Cracks in $2 trillion leverage loan market are becoming too big to ignore
The sudden collapses of auto lender Tricolor and auto parts supplier First Brands appear to be more than isolated incidents as they point to deeper cracks forming in the U.S. leveraged loan market, with losses now rippling across major financial institutions.
According to data from PitchBook LCD and the Loan Syndications and Trading Association (LSTA) analyzed by the Financial Times, the U.S. leveraged loan market, which consists of loans made to highly indebted companies with below-investment-grade credit ratings, is on track for its biggest monthly loss since 2022.
The collapse of First Brands alone has wiped out roughly $4 billion across some of the world’s largest asset managers, including Franklin Templeton, Blackstone, PGIM, CIFC, and Wellington Management.
Yet despite the emerging strain, leveraged loan issuance surged to a record $404 billion in the third quarter of 2025, pushing the total market to an estimated $2 trillion, according to data from The Kobeissi Letter.
“Cracks in the credit market are becoming more apparent,” The Kobeissi Letter wrote.
The wave of defaults by First Brands and Tricolor underscores broader concerns over weak underwriting standards, suggesting lenders may have been too lenient in assessing borrowers’ ability to repay. The developments point to rising risks in the credit market even as issuance continues at a rapid pace.
If defaults spread beyond a handful of companies, analysts warn, it could trigger a broader repricing of risk across credit markets, potentially driving higher borrowing costs and tightening financial conditions.
Leveraged loan risks have long been flagged
Concerns over weak underwriting in the leveraged loan market are hardly new. The Federal Deposit Insurance Corporation (FDIC) has highlighted the issue repeatedly in recent years, most recently in July 2025, when it warned of the “heightened risk” in leveraged lending.
“[L]everaged loan volume has increased and loan structures have weakened,” the FDIC said in its latest review.
The agency also cited findings from as far back as 2018, noting that many leveraged loans “possess weakened transaction structures and increased reliance upon revenue growth or anticipated cost savings and synergies to support borrower repayment capacity.”
Andrew Milgram, chief investment officer of Marblegate Asset Management, told the Financial Times that signs of strain in the credit market have been visible for more than a year.
According to Milgram, “there has been a grudging recognition that there was and is a series of credit problems that could be substantial and could be dangerous to the overall economy.”