Jim Chanos, one of Wall Street’s most prominent short sellers and the investor known for exposing energy trader Enron’s fraud, has said that the bankruptcy of U.S.-based First Brands Group could trigger a wave of corporate collapses.
The 67-year-old investor sounded the alarm about the private debt boom in an interview with The Financial Times on Thursday.
"I suspect we're going to see more of these things, like First Brands and others, when the cycle ultimately reverses," he said, "particularly as private credit has put another layer between the actual lenders and the borrowers."
He compared the $2 trillion private debt market to the packaging of subprime mortgages before the 2008 financial crisis. "With the advent of private credit…institutions [are] putting money into this magical machine that gives you equity rates of return for senior debt exposure," he said. "…Should be the first red flag."
First Brands Chapter 11 Protection
Auto parts maker First Brands Group filed for Chapter 11 protection late on Sunday, disclosing almost $12 billion in debt and off-balance sheet financing. Its abrupt collapse has sparked concerns over riskier lending on Wall Street, as big companies grapple with the prospect of multibillion-dollar losses as a result of the bankruptcy.
Chanos built his name shorting Enron, which, like First Brands, made substantial use of off-balance sheet financing and whose collapse led the 2001 stock market crash.
Opaque Financing
Privately owned First Brands borrowed money through so-called leveraged loans. It also raised billions of dollars through even more opaque financing backed by its invoices and inventory, which was often provided through private credit funds.
"We rarely get to see how the sausage is made," Chanos told the FT.
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