Why credit risks are jarring Wall Street

The blowups of First Brands and Tricolor — while unusual given the allegations of financial irregularities against them — have still rattled investors already jittery over an uncertain economy. Why it matters: If bad loans like those at the two collapsed companies emerge elsewhere, investors are likely to accelerate a move away from risk.And that could be the straw that breaks this bull market's back.What they're saying: Institutional investors who rushed to put money to work without doing as much due diligence as they would have in a tighter credit environment "are scrambling to look at their risk, at their portfolios, at their exposure," Alberto Gallo, chief investment officer at Andromeda Capital Management, tells Axios. "There is a rush to risk discovery."Meghan Robson, head of U.S. credit strategy at BNP Paribas, tells Axios that the reaction of market participants is "part of being later in the credit cycle." Translation: Credit has been booming for a while, and eventually defaults are bound to start ticking up. So investors are on watch.Between the lines: First Brands' collapse stemmed in part from opaque lines of trade credit, or short-term financing that lets companies delay payments to suppliers or borrow against invoices.The company's use of hidden, off-balance-sheet finance made its true leverage and liquidity strain less visible to investors, according to reporting from the Financial Times.Now, clients are asking more questions about trade credit, Robson says, seeing it as another hard-to-track risk.Meanwhile: Retail investors are feeling jittery, too. High yield bond and leveraged loan mutual funds and ETFs last week experienced their biggest outflows since April, according to Morningstar data.When money is pulled from these types of funds, it can tighten the amount of credit that's ultimately available to corporate borrowers. Yes, but: Several strategists contend that First Brands, Tricolor and the bad loans that rocked two regional banks last week were one-offs. While there could be more issues, "we don't see these as signs that there's going to be a broader default cycle in private credit or credit," Robson says.BlackRock's credit team writes that the peak in corporate default activity is likely behind us.And Siebert Financial CIO Mark Malek writes that "there aren't any signs of imminent collapse," as financial conditions remain loose, credit spreads are tight, and consumers are resilient.The bottom line: By the end of last week, a selloff spurred by credit concerns had ebbed. But with investors already on edge, any additional credit hiccups could prompt a new round of selling.

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