AAA Rated Junk: What Tricolor and First Brands Reveal About Credit Markets!

Just weeks before its bankruptcy, First Brands Group was being pitched to investors as a $6 billion loan opportunity. Jeffre was marketing the deal. The company was said to have nearly $1 billion in cash. Then it imploded, proof once again that due diligence is sometimes just a phrase in a pitch deck.

Holdings collapsed even faster. Triricolor operated as both a used car dealership and a subprime lender, offering high interest rate loans to borrowers with limited or no credit history, many of them undocumented. It packaged those loans into AAA rated securities and sold them to investors. When repayments faltered, the whole structure unraveled.

Fifth Third Bank, one of its creditors, is accusing Triricolor of fraud, alleging that the company pledged the same collateral to multiple creditors. Investigators are now combing through what may be a corrupted loan database, and banks have begun repossessing vehicles from dealership lots across the Southwest. The speed of these collapses caught investors offguard. Just months ago, First Brand's debt was marked nearpar by private credit funds.

Some even marked above 100 cents on the dollar. AAA rated securities were trading at full value too before the bankruptcy. Today, First Brand's top tier loans fetch just over 33 cents on the dollar, and Triricolor's lower ranking bonds have plunged to 12 cents on the dollar. These weren't supposed to be crazy investments.

They sat in the portfolios of pension funds, insurers, and asset managers, institutions that aim to avoid volatility, not absorb it. Fol, a bond rating agency, cut its bond rating on somericolor bonds from AAA 19 levels to double C. According to Bloomberg, the rating agency wasn't able to contactricolor and couldn't confirm even basic facts about the business. These defaults have exposed weaknesses in the credit markets are leading investors to question lending standards and the structure of private debt markets.

They've also raised questions about how much risk is hiding in supposedly safe securities and whether more surprises are waiting in the wings. First Brands revealed a $12 billion web of liabilities when it collapsed, and investigators are working to unveil whether the firm pledged the same assets to different lenders several times over in order to borrow these huge sums of money. Jeff, the investment bank, and Millennium Management, one of the biggest hedge funds in the world, are said to be amongst those facing losses. Triricolor and ...