Fitch says First Brands default unlikely to affect traditional direct lending

Core Viewpoint - The recent default of First Brands Group does not indicate increased risk for the traditional direct lending market, according to Fitch Ratings [1] Group 1: Debt Exposure and Market Impact - First Brands' debt is primarily linked to broadly syndicated loans (BSL), not direct lending, with the BSL market having greater exposure to the company's restructuring [2] - The median exposure across 330 Fitch-rated reinvesting U.S. BSL CLOs was 0.4%, increasing to 0.9% for 48 CLOs that completed their reinvestment periods [2] Group 2: Bankruptcy and Liabilities - At the time of bankruptcy, First Brands had nearly USD 5 billion in first-lien term loans and over USD 500 million in second-lien term loans, underwritten and syndicated by investment banks [3] - Traditional direct lending typically involves private negotiations without intermediaries, contrasting with First Brands' situation [3] Group 3: Loan Classification - A USD 250 million loan issued earlier this year should be classified as a private placement of a broadly syndicated loan rather than a private credit facility [4] - First Brands' status as a private company does not change the classification of its debt as syndicated [4] Group 4: Financial Strain Factors - Fitch attributed First Brands' financial difficulties to extensive off-balance sheet financing, including receivables factoring and inventory reverse-factoring [5] - These liabilities differ from traditional direct lending, which is typically on-balance sheet and secured by first-ranking claims over borrower assets [5] Group 5: Default Rates and Future Outlook - The private credit default rate was 5.2% in August, unchanged from the previous month but up from 4.6% in December 2024 [6] - Fitch anticipates that easing interest rates may reduce cash flow pressure on private issuers, potentially leading to lower default rates in future periods [6]