Opinion | Capital Markets | Asset-Backed Finance | Ratings Illusion
The Unraveling of Confidence
This exposé is premised on the recent collapse of Tricolor Holdings and the distress of First Brands Group — both of which, mere weeks prior, were deemed financially sound. Tricolor held triple-A ratings on its asset-backed securities. First Brands was preparing to raise additional debt. Today, one has collapsed. The other is exploring bankruptcy. Debt investors are alarmed. But this is not a surprise. It is a signal. The illusion of financial health is cracking, and the scaffolding behind it is built on engineered visibility, not resilience.
The Mirage of Creditworthiness
Tricolor bundled subprime auto loans into asset-backed securities. These instruments were sold as precise, collateralized, and low risk. First Brands relied on invoice factoring and off-balance sheet financing to maintain liquidity optics. Both companies projected strength. But their models depended on opacity, not durability. When visibility collapsed, so did the illusion.
Asset-Backed Finance and the Illusion of Control
Asset-backed finance is marketed as safer than junk-rated corporate debt. It is tied to tangible assets — solar panels, aircraft leases, music royalties. Yet when those assets are misvalued, misreported, or misaligned with actual cash flow, the structure begins to unravel. Tricolor’s subprime auto loans were modeled on idealized repayment behavior, not verified borrower stability. Inflated vehicle valuations and optimistic income assumptions masked fragility. When defaults spiked, the cash flows collapsed. Similarly, First Brands overstated receivables and relied on aggressive factoring timelines. When payments stalled, liquidity evaporated. The structure did not fail because of volatility. It failed because the assets were engineered to meet rating thresholds — not reflect financial reality.
How Rating Agencies Missed the Signal
The collapse was not merely operational. It was systemic. Credit rating agencies failed on five fronts, as following:
1. Overreliance on Issuer-Provided Data
Agencies leaned heavily on models and performance data supplied by Tricolor and First Brands. These inputs were selectively framed to highlight repayment strength while obscuring borrower churn and asset deterioration. Independent audits were rare. The ratings reflected curated optimism, not verified resilience.
2. Structural Complexity and Ratings Inflation
Tricolor’s ABS structure sliced risk into tranches, giving senior slices AAA ratings despite subprime exposure. The assumption: junior tranches would absorb losses. But when defaults accelerated, even senior tranches faced impairment. The structure simulated control. It did not deliver it.
3. Failure to Account for Liquidity Risk
First Brands’ liquidity depended on receivables and factoring. Ratings agencies assessed its debt based on reported cash flow, but failed to stress-test for delays, customer concentration, or supply chain fragility. When receivables stalled, the liquidity dried up. The risk was not modeled. It was ignored.
4. Incentive Misalignment and Ratings Shopping
Both companies benefited from a system wherein issuers pay for ratings. Agencies compete for business by offering favorable grades. This dynamic incentivizes leniency. Ratings become marketing tools, not risk assessments. The 2008 playbook persists — just with new asset classes.
5. Lack of Forward-Looking Stress Scenarios
Ratings were based on historical performance and base-case projections. They did not model plausible disruptions — such as macroeconomic shocks, or borrower instability. The assumption of continuity replaced the discipline of stress testing.
The Collapse of Trust Signals
This is not merely about two companies. It is about how capital markets manufacture trust. Lending standards are no longer safeguards. They are props — used to simulate stability, attract capital, and defer scrutiny. When those props fail, the collapse feels sudden. But the fragility was always there.
The Systemic Implications
Credit markets are not broken. They are misrepresented. Asset-backed finance, ratings inflation, and off-balance sheet liquidity have created a landscape wherein visibility is curated, not earned. This exposé does not merely dissect two failures. It maps how systemic opacity is normalized — and how trust is engineered until it collapses.