Tom Essaye aptly characterized the situation on 10/16/2025 when he asked, “Are Tricolor and First Brands “Cockroaches?” (www.sevensreport.com).
Here’s Tom’s explanation:
Famed JPMorgan Chase CEO Jamie Dimon issued a warning of sorts about potential stress in some credit markets when he stated, “When you see one cockroach, there’s probably more” in regards to the bankruptcy of sub-prime auto lender Tricolor Holdings. That warning, along with the collapse of auto-parts manufacturer First Brands, is causing some investors to worry about contagion in the credit markets. Given the coverage in the financial media of these two events (which have become even more prominent given Dimon’s comments on the JPM earnings call on Tuesday), I wanted to cover the Tricolor and First Brands bankruptcies, so we all 1) Understand what happened, 2) Examine the possibility that these two events could be a harbinger of more credits stress that could impact the markets and 3) Identify indicators to tell us if contagion risks are spreading.
Tricolor and First Brands: What Happened. For ease of media coverage and because both were mentioned in bank earnings calls this week, the financial media has grouped these two events together. But beyond being in the same general industry (automotive), they are not related to one another and should be considered stand-alone events. Starting with Tricolor Holdings, the company was a sub-prime auto dealer and lender. In a recent bond filing, Tricolor revealed that 68% of its borrowers didn’t have a credit score, while more than half of the borrowers didn’t even have a driver’s license. Put plainly, this was a car dealership and affiliated financing company that sold cars to lower income individuals, many of which could not get auto loans at traditional banks (for various reasons). These loans, which carried much higher interest rates, were then packaged and sold via CLA (collateralized loan agreements). Tricolor declared bankruptcy in late September very unexpectedly (its CLOs plunged nearly 80% in a day in secondary markets), telling us the banks that traded them were blindsided.
Turning to First Brands, this company manufactured and sold auto parts (spark plugs, windshield wipers, brake pads, etc.). The company filed for bankruptcy in early September when it was unable to secure needed financing to continue operations. While also a surprise, concerns about First Brands were present before the failure. Why Did Tricolor and First Brands Go Bankrupt? As usual, it’s the “why” in markets that matters and if Tricolor and First Brands went bankrupt for reasons related to credit markets or the economy, it could be a harbinger of trouble ahead. Tricolor’s sudden bankruptcy could have been the result of sudden underperformance of its loan portfolio. In plain-English, people stopped paying their auto loans in such numbers that it caused a cash crunch and the company was not able to secure debt to fund operations. If that was the reason, it could mean that the lower end of the economy is buckling under tariffs, inflation and slower hiring and that could mean subprime loans across industries could be at risk (and anyone who remembers 2008-2009 knows how bad that can go!).
For First Brands, the concern isn’t so much about the normal economy (demand for spark plugs and wind-shield wipers isn’t the primary concern here). Instead, it has to do with the potential bubble in private credit. First Brands relied heavily on private credit, or money loaned from investment funds such as hedge funds and private equity to finance operations. In fact, there was so much money funneling into private credit over the past decade-plus that fear grew it was all chasing returns and ignoring business risks to get a high yield. The First Brands bankruptcy could be the first domino to fall and if that’s the case, then a lot of private credit investments may be worth much less than we think, which could cause market stress. Those reasons are legitimate causes for concern because they are both substantially negative for the markets and the economy. Positively, it does not appear that either of those are the reasons for the Tricolor or First Brands bankruptcies. Instead, the reason for both appears to be the same, and a familiar one, fraud.
In the case of Tricolor, there are investigations into the practice of “double pledging” where a portfolio of loans is pledged as collateral twice to two different financial institutions. For instance, a portfolio of $50 million in subprime auto loans is sold to “Bank A” for $50 million, and then the same loan is sold to “Bank B” for $50 million, creating a $100 million liability on just $50 million in assets (if they all perform). If that sounds fraudulent, it is, and Tricolor is being investigated for it.
Turning to First Brands, this company was run by a man named Patrick James, who over several decades, left numerous bankrupt companies in his wake (and angry investors). Yet thanks to the boom in private credit, he successfully borrowed billions of dollars to grow his auto-parts businesses. While First Brands was a legitimate auto-parts manufacturer, it appears it was saddled with lots of off-balance-sheet leverage and potentially engaged in “rehypothecation” of collateral that backed its financing. Similar to Tricolor’s story, it is suspected that First Brands used the same collateral (potentially receivables or inventory) to secure multiple loans from different financing partners and either concealed or failed to disclose the practice. The result was an overleveraged company that cracked as soon as business slowed. So, while the Tricolor and First Brands bankruptcies could have signaled potential contagion or economic/market stress, it appears, for now, that the real reason was old-fashioned fraud, and per-haps a lack of sufficient due diligence from investors. While unfortunate for investors and the employees of these companies, these appear to be mostly isolated incidents and not some larger market problem.
What Would Signal a Larger Problem? Just because Tricolor and First Brands appear to be, for now, isolated incidents of potential fraud, we can’t totally dismiss that reality that there may be stress in the lower income portion of the economy that could trickle “up” and impact credit markets, stocks and the economy. But beyond watching for more corporate bankruptcies, a macroeconomic indicator to watch is the Baa over Treasuries credit spread. Baa bonds are high-yield bonds and if we start to see hints of systemic stress in the cred-it markets, junk bonds will get sold hard and the Baa over Treasuries spread will rise, sharply. As we referenced in Wednesday’s Report, 2.00% in the Baa over Treasuries spread is definitely a wake-up call on economic/credit concerns, so that’s a level to watch. Currently, the Baa over Treasuries spread is at 1.72% and if that moves steadily higher, it’s a signal that, per-haps, Tricolor and First Brands aren’t isolated. We’ll continue to watch this and if this metric gets close to 2.00%, we will let you know because that will increase down-side risks in stocks.
We thank Tom for granting us permission to share his summary of the First Brands and Tricolor Affairs.
Kotok View
I agree with the notion that watching credit spreads is an important indicator when looking for cockroaches. Note that there is not much warning when credit spreads widen. They can remain tight for long periods and resisting the human propensity inclined to “chase yield” gets more and more difficult over time. Currently, credit spreads are extremely tight by historical standards.
As for fraud or abrupt credit widening, Jamie Dimon phrased the quote his way.
I use this form: You never see just one cockroach — AND, remember, they breed in the dark.
