Morningstar sees limited fallout from First Brands on financials, auto, direct lending sectors

[Filing for bankruptcy document]
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Morningstar|DBRS sees some pain, but limited fallout, from the First Brands bankruptcy on financial institutions, the auto sector, and private middle-market lenders. However, the recent growth in private credit financing assures that this won't be the last failure of a closely held business to reverberate through the finance sector.

"It appears likely that First Brands Group, LLC (First Brands) filing for Chapter 11 will cause some pain for a wide range of market participants, including a number of banks, asset managers, private credit funds and collateralized loan obligations (CLOs) — and, given the recent growth in private credit financing, we believe that we can expect an increase in complicated bankruptcies of larger, privately held corporates," a Morningstar team, led by Elisabeth Rudman, said in a recent note.

Financial institutions that appear to have meaningful exposure to First Brands, including through client assets, include South State Bank, UBS (NYSE:UBS [https://seekingalpha.com/symbol/UBS]) O'Connor, CIT Group, Onset Financial, and Jefferies Financial Group (NYSE:JEF [https://seekingalpha.com/symbol/JEF]), the report said.

With Morningstar's rated universe of business development companies, only one BDC, Prospect Capital (NASDAQ:PSEC [https://seekingalpha.com/symbol/PSEC]), had exposure. As of June 30, 2025, Prospect's exposure was under 1% of investments at fair value.

"With borrowing costs still elevated and persistent weakness in operating margin for many borrowers, we continue to expect that lower-rated borrowers in our portfolio will remain confronted by headwinds over the next six to 12 months," the note said.

One advantage of the direct-lending community is that it's more closely knit, compared with other loan markets, as investment incentives for lenders and sponsor/borrowers are "sustainably aligned for mutually beneficial outcomes."

Morningstar sees some potential indirect implications for insurance companies, "including mark-to-market losses on CLOs and private credit investments, potential trade credit insurance claims from suppliers of First Brands’ companies, and possible directors' and officers' claims tied to allegations of receivables with double financing."

The firm also doesn't foresee major repercussions in the auto sector, as only about 15% of First Brands' revenue is from original equipment manufacturers, such as Ford or GM. Any fallout would mostly affect other aftermarket parts suppliers. It could eventually affect Tier 1 parts companies and, by extension, OEMs. But Morningstar sees those challenges as manageable.

MORE ON JEFFERIES FINANCIAL GROUP, PROSPECT CAPITAL, ETC.

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* Jefferies tallies $161M of exposure to bankrupt auto-parts maker First Brands (updated) [https://seekingalpha.com/news/4502610-jefferies-tallies-161m-of-exposure-to-bankrupt-auto-parts-maker-first-brands]
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