FCA on alert after US auto parts giant’s collapse exposes cracks in private credit

Britain’s Financial Conduct Authority (FCA) said it is closely monitoring the fallout from the collapse of US auto parts maker First Brands Group, warning that the case underscores growing risks in the rapidly expanding private credit market and its potential implications for the UK’s financial system.

The FCA described First Brands’ implosion, alongside the bankruptcy of subprime auto lender Tricolor, as “interesting case studies” in how unregulated private markets can amplify financial instability.

Both companies filed for Chapter 11 bankruptcy protection in recent weeks, unsettling investors and raising fresh concerns over opaque lending structures in the US auto sector.

First Brands, which makes spark plugs, brake calipers, wiper blades and other car components, listed more than $10 billion in liabilities in its bankruptcy filings, according to Reuters.

The company’s downfall followed revelations about its use of off-balance-sheet financing, including invoice and inventory-backed debt, that masked the true extent of its borrowings.

Auto industry roots, financial-market contagion

Founded by Malaysian-born businessman Patrick James, First Brands grew rapidly through a string of debt-fuelled acquisitions across the US and Europe, eventually controlling more than two dozen auto-parts brands. But as The Guardian reported, the company’s “opaque off-balance-sheet financing” spooked creditors, revealing a debt mountain stretching far beyond what had appeared in its accounts.

The crisis has unnerved Wall Street, with The Guardian noting that “as ever in finance, it’s what investors don’t know that scares the most.” The unraveling has drawn comparisons to Greensill Capital’s 2021 collapse, which exposed widespread weaknesses in supply-chain and receivables finance, and to Carillion’s 2018 implosion in the UK.

The BBC reported that private credit, sometimes called shadow banking, has ballooned since the 2008 financial crisis as traditional banks pulled back from lending. “The private credit market now is about the same size as the entire UK GDP,” according to Edi Truell, chair of Disruptive Capital, in an interview with the broadcaster. “My concern is that you have a blow-up like First Brands, which is in many ways the US equivalent of Greensill - opaque, under-disclosed and over-leveraged.”

Private credit’s role under scrutiny

Private credit funds, investment vehicles that lend directly to companies outside the regulated banking system, are at the heart of the current debate. These funds have grown to manage more than $2 trillion globally, often marketing themselves as flexible alternatives to bank loans.

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However, as The Guardian reported, these markets lack transparency. “When there isn’t as much disclosure, there’s more risk, and there’s a fear of contagion,” said Ben Lourie, professor of accounting at the University of California, Irvine. “Somebody is going to have to take on these losses, and eventually it will reach up into the banks.”

Wall Street banks Jefferies and UBS are among those exposed to First Brands, with Jefferies alone admitting to $715 million in related exposure. An investigation is now examining whether the company’s receivables were pledged more than once.

FCA urges vigilance but downplays immediate UK risk

Speaking after the FCA’s annual public meeting, Simon Walls, the regulator’s executive director of markets, said it was “too soon to say” whether the failures at First Brands and Tricolor signalled a broader systemic threat.

“We don’t know at this stage if they were idiosyncratic or whether there will be issues with underwriting those particular markets that are concentrated,” Walls told reporters.

While the FCA stressed that UK institutions appear insulated for now, the regulator acknowledged that cross-border exposure through global private credit funds warrants attention.

Regulator points to new consumer protections

The FCA’s intervention comes just days after it estimated that the UK motor finance industry could pay about £11 billion in compensation for mis-sold car loans, following a major consultation. FCA chief executive Nikhil Rathi said the new Consumer Duty rules, introduced in 2023, should help prevent similar misconduct and opacity in future.

“We don’t see anything like [the mis-selling scandal] on the radar,” Rathi said. “The Consumer Duty has given us a very powerful tool to prevent this in the future.”

Broader implications for the UK and EU

Market observers warn that the lessons from First Brands may extend beyond the US auto sector. The private credit market’s reach, including European asset managers and insurers exposed through high-yield funds, could mean UK and EU financial systems are not fully immune.

“The lack of transparency is the issue,” Truell told the BBC. “If the FCA has got anything else to do, it could say: you must provide proper, clear accounts. Forget 50 pages of carbon metrics, just tell us what’s the cash on the balance sheet and how many liabilities.”

For now, the FCA and Bank of England are watching closely. While neither sees immediate contagion risks, both have signalled that private credit’s rapid expansion and light regulation will remain under scrutiny — especially if more “idiosyncratic” collapses like First Brands emerge.

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"FCA on alert after US auto parts giant’s collapse exposes cracks in private credit" was originally created and published by Leasing Life, a GlobalData owned brand.

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