In recent months, the US economy has shown resilience, but the performance of automotive parts companies has been poor. The increasing number of bankruptcies in the automotive parts industry is disrupting the high-yield credit market.
This turmoil not only makes it increasingly difficult for low-income consumers to purchase cars but also forces banks and financial institutions to write off loans to these bankrupt companies.
On June 11, automotive parts supplier Marelli Holdings Co. Ltd filed for Chapter 11 bankruptcy protection in Delaware bankruptcy court in the United States to restructure its long-term debt.
On August 18, Car Toys, a self-proclaimed “largest independent multi-channel professional car audio and in-car electronics retailer with multiple stores in the Western United States,” applied for bankruptcy.
On September 10, Tricolor and its dozen or so affiliated companies separately filed for a switch from Chapter 11 to Chapter 7 bankruptcy in the Northern District of Texas bankruptcy court.
This conversion allowed Tricolor to transition from a restructuring process to a liquidation process, including winding down operations and selling assets.
On September 28, First Brands Group and its 98 affiliated debtors filed for Chapter 11 bankruptcy protection in the Southern District of Texas bankruptcy court, leaving over $10 billion in debt issues to be addressed, with $2.3 billion in off-balance sheet debt outstanding.
Tricolor, founded in 2007 with its headquarters in Dallas, is a chain of used car dealerships and a major subprime auto loan institution. The company operates in multiple states, serving thousands of low-income individuals, including those with low credit scores or no credit history.
Tricolor’s unique business model uses Individual Taxpayer Identification Numbers (ITIN) instead of Social Security Numbers. This allows individuals lacking or unable to provide US credit records to access credit. This strategy has played a significant role in serving thousands of low-income individuals, including immigrant communities.
Chris Motola, a financial analyst at NationalBusinessCapital, told Dajiyuan Times, “It’s important to note that many of these loans were extended during times of normalcy in credit standards due to policies during the pandemic, such as student loan deferments.”
Simultaneously, car prices have surged. This has led to the market experiencing loose credit, increased loan amounts for consumers, exacerbating inflation, a soft job market, and other factors.
First Brands was founded by CEO Patrick James and built into an automotive parts conglomerate through a series of aggressive debt acquisitions, owning 25 automotive parts brands. Its well-known brands include Raybestos brakes, TRICO wipers, and FRAM filtration products. He is the sole owner of the company.
The company heavily relied on off-balance sheet financing to raise funds by selling customer invoices to investors in exchange for receivables before customers like Walmart or AutoZone made payments.
However, in early 2025, due to new tariffs implemented by President Trump, financing partners halted lending, leading to a severe cash shortage for the company, expected to exceed $900 million by the end of December.
The bankruptcies of these automotive parts businesses have caused a stir in the high-yield bond (junk bond) market. Since mid-September, the ICE BofA US High Yield Bond Index has risen nearly 50 basis points.
The index, also known as the High Yield OAS, is used to measure the average spread demanded by investors holding US high yield corporate bonds over US Treasuries.
The post-pandemic surge in interest rates has led to higher financing costs for borrowers with lower credit ratings, often low-income Americans, who are struggling with high living costs and a soft labor market.
Simultaneously, the lending institutions of these bankrupt companies are facing substantial losses as they must write off these loans.
This week, JPMorgan disclosed that its wholesale loans to subprime lender Tricolor resulted in $170 million in write-off losses, casting a shadow over its initially robust profit reports. Write-offs describe the terms banks use to describe debts classified as losses.
Meanwhile, investment bank Jefferies Financial expects to incur a $43 million loss due to First Brands’ closure. Court documents reveal that its asset management division’s funds have up to $715 million in accounts receivable from First Brands.
On Tuesday, Jamie Dimon, CEO of JPMorgan, admitted during the company’s earnings call that the $170 million loss due to Tricolor was “not our finest hour” and likened it to a “cockroach,” warning of hidden credit risks in the US financial system. He said, “When you see one cockroach, you usually find more. Everyone should be on guard.”
As the weekend approached, the situation deteriorated further. Regional banks, like Western Alliance Bancorp in Phoenix, Arizona, and Zions Bancorp in Salt Lake City, announced asset write-downs and debt charges, sparking a selloff on Wall Street. Zions admitted that two commercial loans at its California branch had issues, requiring a $50 million provision for bad debt. Western Alliance sued borrower Cantor Group V LLC, alleging fraudulent behavior in the credit agreement.
On Thursday, US regional bank stocks took a hit. Shares of Western Alliance Bank and Zions Bank plummeted nearly 10% and 13%, respectively.
On the same day, Jefferies Financial Group was also impacted, with its stock falling over 10%. Although company executives stressed that the losses due to First Brands were “absorbable” and that the market reaction was “exaggerated,” investor confidence was visibly shaken.
Analysts at investment bank Keefe, Bruyette & Woods stated, “Following the bankruptcies of Tricolor and First Brands, investors are highly wary of deteriorating asset quality.”
Corporate mergers and securities lawyer Joseph Raetzer told Dajiyuan Times, “The bankruptcies of automotive-related companies like First Brands and Tricolor not only indicate pressure in the business lending area but also reflect that headwinds in consumer demand may impact other industries.”
He noted that sustained low consumer confidence, higher interest rates, and extended replacement cycles suggest broader pressures may spread to other industries such as consumer electronics, major appliances, and furniture.
Raetzer believes that business lending institutions must comprehensively readjust their underwriting discipline to cope with these new trends.
He said, “The bankruptcies related to automobiles suggest that consumer-facing firms are facing a crisis, leading to more losses for business lending institutions.”
Doug Burnetti, founding attorney of Burnetti Law Firm and automotive legal expert, believes that the recent collapses of automotive parts suppliers and subprime auto lenders serve as warning signals for the broader transportation sector.
“These bankruptcy cases show how unstable underwriting and off-balance sheet debt can quickly trigger a chain reaction in the parts supply chain, ultimately affecting the cost and reliability of vehicles,” he told Dajiyuan Times.
However, as these bankruptcies unfolded, the US economy remains resilient with falling interest rates, reducing the likelihood of the wave of bankruptcies in the automotive parts industry spreading to other companies and sectors.
David Chiaverini, regional banking analyst at Jefferies, wrote on Thursday, “Risks from non-bank lending are being watched, but we believe that the structured designs of these loans help mitigate losses and bring overall stable credit results.”
On Friday, the US stock market showed signs of stabilizing. The S&P Regional Banks Index rose 1.7%, with Zion and Truist Financial Corp. leading gains. Several banks reported lower-than-expected provisions for credit losses, and online bank Ally Financial’s auto loan business remained robust, alleviating concerns about the economic conditions of low-income consumers.
Analysts point out that despite sharp short-term volatility, regional banks have generally increased capital reserves. Jon Arfstrom, capital markets analyst at RBC Capital Markets, said, “Regional banks have prepared well since 2023 to address potential losses, with their capital levels rising.”
Senior bond analyst Jay Cushing at Gimme Credit believes that it is too early to assert whether the bankruptcies of Tricolor and First Brands are “canaries in the coal mine” warning signs, underlying vulnerabilities in the subprime market, or isolated cases of potential fraud.
He told Dajiyuan Times, “In any case, these events could lead to a gradual tightening of lending standards, cooling credit supply, and ultimately affecting car sales. The market should remain vigilant against these trends.”