Auto parts supplier First Brands and subprime lender and dealership Tricolor both filed for bankruptcy protection last month. The two collapses have rattled some stakeholders in Wall Street's multitrillion-dollar credit machinery, from leveraged loans and collateralized loan obligations (CLOs) to trade‑finance funds and subprime auto loans, raising questions about exposure levels of a number of Wall Street fund managers, which pool capital from investors to provide loans to companies.

"This would serve as a strong precedent for LPs (investors) to question risky offerings," said Zain Bukhari, associate director of risk and valuations at S&P Global. LPs, referring to limited partners, are passive investors that provide capital to a fund.

Some investors may ask for audited statements or quality of earnings from independent audit firms before investing in unsecured assets, Bukhari added. First Brands had roughly $800 million in unsecured supply chain financing liabilities.

A sign of such scrutiny appeared in July when First Brands was trying to raise a $6 billion loan to refinance its debt. In August, however, it became clear that potential lenders would require further diligence, including a quality-of-earnings report, according to a document filed by the auto parts company's chief restructuring officer in bankruptcy court.

Investors and analysts are now assessing the fallout for the individual firms exposed as well as for the broader market. They hope to gain some clarity during the third-quarter earnings season, which kicks off this week.

"The third quarter earnings become a very interesting litmus test for how this shakes out - people will be very closely following the bank reporting," said Andrew Sheets, global head of corporate credit research at Morgan Stanley. "There will be big questions about where auto loan trends are, (and) other consumer credit charge-off trends are."

First Brands filed for bankruptcy protection on September 29, listing more than $10 billion in liabilities. Some of the finance industry's most prominent names, including Jefferies and UBS Group (UBSG.S), have since disclosed exposure of more than $1 billion tied to the collapse of the Ohio-based company. Earlier in October, Jefferies said a fund in its asset management division, Leucadia Asset Management, has about $715 million of receivables tied to First Brands. UBS is assessing more than $500 million of exposure across certain funds.

Some investors have asked Jefferies-linked Point Bonita Capital's fund to return money invested in the fund, a source familiar with the matter told Reuters. On Sunday, Jefferies said its exposure to First Brands Group is limited and that any potential losses would be "readily absorbable." When Jefferies was asked if it will face pressure from investors for more scrutiny on risky investments, a spokesman for the firm declined to comment on Monday.

Other banks exposed include SouthState Bank and CIT Group, which is now owned by First Citizens. A broad range of funds including Sound Point Capital Management, Benefit Street Partners and Palmer Square Capital Management hold CLOs, which collectively hold hundreds of millions of the $4 billion of first-lien term loans of First Brands, according to court documents. Investment firms with over $100 million CLO exposure each include AGL Credit and PGIM, according to the recent court filings.

The funds and banks either declined to comment or did not respond to requests for comment. A UBS spokesperson said the bank was "working to determine the potential performance impact on the small number of our affected funds."

Meanwhile, Tricolor listed over $1 billion in liabilities, with more than 25,000 creditors, according to its bankruptcy petition. Lenders such as JPMorgan (JPM.N) have nearly $200 million of exposure to Tricolor, Reuters has previously reported.

CREDIT RALLY SPUTTERS

The credit rally, which got off to a robust start earlier in October, has hit a speed bump in recent days as investors reduced exposure to certain sectors over concerns around weakness in consumer and auto lending, experts said.

"We now seem to have a catalyst important enough to engender a shade of fear," said Neha Khoda, head of U.S. credit strategy at Bank of America, in a note dated October 10. "Credit investors are questioning if they need to be all-in at super-tight spreads, and they won't get a pushback from us."

To be sure, the collapse of First Brands is unlikely to cause a widespread global meltdown across credit markets, some experts said.

"On a deal-by-deal basis, we don't see conditions in the leveraged finance markets as materially different from historical norms," said Logan Nicholson, senior managing director at asset manager Blue Owl Capital.

In the U.S., the overall exposure of CLOs to First Brands currently stands at 0.21%, according to estimates from Morgan Stanley in a note dated September 26. For the CLO funds currently holding First Brands loans, the exposure levels range between 0.001% and 1.8%.

Some experts said that a divergence has emerged in the CLO industry between holders of senior and junior loans, as a cohort of companies with weaker credit ratings have been buffeted by slower macroeconomic growth and headwinds from the Trump administration's tariff policy.

"Probably the larger impact on markets has been on the loan side," said Morgan Stanley's Sheets, adding that the ripple effect from the bankruptcies could impact junior parts of a CLO's capital structure.