Auto lender's bankruptcy sets off scramble after alleged fraud

Mark Felix/Bloomberg

In the wake of the sudden collapse of subprime auto lender Tricolor Holdings, creditors across the US are scrambling to stake their claim on the company's remaining assets and contain their losses.

In Dallas, the regional bank Triumph Financial Inc. has dispatched teams of employees to used-car lots, where they're identifying and whisking away to safe locations the vehicles they believe are the collateral to their loans. In midtown Manhattan, a boutique investment firm that built a position in Tricolor's asset-backed bonds, Clear Haven Capital Management, has been calling other bondholders, urging them to band together and fight to keep the big banks away from the assets that belong to them. Those banks, including JPMorgan Chase & Co. and Fifth Third Bancorp, have begun to forensically examine their own collateral to try to ascertain the magnitude of the losses.

This is part of what's fueling the frantic rush — the sense that many of the details behind the collapse of Tricolor, a provider of high-interest car loans to undocumented workers, remain murky even a week after its bankruptcy filing. Prominent among them: Was there fraud, as federal investigators are now looking into, and how prevalent was it?

Signs are emerging that it may have been widespread. Banks are exploring whether the same collateral was pledged to multiple lenders, while Fifth Third said last week that it believes the so-called master loan tape — the files that list key information like outstanding balances, credit scores and vehicle types — was "corrupted." People familiar with the probes say the suspected manipulation stretches back months, possibly longer. The final answers will go a long way in determining not just how much creditors will recover of the billions they're collectively owed, but also which of them get paid first.

That race will hinge in part on who can best prove to the court that they have a pristine claim on the company's collateral, said J.R. Smith, a restructuring attorney at Hunton Andrews Kurth. "The bankruptcy process will sort that out and someone's going to lose."

Many already have. Fifth Third has said it faces an impairment charge of as much as $200 million. JPMorgan and Barclays Plc have similar exposure. Prices on the $217 million of asset-backed securities Tricolor just sold in June — part of the almost $2 billion it's issued since 2022 — have cratered over the past week. Some lower-ranking tranches, which take losses first if cash runs short, now fetch as little as 12 cents on the dollar, according to Trace pricing, down from more than 100 cents at the start of the month.

The collapsing prices also highlight a deeper worry: That bond investors may not enjoy the protections they normally count on in asset-backed deals. Those safeguards could unravel if the collateral isn't sound and the paperwork airtight — conditions now being tested as lenders seek to mark territory. These concerns are in part what prompted Alex Bashan, the partner at Clear Haven who oversees the Tricolor position, to push other bondholders to join him in proactively shielding those assets, according to one of the creditors he called.

Blair Adams, a Clear Haven representative, said in a statement that the firm "and other investors in asset-backed securities issued by affiliates of Tricolor are focused on protecting the integrity of the bankruptcy remote collateral structure in which they invested and ensuring that the non-debtor trusts do not become collateral damage in Tricolor's bankruptcy."

Attorneys representing Daniel Chu, Tricolor's founder, didn't respond to requests for comment. Representatives for JPMorgan, Fifth Third and Barclays declined to comment.

At Triumph, the regional lender, bankers and security teams were dispatched after Tricolor's filing to verify collateral, inspect vehicles and take possession of the property, a spokesperson said.

Triumph holds roughly $23 million of Tricolor loans. It expects to work with the bankruptcy trustee to begin the process of liquidating the assets to get repaid, the spokesperson added.

Across the market, other creditors, some with additional claims on Tricolor's assets, are coming to light.

Waterfall Asset Management was a lender through one of the company's borrowing facilities, according to people with knowledge of the matter.

Libremax Capital, a structured-credit focused investor, was a secured lender to the company, according to bankruptcy filings, while private credit shop Ares Management Corp. had provided a small credit facility to an entity that contained loans originated by Tricolor, but exited its investment in 2024, a separate person with knowledge of the situation said.

Spokespeople for Waterfall and Ares declined to comment, while a representative for Libremax didn't respond to requests for comment.

Earlier this week, holders of Tricolor's asset-backed bonds didn't receive some scheduled payments, according to people with knowledge of the matter. They also didn't get a remittance report — the regular statement detailing cash collected from borrowers and how it's distributed — the people said.

Wilmington Trust, the ABS trustee responsible for overseeing the debt and ensuring investors are paid, plans to hold a call with bondholders on Thursday, according to a notice sent to creditors.

The trustee is communicating with investors and is actively engaged in the bankruptcy proceedings, a representative said.

'In the Dark'

The fear inside Wall Street firms is that by the time the dust settles, recoveries could be slim, with competing claims and litigation costs eating away at whatever value remains. Bondholders are secured by a fixed amount of collateral, and if some of it were double pledged, then the pot of money available to make them whole could be smaller than they thought.

"Everyone is in the dark as to how serious these allegations of fraud are, so bondholders and lenders are rushing to protect their interests," said Boris Peresechensky, a portfolio manager at Orange Investment Advisors, which doesn't own any of Tricolor's securities.

Others worry the mess will be so expensive to clean up that much of what's left will get eaten away by legal and advisory fees. Two other big subprime auto lenders that declared bankruptcy in recent years — American Car Center and US Auto Sales — ended up costing some junior bondholders dearly, said Peresechensky.

"Investors in subprime auto deals know that this could be very expensive," he said.

Tricolor opted to liquidate in bankruptcy rather than attempt a reorganization amid concerns over litigation risk and signs there weren't enough assets to restructure, according to a person familiar with the decision.

The company listed more than 25,000 creditors, vendors and other affected parties in its bankruptcy filing.

Some have claims that are a fraction of what the big firms are owed.

Like a towing company by the name of Texas One Transit. Based about a half-hour away from Tricolor's headquarters outside Dallas, it's still waiting to be paid for hauling away repossessed cars.