First Brands Group LLC’s unexpected bankruptcy filing is triggering a wave of investor withdrawals from U.S. loan funds, intensifying pressure on a market already grappling with higher interest rates and economic uncertainty. The outflow, which began late last week and accelerated on Monday, has led to price declines in leveraged loans and collateralized loan obligations (CLOs), according to sources familiar with the matter.
The bankruptcy of First Brands, the parent company of brands like Febreze, Mr.Clean, and Pine-Sol, is rattling loan funds because of the size of its debt – approximately $2.5 billion in loans – and the speed of its collapse. This event underscores the vulnerabilities within the leveraged loan market, where companies with notable debt burdens are increasingly at risk as borrowing costs rise and economic growth slows.Investors are now reassessing their exposure to similar highly leveraged companies, fearing further defaults and losses.
According to filings, First Brands filed for Chapter 11 bankruptcy protection in delaware on Sunday, citing a confluence of factors including declining sales, supply chain disruptions, and the weight of its debt load. The company listed both assets and liabilities in the range of $1 billion to $10 billion.
The immediate impact has been felt in the primary market, where issuance of new leveraged loans has stalled. Existing loans are trading at discounted prices, with some funds facing margin calls as loan values fall. “There’s definitely been a flight to quality,” said one portfolio manager at a large credit hedge fund. “People are looking to reduce risk and raise cash.”
the outflows are reminiscent of the market turmoil seen in March 2023, following the collapse of Silicon Valley Bank, though sources say the current situation is contained and not systemic. Though, the First Brands case serves as a stark reminder of the risks inherent in leveraged finance, especially for companies that took on ample debt during a period of ultra-low interest rates.
Analysts predict further volatility in the coming weeks as investors continue to digest the implications of the First Brands bankruptcy and assess the broader health of the leveraged loan market. the situation is being closely monitored by regulators, who are concerned about the potential for contagion and systemic risk.
