On the money

If you’re coming back to this blog after part 1, then welcome back! If not, then please read it here – This article follows on from that one, exploring securities that have been in the news recently, as well as more ‘junior’ forms of debt – which carry substantially more risk. Whilst less heavily utilised in terms of total issuance volumes, defaults involving these debt vehicles may weigh even more heavily on investors than other vehicles owing to the nature of companies that take them out. Keep reading to find out more:

Asset-Backed Securities (ABS)

• Used by: auto lenders, credit-card issuers, consumer-finance platforms, equipment lessors
• Used for: funding pools of loans/receivables by turning them into tradeable bonds – e.g., repackaging up car loans as commercially traded bonds
• Funded by: structured-credit investors, bond funds, banks, insurers
• Typical size: deals from a few hundred million to over a billion; US ABS outstanding around $1.6 trillion (ex-mortgages)
• Typical yield: prime AAA auto ABS roughly 4-5% in recent years; mezzanine and subprime tranches higher
• Security: backed by specific pools of assets (auto loans, card receivables, etc.), with tranching and credit enhancement

ABS are bonds whose cash flows come from specific pools of loans or receivables rather than from a company’s general cash flows. A lender sells a pool of assets to a special-purpose vehicle, which then issues several tranches of notes. Senior tranches have first claim on the pool’s repayments; junior tranches take losses first.

Given recent events, I’d be remiss not to acknowledge the recent bankruptcy of First Brands Group, the heavily leveraged US auto-parts maker behind FRAM filters and Autolite spark plugs. First Brands relied on large amounts of off-balance-sheet financing – selling trade receivables into opaque vehicles and supply-chain finance programmes rather than using straightforward, on-balance-sheet ABS deals. When the company filed for Chapter 11 in September 2025, it disclosed liabilities of $10-50 billion against assets of only $1-10 billion, with investigators now probing allegations that it effectively “double-pledged” up to $2.3 billion of receivables into multiple structures. The fallout has been painful and very real: Jefferies has revealed about $715 million of exposure through a trade-finance fund, UBS is winding down invoice-finance funds that had more than 20% of assets tied to First Brands, and trade credit insurers face hundreds of millions of dollars in potential claims. Although this sits closer to trade-finance and supply-chain securitisation than to plain-vanilla auto-loan ABS, the lesson for investors is similar: where there are assets, there exists room to misjudge the value of assets, or to accidentally double-pledge the value of assets, unlike equity and intellectual property, which is much easier to keep track of on an accountant’s spreadsheet. Although a retail investor will almost never have the time to do their own deep digging into the minutiae of every ABS, it’s definitely worth remembering that Asset-backed securities are only as reliable as their assets.

Ford Credit is a more traditional, reliable issuer, which we’ll look at for an example of ABS done right. In 2024 it completed about $16 billion of securitisations and $33 billion of total public issuance. These include transactions such as Ford Credit Auto Owner Trust 2024-C and 2024-D, each around $1.3 billion in size and backed by prime US retail auto loans on new and used vehicles, with tranches rated from AAA downwards.

The economics are straightforward: Ford originates car loans, sells them into trusts, and receives funding at spreads that are often tighter than its own unsecured bond spreads. Investors get diversified exposure to consumer loan pools with structural protections.

For senior tranches of prime ABS (like Ford’s main auto deals), historical default rates have been extremely low, including through the 2008 crisis. Risk is higher in subordinate tranches and in collateral types like subprime auto or niche consumer loans, where recent years have seen rising arrears. ABS markets can also become illiquid in stress, causing spread spikes even for strong collateral.

Investor takeaways:

• If you own shares in a lender or auto-finance company, keep an eye on how easily it can sell ABS – tighter spreads and steady issuance usually mean its funding is healthy, while cancelled deals or sharply higher costs are a warning sign.
• When rating agencies start reporting rising arrears or defaults in a company’s securitised pools, treat that as an early alert that its customers are struggling and future profits may be under pressure.
• In annual reports, check how much of each deal the company keeps for itself (junior tranches, guarantees, etc.); the more it retains, the more credit risk still sits with shareholders if those loans go bad.

