Verification, Not Assumption
The lesson from Tricolor and First Brands is simple and dire: Ratings are narratives, not truth.
For investors, the intellectual vigor required for successful credit analysis must now exceed simple ratings checks. Diligent verification of underlying assets, especially in structured finance and private credit, is non-negotiable.
The systemic implication is clear: We have entered a high-yield environment where risk is once again being manufactured, misrepresented, and then mass-marketed with a stamp of approval that’s functionally worthless under stress.
Do you trust the rating, or the data? The next collapse is already being engineered.