A string of defaults in the past month by private companies have exposed critical gaps in due diligence and valuation policies by both major commercial banks and private credit managers. While many organizations have been quick to paint these losses as isolated frauds or “within modeled expectations” for this credit cycle, the true patterns warrant deeper examination—both in terms of correlation and opportunities for earlier detection.
As JP Morgan CEO Jaime Dimon famously warned, “If you see a cockroach, there are probably more…”. Our interest in these defaults is that we know the continued democratization of credit means that investors—rather than taxpayers or pension funds—will increasingly bear the consequences of insufficient underwriting standards. A robust investor due diligence program needs to stay in front of the developments to help protect investors.
| Company |
Date |
Cause of Default & Notes |
|
Tricolor Holdings
|
09/10/2025
|
Chapter 7 bankruptcy (full liquidation): Warehouse liquidity lines cancelled, fraud identified in double-pledging collateral. Aggressive subprime market marketing (i.e. offering loans 5% less than the competition) and misleading growth metrics were major factors.
|
|
First Brands
|
09/25/2025
|
Chapter 11 bankruptcy (restructuring): Banks stopped lending, highly leveraged, possible fraud and payment-in-kind (PIK) concealment. Significant off-balance sheet debt and non-transparent single-owner structure were major factors.
|
|
Renovo Home Partners
|
11/03/2025
|
Chapter 7 bankruptcy (full liquidation): Private Credit led forced liquidation, negative EBITDA and reliance on PIK extensions. Poor housing market and a bad business model over many years. Loan was valued at par ($100) weeks before price went to $0.
|
Source: Bloomberg, as of 11/10/2025
Are There More Cockroach Wannabes?
Future private credit risks may lie not in the cockroaches exposed by defaults, but in the “zombie companies” that quietly persist. These are businesses unable to generate sufficient cash flow, borrowing excessively just to stay afloat, often disguising poor performance with financial engineering.
Looking at the Bloomberg US 2000 Index (generally smaller companies) over the past 12 months, we found that nearly 30% of companies lacked the cash flow to service their debt, as EBITDA minus interest expense was negative—a striking indication of stress beneath the surface. Private markets, with their opacity and less rigorous disclosure, may be hosting similar vulnerabilities as public markets. Many private businesses that survive solely on borrowed funds can escape stress, until it is too late. So once again, a robust due diligence program to help pick better credit managers is paramount.
Evolving Beyond the “3 Cs” of Credit
The traditional “Character, Capacity and Capital” credit framework is increasingly outdated and inadequate to evaluate a private credit manager. To strengthen client outcomes, due diligence programs must incorporate new factors, including:
- Procedures for flagging statistical outliers—both positive and negative.
- Focus on the level and vintage of PIK loans, especially those added post-origination.
- Scrutiny on valuation procedures and adjustment triggers.
- Awareness of sector-specific credit exposure, currently focusing on consumer exposures.
- Existence of experience-based workout teams and most recent example of how “handing over the keys” of a company from private equity to its lenders worked out for investors.
Conclusion
Corporate bankruptcies are a natural and healthy aspect of our economy, helping to redirect capital to productive companies. However, today’s historically low public default rates suggest risk may be being transferred to less visible private markets. So, when losses are realized, the severity of loss may be much higher than expected as mark-to-market (MTM) pricing generally is delayed.
The key question: which private credit managers and structures are most vulnerable as economic conditions shift or mergers and acquisitions (M&A) activity remain stalled? A blend of investor exuberance, loosened covenants, new financing structures, leverage and economic shifts led to the now obvious warning signs in 2007, well before there was a crisis. Remember when a few mortgage conduits went from $100 to $0 during 2007-2008? <Insert cricket sounds here>.
At this point, there doesn’t appear to be a systemic risk to the economy from our cohort of zombies in both private and public markets, but then again that is little solace for fixed income investors who could lose years of income due to a series of defaults.
Important Disclosures & Definitions
Bankruptcy: a legal proceeding initiated when a person or business is unable to repay outstanding debts or obligations.
Bloomberg US 2000 Index: measures the performance of the smallest 2,000 companies by market capitalization that are part of the Bloomberg US 3000 Index, which represents approximately 99% of the US market capitalization. One may not invest directly in an index.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA): a measure of a company’s overall financial performance.
Mark-to-Market (MTM): a method of measuring the fair value of accounts that can fluctuate over time, such as assets and liabilities.
AAI001031 11/18/2026
