First Brands Group LLC’s unexpected bankruptcy filing is triggering a wave ofโ investor withdrawals from U.S. loan funds, intensifying pressure on a market already grappling โคwith higher interest rates โand economic uncertainty. The outflow, which beganโข 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 โคbankruptcy of First Brands, the parent company of brands like Febreze, Mr.Clean,โ and Pine-Sol, is โrattling loan fundsโข because of โthe size of its debt – approximately $2.5 billion in โloans – and the speed of โฃits collapse. This event underscoresโ the vulnerabilities within the โคleveraged loan market,โค where companies with notable debt burdens are increasingly at risk as borrowing costs rise and economic growth slows.Investors โare now reassessing their exposure to similar highly leveraged companies, fearing further defaults and โlosses.
According to filings, โFirst Brands filed forโ Chapter 11 โขbankruptcy protection inโ delaware onโ Sunday, citing aโค confluence of factors including declining sales, supply chain โdisruptions, and the weight of its debt load. The company listedโ both assets and liabilities in theโ range of $1 billion to $10 billion.
The immediate impact has been felt โคinโ the primary market, where issuance of new leveraged loans has stalled. Existing loans are trading โat 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 โฃof the market turmoil seen in March 2023, following the collapse of Silicon Valley Bank, thoughโ sources say the current situation is contained and not โฃsystemic. Though,โข the โFirstโ Brands case serves as a stark โฃreminder ofโ the risks โinherent in leveraged finance, especially for companiesโ that tookโฃ 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 andโ 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.
