From Mawer Global Credit Team
Credit markets today reflect a level of calm that feels increasingly out of sync with reality. Investment grade and high yield spreads are at or near multi-decade tights, investors continue to chase yield, and risk premiums have all but evaporated. On the surface, credit appears healthy. Beneath the surface, the foundations are beginning to shift and nowhere is this more visible than in the auto sector.
Auto credit is historically one of the earliest areas to show signs of stress when consumer credit conditions begin to deteriorate. Today, the lights are flashing red. Used car sales are falling, delinquencies are rising, and lenders are loosening underwriting standards to maintain origination volumes and support sales. This may be more than sector specific weakness, it could be an early warning sign that credit risk is being mispriced more broadly across the market.
For example, take Tricolor, a subprime auto lender that specializes in serving borrowers with limited or poor credit histories. The company filed for Chapter 7 bankruptcy on September 10, 2025, after a rapid deterioration in credit performance and mounting financial stress. In the quarters leading up to the filing, Tricolor reported a sharp increase in delinquencies and charge-offs, as its customer base (largely made up of subprime borrowers) came under pressure. In an effort to maintain growth, Tricolor had loosened its underwriting standards, and increased exposure to higher-risk borrowers just as used car values were falling and funding costs were rising.
Beyond performance, Tricolor’s downfall revealed flaws in collateral and securitization management. Tricolor was an active funder in the securitization market, where borrowers pledge specific assets for lenders. Following the filing, multiple lenders claimed rights to the same pools of auto loan collateral. The ensuing disputes led to a chaotic scramble, with some lenders reportedly racing to physically seize vehicles directly from dealership lots in an attempt to secure recoveries. Lenders such as Fifth and Third have already booked sizeable losses in relation to their Tricolor position. The confusion exposed deep weaknesses in asset tracking and documentation, a reminder of how fragile some subprime ABS structures can be when risk oversight is not robust.
A similar story unfolded with First Brands Group, a major aftermarket auto parts supplier, which filed for Chapter 11 bankruptcy on September 28, 2025. While slowing demand from OEMs (Original Equipment Manufacturers) and retail channels was part of the story, the more alarming finding came during the bankruptcy proceedings when double-pledged receivables were discovered. Some companies frequently sell their accounts receivables to banks or investors as a form of financing. First Brands had pledged the same receivables to multiple lenders, with inadequate internal controls to prevent or detect the overlap. This breakdown in basic asset verification undermined lender confidence and turned what might have been a manageable restructuring into a disorderly credit event.
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The First Brands case is a cautionary tale for lenders in today’s tight-spread environment. It underscores how assumptions around asset quality and recovery can break down rapidly when internal controls are weak and transparency is lacking. Both First Brands and Tricolor are private companies that don’t have the same reporting standards as those of a public company. It also highlights the broader risks building across the auto ecosystem, where margin compression, weakening demand, and operational stress are increasingly colliding with fragile capital structures.
Even Ford Credit, the finance arm of Ford Motor Company, has shown signs of late-cycle credit stretching. In order to maintain loan origination volumes and vehicle sales, Ford Credit has begun loosening its underwriting standards and increasing its use of extended loan terms and higher loan-to-value ratios. While this may temporarily preserve volume, it comes at the cost of rising delinquencies, particularly in subprime segments. With used vehicle prices falling and consumer financial stress building, Ford’s risk exposure is increasing. To be clear, we are not suggesting that Ford Credit is in financial distress or facing the same issues as smaller, riskier lenders. Rather, the point is that even well-capitalized, investment-grade lenders are beginning to ease credit standards in response to market pressures.
In contrast, CarMax is taking a very different approach. Rather than loosening standards, CarMax has maintained strict credit underwriting standards and tighter lending discipline. From a credit investor’s perspective, this is a prudent, risk-aware strategy. But operationally, the company is paying the price. Volumes have dropped sharply, inventory turnover has slowed, and margin pressure has intensified. Management has cited both weakening consumer demand and tighter credit availability as key headwinds, but unlike others they have opted not to chase risk in response.
CarMax’s results serve as a useful litmus test. They show what happens when a business prioritizes credit quality, even at the expense of near-term growth. While Ford Credit and CarMax operate in very different parts of the auto finance landscape, their contrasting strategies underscore a broader tension many lenders and originators now face: Do you loosen standards to keep volumes flowing, or hold the line and accept operation pain?
This is all happening against a backdrop of historically tight credit spreads. Investors are being asked to take increasing credit risk with shrinking compensation. Even as fundamentals weaken, markets are pricing credit as if there were no broader warning signs or red flags. That disconnect becomes especially dangerous when credit is being extended based on collateral that may not hold its value, or worse, may not be properly verified or tracked.
The rise of private credit adds another layer of concern. In the absence of mark-to-market pricing, valuations remain static even as risk increases. This lag creates a false sense of stability. And when these structures break, they do so suddenly. We have already seen the pattern of small cracks, trickles of negative news, and then abrupt bankruptcies or restructurings that catch markets off guard. Tricolor and First Brands are early examples but likely not the last.
What ties these stories together is a market grappling with the trade-off between growth and discipline. For now, many players are choosing growth. But the cost of that choice is becoming more apparent. Credit is being mispriced, risks are being papered over, and transparency is declining, particularly in asset-backed and private credit markets. Credit stress rarely starts in the headlines. It begins at the margins, in the loosening of terms, the erosion of recoveries, and the silence around valuations. If the auto sector is showing signs of strain, it could be a leading indicator of broader weakness across the market.
