Troubling signs in corporate debt

Rob Armstrong (0:06)

Pushkin.

Katie Martin (0:09)

Corporate debt is hot right now. So, it's a little alarming to see some cracks starting to form. One of the cracks is in First Brands, which is a car parts supplier. I've never heard of it either. But it's been feasting on private money from lenders, and now it looks like it's heading into bankruptcy. Another is Tricolor Holdings. Again, not exactly a household name, but it's a subprime auto lender that has run itself into a sticky patch. This all makes you wonder, has the corporate debt market overheated? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London. But I'm actually in New York this week. Hooray! Hooray! Giving an address to the UN. No, hanging out with the big fella, Rob Armstrong from the Unhedged newsletter, the Daily Newsletter for discerning markets dorks. Rob, my first question.

Rob Armstrong (1:07)

It's great to have you tease me face to face, Katie. That's the point. I was getting tired of being mocked from 3,000 miles away.

Katie Martin (1:16)

Tell me, why is it so hot here? It's very, very hot.

Rob Armstrong (1:19)

It's very hot. September is still summer in New York and it is still humid. I hope you didn't pack a sweater or as you would say, a jumper, because you will not need it here in New York City in September.

Katie Martin (1:31)

I didn't pack a jumper, but I did pack a suit to wear at an event tomorrow, which I think, error.

Rob Armstrong (1:38)

I'm going to be wearing a suit tonight and I'm going to be sweating. But Katie, I'm going to be looking good.

Katie Martin (1:45)

You reckon.

Rob Armstrong (1:46)

Yeah.

Katie Martin (1:47)

Now listen, Rob, it is never good when the top of the FT homepage has big stories about credit going wrong. Allow me to tell you what's in the current story at the top of our homepage from our colleague Eric Platt and also Robert Smith in London. US debt investors have raised the alarm over lax lending standards in credit markets after the unraveling of two companies that just two weeks ago were deemed to be in strong health.

Rob Armstrong (2:17)

As all discerning problem connoisseurs in markets know, the credit market is where the bad stuff always happens.

Katie Martin (2:25)

Always happens. So, let me just carry on from this story. So, I'm paraphrasing a little bit. Tricolor Holdings, at the start of this month, appears to have failed. And First Brands Group is looking at bankruptcy proceedings. The thing is, Tricolor had a triple A rating when it borrowed in credit markets. Very recently, basically, the people who examine who's borrowing what under what terms say, yep, this is a very solid company.

Rob Armstrong (2:53)

Really solid.

Katie Martin (2:54)

Super solid. First Brands seems to have amassed as much as $10 billion in debt and off balance sheet financing. Yikes. And it almost raised some more last month. So let's start with First Brands.

Rob Armstrong (3:08)

Okay.

Katie Martin (3:09)

What the hell is First Brands?

Rob Armstrong (3:10)

Okay. First Brands is a very simple thing. It is a company that produces car parts, which is a very normal, real economy thing to do.

It is also, it is worth noting, what we call a roll-up in our world, which means it started out making just one or two kinds of car parts, but then it got a hold of some financing to buy other car parts. So I can't remember it exactly what it was, but maybe it was spark plugs, and then it went to windshield wipers, and then it went to catalytic converters or whatever it is. In general, roll-ups end in one of two ways. Either they make the owners very rich because they become these very powerful horizontally integrated businesses that dominate their industry, or they borrow one dollar too much, or more often more dollars than that, and they blow up in a blaze of glory. And like they kind of get addicted to buying other companies and borrowing money and growing in organically, and they kind of fly off the rails. And this company, First Brands, seems solidly in the fly-off-the-rails category.

Katie Martin (4:20)

Yeah, yeah. Whereas, like, Tricolor is a very different sort of business. And this is interesting in other ways. So, again, it's not exactly a household name, particularly outside of the States. But as I understand it, it lends money for people with low credit ratings, like generally low-income people, to buy cars.

Rob Armstrong (4:42)

Yeah. It actually sells the cars, too.