A leveraged loan is a loan to a company that already carries heavy debt.

Banks arrange these loans, then sell them to funds and investors.

They fund buyouts and acquisitions, and they sit at the center of private credit and CLOs.

In late September 2025, auto-parts maker First Brands filed for bankruptcy.

It carried about $9 billion in debt, including more than $4.6 billion in first-lien loans.

Within weeks, its top loans fell from near full value to about 36 cents on the dollar.

Regulators and lenders pointed to fraud and hidden, off-balance-sheet debt.

It ranked among the largest defaults in the leveraged loan index's history.

A company borrows through a loan arranged by a bank.

The loan is secured, meaning it is backed by the company's assets.

First-lien loans get paid first if the company fails; second-lien loans come after.

The bank sells pieces of the loan to many investors, spreading the risk.

The rate floats with short-term rates, so lenders earn more when rates are high.

Those loans then get bundled into CLOs and held by funds, so the risk travels far.

The first stress point is hidden debt. If a borrower owes more than it showed, the collateral falls short.

First Brands showed how fast that can turn a loan to pennies.

The second is the float. Rising rates raise the interest a shaky borrower must pay.

The third is the spread. These loans sit inside CLOs, funds, and private credit, so one default touches many holders.

Most leveraged loans pay as promised, and their senior, secured place offers real protection.

The market is deep and has funded business for decades, and that deserves credit.

What can break is trust in the numbers. A fraud or hidden debt can sink a loan overnight.

You can watch the signals. The loan default rate and average loan prices are reported regularly.

A single name falling from par to pennies is the clearest warning of trouble beneath the surface.

A leveraged loan is senior, secured debt for risky borrowers, and usually that structure holds.

The danger is what you cannot see: hidden debt and fraud, as First Brands revealed.

The next test is whether more names crack. Watch the leveraged loan default rate and secondary loan prices.