When Hidden Leverage Becomes Systemic

The sudden collapse of First Brands Group shows how today’s credit markets have outgrown the rules built to keep them safe. A mid-sized auto-parts manufacturer should not have been able to build a web of $10 billion in loans, leases, and supplier-finance obligations with so little transparency. When confidence cracked, lenders discovered exposures they hadn’t seen, and the result was one of the largest private-company failures in recent memory.

What makes this episode troubling is not only the scale of mismanagement inside one firm, but what it reveals about structural blind spots in the financial system. Private credit and supply-chain finance have moved vast amounts of lending outside traditional bank supervision. These markets fund productive investment — but without visibility, they also hide leverage, delay market discipline, and create channels for contagion.

In a short note from the Centre for European Transformation, I outline six policy steps that could prevent similar episodes from destabilizing the system. The first is to extend oversight to large private-credit funds and financing vehicles, whose size now rivals the leveraged-loan market. The second is to mandate disclosure of off-balance-sheet financing — including factoring, supplier finance, and inventory programs — not only for listed firms but also for large private issuers. A third is to restore early-warning mechanisms through stronger covenants and more active creditor monitoring, ensuring that distress triggers intervention before liquidity disappears.

Beyond disclosure, policymakers need to align incentives along the “shadow-banking chain.” Intermediaries who arrange or distribute risky financing should retain some exposure to ensure proper underwriting. Pension funds and insurers investing in private-credit vehicles deserve clearer reporting on where their capital is deployed. And given the global nature of such exposures, supervisors must coordinate internationally on standards for transparency and risk reporting.

The lesson of First Brands is straightforward: hidden leverage is the new systemic risk. Transparency, governance, and early intervention are not administrative burdens — they are the foundation of stable markets. If regulators can bring these principles to the rapidly growing world of private credit, they can preserve its benefits without importing its dangers.

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