Subprime Crisis 2.0? Red Flags Fly As Alleged Fraud Triggers Billion-Dollar Auto-Lender Bankruptcy

Did a medium-sized canary just croak in the coalmine of consumer credit?

While the world and his pet rabbit was avidly glued to the screens, hanging on every word from Fed Chair Powell, something happened in a name that few have likely heard of that could have a much greater impact on markets.

After seeing its bonds rise week after week, seemingly amid confidence in the US consumer (especially at the lowest incomes)…

…prices for the almost $2 billion of debt behind subprime auto-lender Tricolor Holdings suddenly collapsed yesterday, leaving creditors across the US scrambling to stake their claim on the company’s remaining assets and contain their losses…

As Bloomberg reports, the details behind the collapse of Tricolor remain uncertain, with federal investigators looking into possible fraud and banks exploring whether the same collateral was pledged to multiple lenders.

In Dallas, the regional bank Triumph Financial Inc. has dispatched teams of employees to used-car lots, where they’re identifying and whisking away to safe locations the vehicles they believe are the collateral to their loans.

In midtown Manhattan, a boutique investment firm that built a position in Tricolor’s asset-backed bonds, Clear Haven Capital Management, has been calling other bondholders, urging them to band together and fight to keep the big banks away from the assets that belong to them.

Those banks, including JPMorgan Chase & Co. and Fifth Third Bancorp, have begun to forensically examine their own collateral to try to ascertain the magnitude of the losses.

This is part of what’s fueling the frantic rush – the sense that many of the details behind the collapse of Tricolor, a provider of high-interest car loans to undocumented workers, remain murky even a week after its bankruptcy filing.

Prominent among them: Was there fraud, as federal investigators are now looking into, and how prevalent was it?

“Everyone is in the dark as to how serious these allegations of fraud are, so bondholders and lenders are rushing to protect their interests,” said Boris Peresechensky, a portfolio manager at Orange Investment Advisors.

Two other big subprime auto lenders that declared bankruptcy in recent years — American Car Center and US Auto Sales — ended up costing some junior bondholders dearly, said Peresechensky.

Signs are emerging that it may have been widespread. Banks are exploring whether the same collateral was pledged to multiple lenders.

Bloomberg reports that people familiar with the probes say the suspected manipulation stretches back months, possibly longer.

Earlier this week, holders of Tricolor’s asset-backed bonds didn’t receive some scheduled payments, according to people with knowledge of the matter.

They also didn’t get a remittance report – the regular statement detailing cash collected from borrowers and how it’s distributed — the people said.

Tricolor opted to liquidate in bankruptcy rather than attempt a reorganization amid concerns over litigation risk and signs there weren’t enough assets to restructure, according to a person familiar with the decision.

The company listed more than 25,000 creditors, vendors and other affected parties in its bankruptcy filing.

The bottom line is a major (subprime) auto-lender just hit the wall in epic fashion (out of nowhere) as the Emperor’s clothes narrative of the so-called “strong consumer” (spending was solid in aggregate) were suddenly exposed as more evidence of the K-shaped economy Americans are living in (haves and have-nots) and the divergence is getting wider.

If collateral-backed subprime auto-lenders are collapsing, how long before default rates on Buy-Now, Pay-Later entities start to soar?

The Bear Traps Report’s Larry McDonald recently noted that BDCs and Private Credit entities are starting to creak – with some sizable names trading well off recent highs. While the driver for much of that pain appears to be AI data-center over-spend, contagion from these archaic credit assets (from subprime auto to BNPL) into the mainstream is not something anyone wants to experience again.

Is Tricolor Holdings the June 2007 Bear Stearns Structured-Credit Fund of 2025?