First Brands: Hidden Leverage and the Risk You Don’t Hold Directly
In September 2025, the automotive-parts supplier First Brands Group filed for Chapter 11 with liabilities reported at around $11 billion — and a structure that stunned its own lenders. Creditors who believed they were financing a business at roughly five times leverage discovered that, once off-balance-sheet obligations were counted, the real figure was significantly higher. Much of the borrowing — billions of it — had been raised through invoice factoring, supply-chain finance and opaque special-purpose vehicles that never appeared as conventional debt.
First Brands is not a hedge fund, and a competent manager knows their own book to the cent. So the interesting question here is not whether a fund should “check its leverage” — it is what an opaque, engineered blow-up of this size says about the parts of risk that even well-run funds have to work hardest to see: exposure that is engineered to stay invisible until it is too late, and the second-order risk that travels through the system to managers who never touched the paper.
What actually happened
On the visible numbers, First Brands looked healthy — strong revenue, solid reported earnings, modest first-lien leverage. That apparent health let it pursue a debt-fuelled acquisition spree. The problem was everything that did not appear in those numbers. Alongside its syndicated loans, the company had borrowed billions more from private lenders through receivables and inventory financing structured to sit off the balance sheet. Covenant-lite loan terms meant the usual early-warning mechanisms never tripped. When a refinancing attempt in 2025 forced the hidden obligations into view, confidence evaporated, the debt repriced violently, and the structure collapsed with very little warning — drawing immediate comparisons to the Greensill failure a few years earlier.
The real story is invisibility, not leverage
Plenty of healthy businesses carry leverage; that was never the issue. The issue was that First Brands’ leverage was engineered to be invisible. Receivables and inventory financing sat off the balance sheet through special-purpose vehicles; covenant-lite terms meant the usual early-warning triggers never tripped; and private letter ratings, increasingly supplied by smaller agencies under commercial pressure, flattered the picture. The result was a structure in which the normal sequence of distress signals — covenant breaches, rating downgrades, disclosure — simply did not fire in order. Bankruptcy was not the culmination of visible deterioration; it was the first unambiguous signal that anything was wrong. That inversion, where the failure is the warning, is the genuinely important feature — and it is a structural problem, not a competence problem.
Where the exposure actually travels
For most funds the First Brands lesson is not direct — they never held the paper. It is about second-order exposure, and that is the part worth real attention. The collapse rippled through the financing plumbing it touched: some leveraged-loan funds saw their largest weekly outflow in months, and the stress carried into CLOs, trade-finance funds and private-credit vehicles correlated to the same structures. A manager can be exposed without ever having underwritten the name — through a counterparty, a financing vehicle, a CLO tranche, or simply a crowded position that reprices when sentiment turns. The valuable work, then, is not auditing your own leverage; it is mapping the indirect connections — which counterparties, financing arrangements and positions are wired into the same opaque plumbing, and how they behave when one node fails. That is precisely the kind of exposure that does not appear on any single position report, because it lives in the connections between them.
What it signals about the wider market
Beyond any individual fund, First Brands — alongside the near-simultaneous failure of subprime auto lender Tricolor — is a data point about the state of private credit and structured finance. The same ingredients recur: rapid growth in private and supply-chain financing, covenant-lite proliferation, ratings under commercial pressure, and off-balance-sheet structures that can mask latent weakness — the pattern that produced Greensill a few years earlier. The consensus is that the systemic risk is contained, largely thanks to post-2008 structural protections in instruments like CLOs. That is reassuring at the system level, but the signal for any manager with credit exposure is more pointed: opacity has been quietly accumulating, and the market’s early-warning machinery is weaker than its headline health suggests. The next one of these will, by construction, also be invisible until it isn’t.
The work this points to
None of this is an argument for a fund to second-guess its own book — it knows its positions. It is an argument for treating the invisible and the indirect as first-class risks rather than afterthoughts: stress-testing for contagion and not only for direct exposure, scrutinising the financing structures of the counterparties and vehicles you rely on, and bringing genuine scepticism to anything whose apparent health depends on continuous funding and favourable ratings. This is second-order, structural risk work — and it is exactly where independent, experienced risk leadership earns its place, because seeing the exposure that lives between positions rather than within them is a full-time discipline, not a quarterly report.
Ridge Line provides experienced, independent risk leadership to alternative managers and family offices. Get in touch to discuss your firm’s risk picture.