Mezzanine Debt

• Used by: private equity sponsors and mid-market companies that have exhausted cheaper debt
• Used for: topping up leverage in buyouts, funding acquisitions or dividends where senior lenders stop
• Funded by: specialist mezzanine funds, private credit platforms, some BDCs
• Typical size: tens to low hundreds of millions per deal; strategy AUM in low hundreds of billions globally
• Typical yield: cash coupons around 11-13%, with total targeted returns in the mid-teens
• Security: subordinated (second-lien or unsecured); sits below senior debt and often has equity warrants

Mezzanine debt occupies the space between senior loans and equity – as the name suggests, it’s above ordinary shareholders in the event of default, but below more senior forms of secured debt. It is private, illiquid and expensive. Coupons are normally fixed in the low-teens, paid quarterly, and lenders often receive equity kickers such as warrants. In exchange, mezzanine investors accept that, in a downside, they are close to the firing line.

Oaktree’s mezzanine funds give a sense of how this works in practice. The firm notes that current coupons typically range from about 11% to 12.5%, with overall targeted IRRs in the mid-teens once equity participation is included. Since 2002, Oaktree reports investing about $2.9 billion across more than 120 mezzanine and senior loan deals, with realised losses of only about 1.3% of invested capital – evidence that disciplined holders of mezzanine debt can make money despite the risk.

For companies, mezzanine is attractive when senior lenders (banks, term-loan investors, unitranche funds) have already lent as much as they are comfortable with, but the sponsor still wants more leverage without issuing new common equity – it’s one of the first warning lights highlighting that the mainstream market is becoming nervous about a company’s borrowing.

The downside is obvious: if performance falters and enterprise value falls, mezzanine is the first debt layer to be sacrificed after equity. Recoveries can be minimal, and the double-digit coupon is a real drag if refinancing is delayed.

Investor takeaways:

• The presence of mezzanine debt is a loud signal that leverage is pushed to the limit; safer balance sheets almost never use it.
• Equity stories assuming painless mezz refinance at par should be treated with scepticism, especially in a higher-rate environment.
• In a restructuring, mezzanine debt and equity are usually struck off together; mezz is not a cushion for shareholders, just another claim ahead of them.

Unitranche Loans

• Used by: private equity sponsors financing leveraged buyouts and recapitalisations
• Used for: replacing separate senior and mezzanine tranches with one blended facility
• Funded by: private credit funds and lender clubs (not broadly syndicated)
• Typical size: from mid-market deals to multi-billion transactions (e.g. Stamps.com, Aptean)
• Typical yield: roughly SOFR + 500-800 bps (9-13% all-in)
• Security: first-lien secured on the business, but with higher overall leverage than traditional senior loans

A unitranche loan is a single, large secured loan that economically combines senior and subordinated debt. The borrower sees one facility with one interest rate and one set of covenants. Behind the scenes, some lenders may have “first-out” rights to be repaid sooner at a lower return, while “last-out” lenders earn more in exchange for subordinate economics. This is all handled via an agreement among lenders.

Unitranche financing started out in mid-market deals but has moved up the size spectrum. Thoma Bravo’s $6.6 billion acquisition of Stamps.com in 2021 used about $2.6 billion of unitranche debt from a club including Blackstone, Ares and PSP Investments, at the time the largest single unitranche deal ever. More recently, commentators have highlighted a $1.7 billion covenant-lite unitranche for software company Aptean and a $1 billion unitranche for NextGen Healthcare’s take-private, both backed by direct-lending clubs.

Pricing typically falls somewhere between traditional senior loans and mezzanine: in today’s market, SOFR + 500-800 bps is common, giving all-in yields in the 9-13% range. The loans are usually covenant-lite – that is, they are backed by fewer test of affordability – and held to maturity by a small number of private funds, meaning there is unlikely to be a heavily traded secondary market for segments of unitranche loans.

Investor takeaways:

• Don’t be lulled by the label “senior secured”: in a highly levered unitranche, the economic risk can resemble that of a traditional senior debt plus mezzanine lending.
• Companies with large unitranches maturing in a tight window are highly exposed to private-credit sentiment; if lender appetite fades, refinancing may be difficult or dilutive.
• A concentrated lender group can be helpful in a clean workout, but it also has considerable leverage over equity when things go wrong – a unified, concentrated lender group may be more able to force serious concessions on the company in the event of debt restructuring, leaving small shareholders in the lurch/

