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Financial markets

Credit Market Concerns Rise Amid Auto Parts and Subprime Auto Lender Bankruptcies

Strategic Insights

— 2 min read

Credit market participants are adjusting their risk profiles following the bankruptcy of auto parts company First Brands Group and subprime auto lender Tricolor Holdings, raising concerns about the health of the sector. JPMorgan Chase & Co. took a $170-million charge in its third quarter related to Tricolor, prompting CEO Jamie Dimon to caution investors about potential risks in the credit market. Several Canadian fund managers, including Mackenzie Investments and CIBC Asset Management, are reducing their exposure to credit risk or being more judicious in their investments.

Key Takeaways:

  • The bankruptcies of First Brands Group and Tricolor Holdings have raised concerns about the health of the credit market, with JPMorgan Chase & Co. taking a $170-million charge in its third quarter related to Tricolor.
  • Canadian fund managers, such as Mackenzie Investments and CIBC Asset Management, are reducing their risk profiles or being more cautious in their investments in response to the bankruptcies.
  • The exposure to First Brands among Canadian collateralized loan obligation (CLO) ETFs was "pretty minimal," ranging from zero to under 50 basis points, according to National Bank Capital Markets' director of ETFs and financial products research, Tiffany Zhang.
  • Some CLOs held by Canadian ETFs, such as Mackenzie's AAA CLO ETF, have small exposure to First Brands, but the fund's head of fixed income, Konstantin Boehmer, says there has been no impact on performance.
  • The CLO industry average exposure to First Brands is about 0.23 per cent, according to Aaron Young, executive director and head of client portfolio management at CIBC Asset Management.
  • BMO Global Asset Management has "a de minimus exposure" to First Brands and says the impact on its fund, if any, will be minimal, while RBC Global Asset Management has "immaterial exposure" to First Brands in its BMO AAA CLO ETF.
  • The exact exposure of First Brands' debt within the CLO industry is still being determined, but the approximate value is US$2.1-billion, or roughly 0.2 per cent of the total US$1.2-trillion CLO market, according to Corton Capital Inc. consultant Keith Pangretitsch.
  • The CLO structure has proven resilient, with ETFs holding their value in the weeks following the First Brands bankruptcy, according to portfolio manager Jeff Sujitno of Wellington Square Advisors.

Statistics:

  • US$170-million: JPMorgan Chase & Co.'s charge in its third quarter related to Tricolor Holdings
  • 0.23 per cent: The CLO industry average exposure to First Brands
  • US$2.1-billion: The approximate value of First Brands' debt within the CLO industry
  • 0.2 per cent: The approximate percentage of the total US$1.2-trillion CLO market that First Brands' debt represents
  • US$188-million: The amount of outflows in the U.S.-listed CLO ETF space from Oct. 1 to Oct. 24
  • US$2.7-billion: The amount of redemptions in the U.S.-listed senior loan ETF category from Oct. 1 to Oct. 24
  • $660-million: The value of Canada's CLO ETF market across 14 products from six providers
  • $51-million: The amount of inflows in Canada's CLO ETF market during the Oct. 1 to 24 period

Sources:

  • Globe and Mail, by Doug Alexander: "JPMorgan warns of credit market risks after US bankruptcies"
  • Bloomberg: "JPMorgan Takes $170 Million Charge on Tricolor Holdings"
  • National Bank Financial's ETF research team: "CLO ETFs and Senior Loan ETFs in the Spotlight"
  • Globe and Mail, by Doug Alexander: "Canadian investors anxiously watch US credit market after two major bankruptcies"

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