The speed at which US car parts maker First Brands Group unravelled has shocked Wall Street.
The privately held group’s longtime bankers at Jefferies were marketing a $6bn loan deal to investment funds less than two months ago on the basis that the multinational conglomerate was in no immediate peril, with more than $1bn of cash and other sources of liquidity to hand.
First Brands on Sunday filed for Chapter 11 protection, disclosing more than $10bn in total liabilities but with the full extent of its off balance sheet financing still unclear.
The bankruptcy could result in billions of dollars of losses for some of the biggest players in private debt markets. But there are also potential winners on Wall Street, with some funds having shorted the privately held debt before the company collapsed.
Losers
Patrick James
The bankruptcy filing marks a stunning fall for Patrick James, the low-profile industrialist who used debt to stitch together First Brands away from the glare of public markets.
Over the past decade, James transformed his group from a niche Ohio-based supplier of spark plugs and brake components into a sprawling industrial empire with an enterprise value in the billions of dollars.
As well as owning First Brands through a chain of private limited liability corporations, James is listed in bankruptcy filings as president and chief executive of many of First Brands’ main corporate entities.
This is not his first brush with aggrieved lenders, however.
The 61-year-old moved to Ohio from his native Malaysia to attend university and in the 2000s acquired a string of small-scale manufacturing plants across the US.
After several of these companies experienced severe difficulties during the 2008 financial crisis, James and other companies linked to him were sued by two lenders, which alleged that fraudulent conduct had exacerbated their losses.
In one of the cases a bank accused James and other defendants of making “misrepresentations and omissions” relating to their “accounts receivable” — money due under customer invoices — and “inventory”.
James strongly denied the allegations of fraud in the two cases, which were both dismissed after settlements were reached.
In those lawsuits, the defaulted loans at stake were measured in millions not billions of dollars. The sums at stake in the current crisis highlight how the boom in the US private credit industry during the past decade has supercharged private companies’ ability to borrow money.
First Brands did not respond on behalf of James.
Collateralised loan obligations
Collateralised loan obligations — structured investment vehicles that have long bolstered the market for lending to riskier companies — were among the holders of First Brands’ loans.
While this debt was private, it was “broadly syndicated” in a process overseen by banks, rather than negotiated directly between the funds and the company. CLOs report their holdings publicly and typically require credit ratings for the loans they buy.
These CLOs will have bought First Brands debt at close to face value. But even its first-ranking debt is now trading at little over 33 cents on the dollar.
Big holders of First Brands debt through these vehicles and other loan funds have included asset managers PGIM, CIFC and Blackstone.
Some CLOs have already sold their positions, according to people familiar with the trades. These included those that previously agreed to restrict their trading in order to learn private information around First Brands’ restructuring.
Such trades can be facilitated through a “big boy letter”, which waives liability if the buyer is disadvantaged by the seller’s greater knowledge of the situation.
PGIM and CIFC declined to comment. Blackstone confirmed it had no current exposure to First Brands’ debt.
Invoice and inventory lenders
Away from the quasi-public CLO market, First Brands engaged in even more under-the-radar financing.
It was a big user of invoice and inventory finance, much of which is less clearly disclosed on corporate balance sheets. Private credit funds provided much of this financing.
While First Brands’ accounts did not clearly disclose how much it had outstanding in “factoring” facilities — which allow companies to sell outstanding customer invoices to banks or investors in return for upfront cash — the group recently gave more detail to potential lenders.
This showed it had $2.3bn of “factored” customer invoices — expected inflows of funds that it has sold to lenders in exchange for cash — outstanding at the end of 2024, according to documents seen by the Financial Times. This was equivalent to more than 70 per cent of its annual sales.
On top of this, First Brands’ accounts show it had $682mn in “supply chain finance” outstanding at the end of 2024, a technique sometimes called “reverse factoring” under which a lender pays suppliers’ bills upfront and then collects the money from the company later.
New US accounting standards brought in at the end of 2022 require companies to disclose this financing more clearly, although these rules do not cover all forms of financing involving supplier invoices, and the level of corporate disclosure varies.
First Brands had also raised inventory finance — typically secured against stock in warehouses — through several “special purpose entities”. Some of these entities filed for bankruptcy last week and First Brands’ own Chapter 11 filing included additional information on this debt.