Preferred Shares and Hybrid Capital

• Used by: banks, insurers, utilities and some corporates
• Used for: raising regulatory capital or equity-like funding without issuing common shares
• Funded by: income-focused investors, banks, insurers, hybrid and preferred funds
• Typical size: individual issues from hundreds of millions to a few billion; global preferred/hybrid market around $1.3 trillion
• Typical yield: many 2023-25 bank and corporate issues in the 6-8% range; riskier AT1/Hybrids higher
• Security: deeply subordinated to all other debt; senior only to common equity; coupons often deferrable or cancellable

Preferred shares and hybrid securities sit between debt and equity. A preferred share is essentially a type of share which is paid a fixed coupon by the issuing company (but often no voting rights). They usually pay fixed or fixed-to-floating dividends, often have no set maturity, and are callable at the issuer’s option after a number of years. In bank capital structures they are part of Additional Tier 1 or Tier 2 capital, designed to absorb losses before senior creditors.

Goldman Sachs’s Series Z preferred issue in January 2025 is a straightforward example. The bank sold 76,000 shares of perpetual 6.85% fixed-rate reset non-cumulative preferred stock, each with a $25,000 liquidation preference, equating to roughly $1.9 billion of deeply subordinated capital. This counts towards Goldman’s regulatory capital while avoiding dilution of common shareholders.

At the other extreme, Credit Suisse’s Additional Tier 1 bonds show how risky these instruments can be. In March 2023, Swiss regulator FINMA ordered a full write-off of about CHF 16.5 billion of Credit Suisse AT1s as part of the emergency takeover by UBS, wiping out AT1 holders even as some equity value remained. In October 2025 Switzerland’s Federal Administrative Court ruled that the write-off order lacked a proper legal basis, but any compensation remains uncertain and subject to appeal.

This episode underlines that hybrids are explicitly designed to be loss-absorbing and that regulators can exercise wide discretion in a crisis. Dividends can often be skipped without legal default, and recoveries in liquidation are typically minimal.

Investor takeaways:

• If a company you own suddenly starts issuing a lot of preferreds or hybrids, ask why now- it can be a benign way to fine-tune capital, but under stress it may signal they are running out of cheaper options.
• Remember that coupons on many preferreds and AT1s can be skipped without legal default; if the business hits trouble, those payments are not guaranteed income for you as a retail holder.
• A thick layer of preferreds and hybrids above the ordinary shares means more of the company’s cash flow goes to other investors and, in a bad scenario, more capital must be wiped out before losses reach senior creditors – both of which reduce the upside and safety margin for common shareholders.

Corporate bonds may be the most visible piece of the puzzle, but the real story of a company’s risk and resilience sits in the rest of its capital stack. Across all the instruments in this article, a few themes repeat: who is providing the money, on what terms, how easily that money can disappear, and where the pain falls if things go wrong. A blue-chip issuer tapping commercial paper for working capital and prime auto ABS for funding is in a very different place from a sponsor-backed company relying on unitranche loans, mezzanine debt and opaque receivables structures, even if the headline bond spread looks similar.

For equity investors, the most useful discipline is to treat every non-plain-vanilla funding source as information. A large syndicated loan or unitranche usually means high leverage and a lot of bargaining power in the hands of a small lender group; heavy use of private credit and mezzanine tells you the cheap money has already been tried and exhausted. Growing reliance on securitisations and off-balance-sheet vehicles can be perfectly rational – as with Ford Credit’s core ABS programme – or a warning sign, as First Brands’ collapse shows. Preferreds and hybrids can be smart capital optimisation for a strong bank like Goldman Sachs, but when issued in bulk under pressure they are often the last stop before more painful measures.

Practically, this boils down to a short checklist whenever you look at a company’s debt:

• Structure: Is funding long-term, diversified and transparent (bonds, plain ABS, modest CP), or concentrated, short-dated and bespoke (unitranche, private credit clubs, mezzanine)?
• Price and position: Are spreads and coupons consistent with the story management is telling, and where does each instrument sit in the waterfall if enterprise value falls?
• Refinancing risk: Are there big, lumpy maturities in private or structured markets that depend on continued “risk-on” sentiment to roll?
• Incentives: Who can pull the plug, and how much leverage do they have over equity in a restructuring?

If you fold these questions into your normal bond-yield and leverage analysis, the alphabet soup of CLOs, ABS, unitranche loans and hybrids stops being background noise and becomes a map of where risk really sits. You may never buy a mezzanine tranche or a slice of a CLO, but understanding who does – and on what terms – will make you far better at judging which corporates deserve your capital, and which ones are quietly living on borrowed time.