Key points

  • Two recent defaults in the US (Tricolor Holdings and First Brands) have produced notable but, so far, contained market reactions. The immediate effects are concentrated in the subprime auto and downstream segments, with selective markdowns at exposed banks and non-bank lenders, and wider spreads in distressed and high yield credit.

  • Market plumbing signals (including short-term funding markets, dealer inventories) indicate localised funding friction rather than a broad systemic failure. Liquidity indicators and bank provisioning remain broadly stable.

  • Our review looked at the potential impact across three layers – idiosyncratic, clustered/sectoral and systemic – which suggest this episode appears manageable and will earn a pass for now.

  • That said, it is a useful wake-up call. The growing size and opacity of private flows, and their tightening links with banks and other intermediaries, raise structural risks that require ongoing monitoring.

  • The risk premium on affected segments will likely creep higher, pushing up funding costs and putting added pressure on leveraged and private players, while leading to increased investor and manager selectivity.

Default shockwaves: short‑term pass, medium‑term wake‑up call

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