This blog is the first in a series by the IFoA Private Credit Working Party. We begin with a case study that allows an examination of the credit risk, structural complexity, and regulatory considerations through the lens of the bankruptcy of First Brands, a privately owned American auto parts manufacturer, in September 2025.
Private credit has grown from a niche post-GFC funding solution into a $2 trillion asset class, filling the lending gap left by banks facing more constraining capital regulation. For investors it can offer illiquidity premium – potentially higher returns than traditional corporate credit – alongside diversification benefits and bespoke covenant protection. For borrowers, it can offer execution certainty and structural flexibility often unmatched in public markets. Its rapid growth has drawn increasing regulatory scrutiny driven by valuation opacity, expanding retail exposures and increasingly complex structures. First Brands has emerged as a high-profile headline insolvency case, making it an interesting case study.
First Brands pursued an aggressive acquisition strategy with 20+ buyouts ($4 billion) completed since 2018. With a 5x revenue expansion from around $1 billion in 2020 to $5 billion+ in 20241, the balance sheet became highly leveraged and structurally dependent on supply chain finance (SCF) to sustain operations. Factoring – that is, selling receivables to third-party providers to receive immediate cash at a discount – became the primary mechanism for working capital financing for First Brands.
Bloomberg reported that 70% of First Brands’ revenue was factored as of 2024 year-end, well beyond the level considered typical within the aftermarket auto parts industry2. The scale of reliance suggests that factoring functioned as structural financing rather than a short-term liquidity management tool – a red flag visible in the ratio itself. Over-dependence on factoring has long been a classic source of insolvencies, yet standard underwriting frameworks often still treat it as working capital, not debt.
This dependency created rate sensitivity that compounded from 2022. As rates rose, providers widened their discount, reducing the cash First Brands received per dollar of receivable. This was further exacerbated in April 2025 by tariff shocks introduced by the Trump administration that stressed free cashflow.
First Brands’ capital structure included both on and off-balance sheet liabilities, with court filings disclosing $11.5 billion total debt (from First Brands’ perspective) as below3.
On-balance sheet debt: Broad syndicated loan (BSL) ($5.5 billion) and asset backed financing (ABL) ($0.6 billion), both underwritten by banks. BSL is marked to market and traded in the secondary market. Direct private credit investors' exposure was limited because:
Off-balance sheet debt: $5.4 billion exposure in receivable factoring and inventory-based financing – nearly half of total debt. These differ from direct lending typically held by UK insurers in MA portfolios, particularly in duration, and are uncommon in global insurer portfolios. The instruments sit within 112 bankruptcy-remote structures, ring-fenced legal entities that isolate collateral – including invoices and inventory – from First Brands’ operating company (OpCo) under insolvency. Despite the ring-fencing, collateral values remained contingent on First Brands’ operational performance.
Under prevailing accounting standards, some off-balance sheet lending arrangements may be reported separately from on-balance sheet debt where legal and accounting criteria are met. However, in First Brands’ case, the use of working-capital financial structures appears to have obscured the group’s true leverage and materially weakened disclosure quality. If lenders relied only on the reported financials to underwrite the credit without adjustment, the risk would have been significantly underestimated.
Payment priority is governed by contractual lien and collateral agreements, as illustrated in the table below:
| Category | Instrument | Collateral |
| On-balance sheet | ABF | Borrowing base |
| First-lien BSL | OpCo operating assets | |
| Second-lien BSL | Same asset pool | |
| Off-balance sheet | SCF | Program-specific receivables |
ABF is senior secured with the highest payment priority. Second-lien BSL is junior secured with the lowest payment priority. SCF is not part of OpCo debt waterfall (structurally separate).
Off-balance sheet facilities are held within separate, bankruptcy-remote structures, secured only against their own collateral (for example receivables, invoices or inventory). They sit outside the OpCo balance-sheet debt waterfall entirely.
