Rising Risks in Regional Banking: First Brands' Collapse and Contagion Fears

The collapse of First Brands Group in September 2025 has exposed systemic vulnerabilities in the regional banking sector, particularly in a high-interest-rate environment. As a major auto parts supplier with $10 billion in liabilities, First Brands' Chapter 11 filing triggered a cascade of losses for creditors, including regional banks like Jefferies, Zions Bancorporation, and Western Alliance Bancorp. The fallout underscores how opaque financing structures, aggressive leverage, and interest rate sensitivity have amplified contagion risks.

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Early-Warning Indicators: Liquidity, Delinquency, and Interest Rate Sensitivity

First Brands' financial distress was evident long before its bankruptcy. By late 2025, its liquidity had deteriorated sharply, with a $800 million buffer deemed insecure despite holding $909 million in unrestricted cash in March 2024, according to a Capital Market Journal report. The company's Days Beyond Terms (DBT) metric—measuring accounts payable delays—reached four times the industry average, with some bills outstanding for over 55 days, according to The BRAKE Report. This liquidity crunch was compounded by a failed $6 billion refinancing effort and reliance on off-balance-sheet financing, which obscured its true debt burden, as The BRAKE Report also notes.

Interest rate sensitivity further exacerbated the crisis. First Brands' senior debt carried an interest rate 5 percentage points above the floating rate benchmark, according to a CFA Institute blog post, a costly structure that became unsustainable as rates climbed. By September 2025, its senior debt had plummeted to 33 cents on the dollar, while junior debt became nearly worthless, the Capital Market Journal reported. Moody's downgraded the company to Ca, signaling imminent default, according to The BRAKE Report.

Regional Banks' Exposure and Amplified Vulnerabilities

Regional banks face direct and indirect exposure to First Brands' debt. Jefferies, for instance, holds $715 million in accounts receivables tied to First Brands through its Leucadia Asset Management unit, according to a MarketMinute article. Western Alliance Bancorp, meanwhile, is entangled via a leveraged facility with a Jefferies-linked fund, where $715 million in First Brands receivables are pledged as collateral, per that MarketMinute article. Zions Bancorp disclosed a $60 million expected loss from commercial loans as part of the same coverage.

The high-interest-rate environment has magnified these risks. Regional banks already grapple with a $1 trillion commercial real estate (CRE) maturity wall by year-end 2025, with 44% of their loan portfolios tied to CRE—far higher than the 13% for larger banks—according to a MarketMinute report. Declining property values and refinancing challenges have intensified default risks. For example, Zions recently charged off $50 million in commercial loans due to borrower misrepresentations, as that MarketMinute report noted.

Contagion Mechanisms: Opaque Structures and Systemic Spillovers

First Brands' collapse highlights the fragility of opaque financing arrangements. Reverse factoring and invoice financing allowed the company to accumulate debt outside traditional balance sheets, masking its leverage until it was too late, The BRAKE Report explains. These structures, common in private credit markets, lack transparency, making it difficult for investors to assess risk.

The ripple effects are already evident. U.S. CLO managers hold $2 billion in First Brands' loans, while European CLOs have €520 million in exposure, per the Capital Market Journal. Business development companies (BDCs) like Prospect Capital and Great Elm Capital face potential losses of 75%–100% on their First Brands investments, the Jefferies MarketMinute coverage warned. The KBW Nasdaq Regional Banking Index plummeted 6.3% on October 16, 2025, as investors fled risky assets, according to the MarketMinute report.

Investor Implications and Systemic Risks

The First Brands saga serves as a cautionary tale for investors. Regional banks' heavy reliance on CRE and complex debt structures, coupled with a high-rate environment, creates a perfect storm for defaults. Regulators are now scrutinizing private credit's rapid growth, as its interlinkages with traditional banking systems could transmit shocks across institutions, according to the CFA Institute blog post.

For now, the market is pricing in a flight to safety, with gold and U.S. Treasuries surging. However, the broader lesson is clear: in a world of opaque financing and rising rates, even well-capitalized institutions are not immune to contagion.