Bond investors in the United States are warning about loosened lending standards in the credit market, as two companies previously considered to be in good condition have suddenly fallen into distress within recent weeks.

Earlier this month, the collapse of subprime auto lender Tricolor Holdings, combined with auto parts supplier First Brands Group beginning to consider bankruptcy proceedings, caught investors off guard. Tricolor had received unanimous AAA ratings when borrowing in credit markets, while First Brands' on and off-balance sheet financing totaled potentially $10 billion, having nearly secured refinancing just last month.

Investors initially intended to view these two incidents as isolated cases, but together they reveal cracks emerging within the credit market. Since the financial crisis, as traditional banks have gradually withdrawn, the credit market has become a crucial funding source for consumers and businesses.

Traders and investors have begun questioning current risk management mechanisms, wondering how these systems could have allowed Tricolor and First Brands to reach the brink of collapse in such a short timeframe.

An investor who sold Tricolor bonds last week described the company's collapse and subsequent market turmoil as "one of the worst things I've seen in the asset-backed securities market."

Both companies utilized asset-backed securities (ABS) structures: Tricolor packaged subprime auto loans into bonds, while First Brands pledged receivables to specialized funds to obtain credit.

The core of ABS involves financing backed by specific assets or loans as collateral, including credit card debt, railroad car and solar panel lease contracts, aircraft, or music copyrights. Some investors indicate they have recently begun thoroughly reviewing their portfolios to confirm they haven't invested in companies in similar situations, and are asking more detailed questions when underwriting new deals.

**Potential Loss of ABS Financing Appeal**

Investment banks have increasingly invested in ABS in recent years, claiming these products are much safer than the junk-grade loans they traditionally handled.

However, Tricolor is now under investigation by the U.S. Department of Justice for suspected fraud, while some investors have long harbored doubts about First Brands' financial reporting and receivables financing methods. Lenders are now concerned they lack clarity about the scale of these off-balance-sheet financings.

Analysis suggests the crisis at Tricolor and First Brands could cause the hot ABS financial sector to lose its appeal. While ABS is not a new product, it has developed rapidly. Major Wall Street institutions like Apollo Global Management and KKR continue developing new lending methods.

This development previously benefited non-bank lending institutions, with Tricolor leveraging strong market demand for auto loan-backed bonds to significantly expand its lending operations.

Approximately $2 billion was lent to Tricolor secured by auto loans, and these lenders now face difficulties. According to two sources, the company failed to pay interest in September, with some lenders reportedly attempting to seize vehicles.

**Major Banks Also Affected**

Several major banks have been impacted, including JPMorgan Chase and Fifth Third Bank, facing potential losses on auto loans worth hundreds of millions of dollars.

Another investor who sold packaged Tricolor loans expressed complete surprise that a bank like JPMorgan failed to detect potential financial problems, despite being one of the primary underwriters for these debt issuances.

"This is what's truly shocking - JPMorgan is one of the world's most professional lending institutions. How could they possibly miss this issue?"

Since the financial crisis, global central bank policymakers have attempted to strengthen the banking system, including transferring lending from the regulated banking system to other parts of the financial system.

European Central Bank officials received briefings last week covering the rise of non-bank lenders like Tricolor and their collapse processes.

Columbia Business School Professor Tomasz Piskorski suggests Tricolor's failure may prompt investors to become "more cautious."

He indicates rating agencies will implement stricter oversight, and credit may consequently become less accessible.

**ABS Problems Persist Despite Continued Institutional Investment**

Regarding First Brands, underwriter Jefferies was still promoting a new $6 billion loan deal for the company several weeks ago, assuring investors the group maintained nearly $1 billion on its books as of March this year.

However, First Brands is now negotiating emergency rescue financing with lenders to fill an imminent funding gap, a process that could ultimately lead to bankruptcy filing.

The rapid decline in debt value has also shaken the $1.5 trillion U.S. leveraged loan market - First Brands' subordinated bonds traded at just "pennies on the dollar" this week.

Lenders have virtually no transparency regarding First Brands' use of "accounts receivable-backed financing." This financing is typically completed by specialized funds with completely opaque operations.

Previous reports indicated hedge fund giant Millennium Management and an investment division under Jefferies had both provided such financing to First Brands.

Multiple experts in receivables financing explained that some lenders continued investing despite obvious problems in First Brands' financing scheme because these "seemingly secured" assets offered high yields. One fund manager stated:

"A whole bunch of people specifically established receivables funds. When you have too much money burning a hole in your pocket, you start taking risks. This company always offered the highest yields in the market and could always provide more, without limits."

Despite rapid selling of First Brands bonds and Tricolor's collapse, fund managers continue investing in new ABS.

Sources indicate Goldman Sachs is preparing to sell a $300 million asset portfolio this week, targeting subprime credit card receivables issued by fintech company Mission Lane.

Dylan Ross, head of asset-backed financing at asset management company TCW, suggests market acceptance of such deals demonstrates continued confidence in asset securitization financing methods.

"Since the financial crisis, virtually no investment-grade structured products have defaulted. The problem isn't with asset securitization."