Specialist credit investment firms Evolution Credit Partners, AB CarVal and Aequum Capital are named in relation to the inventory debt in Sunday’s bankruptcy petition. Boston-based Evolution is separately listed as having factoring exposure.
Jefferies
Jefferies is one of the hardest-charging banks on Wall Street in the niche area of issuing riskier debt to bond and loan investors. It has grown its business prolifically since the financial crisis, hiring from rivals and expanding its business with private equity sponsors.
But its reputation in US credit markets had already suffered from its decision to lead a junk bond deal for struggling department store group Saks Global in December. Less than a year after issuance, the company restructured its debt, pitting creditors against each other. Some of its bonds are trading at less than 40 cents on the dollar, with investors suffering painful paper losses.
The First Brands fiasco threatens to tarnish its image further. Jefferies’ relationship with First Brands stretches back years, with Securities and Exchange Commission filings showing it financed multiple transactions for the group when it was growing fast.
The wheels came off its latest debt deal, a $6bn loan intended to refinance the group’s debt stack, last month after debt investors requested more information about First Brands’ invoice factoring and other elements of its accounting.
Jefferies shelved the deal, framing it as a pause until clarity was reached, but First Brands instead collapsed into bankruptcy within weeks.
The banking group also has more direct exposure to the multibillion-dollar bankruptcy.
Many of First Brands’ loan investors were not aware that an investment unit of Jefferies also provided more opaque financing to the auto parts company linked to its customer invoices. An FT report revealed the connection this month.
Jefferies, along with three other creditors to First Brands’ invoice “factoring” facilities, is listed as an unsecured creditor with a “contingent”, “unliquidated” or “disputed” claim, indicating its claim could face difficulties.
Jefferies declined to comment.
BDO
First Brands’ collapse could also lead to scrutiny of the group’s longtime auditor, BDO USA, which in March gave the company’s accounts a clean bill of health through a so-called “unqualified” audit opinion.
Debt investors have already raised questions around First Brands’ disclosure of off-balance sheet financing, prompting the group to appoint Deloitte last month to produce a “quality of earnings” report in a bid to assuage these concerns. However, First Brands’ descent into bankruptcy came before the “Big Four” accountancy firm could complete its review.
BDO did not respond to a request for comment.
Winners
Apollo
The FT reported this month that private asset specialist Apollo Global Management had built a short position against the company’s debt, something that is difficult and expensive to do for both technical and administrative reasons.
Apollo held the short for more than a year, although it had closed the position before the bankruptcy. In the context of Apollo’s $840bn of assets, any windfall on the First Brands short is likely to be small. However, the bet could still draw further scrutiny given the firm’s private equity funds own Michigan-based auto parts maker Tenneco, a rival to First Brands.
Diameter Capital Partners — a US credit hedge fund in which Apollo holds a stake — also shorted the debt and took profits on the trade recently. Diameter is known for its buccaneering bets in credit markets, having been an early buyer on long “hung” loans linked to Elon Musk’s buyout of Twitter.
Apollo declined to comment.
Distressed debt funds?
As many CLO managers headed for the exits, other credit funds spied an opportunity.
A number of large specialist distressed debt investors bought up large blocks of First Brands debt at a discount as worries escalated over the past fortnight.
Goldman Sachs debt traders estimate that almost $1bn of First Brands loans changed hands on Thursday, according to a note to clients seen by the FT, describing it as the “largest risk transfer in a structure in a single day” since Credit Suisse was rescued by rival Swiss bank UBS in 2023.
Diameter could also stand to profit further: the hedge fund has bought First Brands’ top-ranking debt at deep discounts to face value in recent days, according to two people familiar with the trade. One of those people added that the purchases were made at below 40 cents on the dollar.
Diameter declined to comment.
The trade is not for the faint of heart, however, given the substantial uncertainty about First Brands’ financial exposure.
These credit funds typically look to profit from a bankruptcy’s debtor-in-possession loan (Dip) — new funding to keep the business’s operations running that typically has first priority over the company’s long list of existing lenders.
First Brands has said it has secured a $1.1bn facility.
