The recent Chapter 11 bankruptcy filing by First Brands Group, the global supplier behind popular aftermarket brands like FRAM filters and Raybestos brakes, is a stark warning about the vulnerabilities hidden within the modern leveraged loan market. The company’s collapse, fueled by massive debt and complex, opaque financing, highlights the consequences of the aggressive lending standards prevalent in the upper middle market.
First Brands Group was a product of an aggressive, debt-financed “roll-up” strategy. Over the last decade, it quickly amassed a portfolio of over two dozen brands through a flurry of acquisitions. While this created an automotive parts juggernaut, it saddled the company with an estimated $10 billion to $50 billion in total liabilities.
The rapid unravelling was a direct result of critical financial distress:
First Brands’ swift implosion is viewed by many as a textbook example of the risks inherent in the lending practices of the upper middle market. UMM is a segment where large, high-leverage companies often obtain financing through the broadly syndicated loan (BSL) market.
The key enabler in this scenario was the company’s reliance on Covenant Lite Loans.
The borrower-friendly nature of upper middle market debt essentially delayed the crisis, allowing a solvable problem to fester into a sudden, complex bankruptcy.
A financial implosion of this magnitude would be far less likely in the core middle market ($10-$50M in EBITDA), which is generally financed by direct lending from private credit funds like PennantPark.
In the core middle market, a quarterly breach of a maintenance covenant would have forced First Brands and its lenders to the negotiating table long before the situation became unmanageable. This early intervention mechanism, largely removed from the upper middle market, is the fundamental difference that makes the First Brands bankruptcy a crucial warning sign for the entire leveraged finance ecosystem.
For investors evaluating private credit or diversifying beyond the mega funds, we encourage you to reach out to our team to discuss these trends in more detail. Please contact invest@pennantpark.com or reach out to any of the professionals listed below.
PennantPark was founded in 2007 as an independent middle market credit platform. The firm was founded by Art Penn, a private credit industry veteran that previously co-founded Apollo Investment Management. We have invested over $26 billion across multiple economic and credit cycles since inception, and we manage $10 billion in AUM today.[i] PennantPark serves a broad range of sophisticated investors with product offerings that include business development companies, private capital funds, joint ventures, and other specialized funds.
Our highly experienced team primarily invests in the core middle market, targeting companies with earnings of $10 million to $50 million. These mid-sized companies are often overlooked by banks and large investment managers, resulting in senior secured loans that feature higher yields, lower leverage, and stronger lender protections when compared to the upper middle market and broadly syndicated loans. We focus on five key industry verticals where our track record is excellent and where we have the most expertise and experience. These industries include healthcare, government services, business services, consumer, and software & technology.
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