The structural isolation relies on true-sale treatment, meaning the assets are legally transferred out of the OpCo. If ‘true-sale’ status is successfully challenged in insolvency proceedings, SCF claimants risk being characterised as unsecured OpCo creditors, losing their structural seniority – a question that proved central to post-filing disputes.
In 2025, fluctuating US tariff policies proved challenging for First Brands, as it faced cost pressure and cash drain. According to Reuters, First Brands estimated that Trump's new tariffs cost the company $219 million from April 2025 to August 2025, despite efforts including front-loading inventory ahead of the April announcement4. This triggered a liquidity crunch. But importantly, the underlying solvency hit (hidden off-balance sheet debt) made recovery impossible. The court filing3 disclosed about $1.1 billion in annual earnings alongside $900 million on-balance sheet annual interest burden, implying 1.2x interest coverage on reported debt.
In light of the compressed margins and increasing costs, First Brands undertook a refinancing effort to extend its existing 2027/2028 BSL debt to 2030 maturity to create liquidity headroom. The proposed deal included a significant upsizing of the second lien tranche, signalling that additional liquidity was the primary objective as opposed to maturity relief alone.
Investors demanded deeper due diligence, including a quality of earnings report. Specifically, they raised scepticism over reported EBITDA, which was inflated by acquisitions-related add-back, as well as the opacity of off-balance sheet lending. The process was paused in August/September as First Brands failed to deliver the request.
Markets reacted sharply as the Financial Times reported that alternative asset manager Apollo had taken a credit default swap short position on First Brands months before the refinancing attempt5. The receivables purchasers withdrew from the factoring program, breaking the liquidity supply from the SPV to OpCo – the group’s centralised treasury hub. This resulted in immediate working capital starvation across subsidiaries, even healthy ones. Secondary prices for BSL plummeted soon after, with first lien loans falling from near par to 30s in September. The sequence of events pushed First Brands to file for Chapter 11 bankruptcy on 28 September 2025, followed by credit downgrades by the rating agencies.
Post-filing court proceedings focused on:
The DIP facility supported continued business operations while the company entered a formal restructuring process. Subsequent disclosures and board-level investigations raised credit concerns over the legitimacy, transparency, and collateralisation of supply chain financing structures6. First Brands allegedly inflated invoices and double-pledged some receivables and invoices, meaning the same collateral was used to support more than one financing arrangement.
More broadly, investors in private credit funds, particularly retail investors, have grown increasingly cautious, reflected in a surge of fund redemption activity in recent months.
For UK and European insurers, a US auto parts bankruptcy case might seem an unusual choice of case study. Yet the structural lessons are universal. First Brands highlights why genuine ‘look through’ is not merely a risk monitoring discipline but a prerequisite for sound capital modelling – understanding true leverage, collateral quality and payment seniority can be the difference between an accurately priced exposure and a significantly understated one.
When look through is missing, covenants can serve as a valuable safeguard, but First Brands appears to have had little practical covenant protection. That left lenders with limited early-warning triggers and limited ability to intervene before deterioration became acute. Insurers should therefore reflect covenant strength explicitly in risk-adjusted returns.
As the Solvency II 2027 reforms improve capital efficiency for non-STS structured finance – including ABF, RMBS and CLOs – this discipline becomes more, not less, important: the reward of preferential spread risk capital treatment should be earned through genuine understanding of the waterfall, recognising that achieving full line-of-sight into borrowers’ businesses involves real effort and cost.
While First Brands’ downfall appears potentially idiosyncratic – a boiling point of structural opacity, extreme factoring dependency and alleged fraud – its vulnerability was clearly amplified by broader macro and market conditions, drawing attention to the broader default environment. The chair of Partner Group has warned that private credit default rates could double in the next few years amid AI-driven disruption7. In similar context the working party is assessing private credit through the lens of systemic risk; a question this case study begins, but does not answer, alone.
