Fallout from First Brands bankruptcy ripples through credit markets

The bankruptcy of auto-parts supplier First Brands Group is sending shockwaves through corporate credit markets, as creditors, regulators and investors grapple with the fallout from billions of dollars in vanished financing and mounting questions about the company’s accounting practices.

First Brands, a Michigan-based supplier of filters, brakes and lighting systems, filed for bankruptcy protection on September 29 after lenders began probing irregularities in its financial reporting.

The company’s unexpected collapse has drawn scrutiny from the Department of Justice, which according to Reuters and the Wall Street Journal has opened an inquiry into the circumstances surrounding the bankruptcy and the company’s complex web of off-balance-sheet financing arrangements.

Court documents reveal that First Brands had amassed $11.6 billion in liabilities, including roughly $2.3 billion in short-term financing that has yet to be accounted for.

Barron's reports that the company’s funding relied heavily on factoring – a form of trade financing in which it sold customer invoices to outside investors, including units of UBS and Jefferies, to secure cash upfront.

While factoring is a common practice, court filings allege that First Brands borrowed billions through these short-term loans, much of it kept off the balance sheet via a network of separate corporate entities. In some cases, invoices may have been sold more than once.

The unraveling began in mid-September, when First Brands reportedly stopped forwarding customer payments to its factoring investors. By the time the company entered bankruptcy proceedings, creditors including Jefferies, UBS, Millennium and Katsumi Global were left with significant exposure.

Jefferies disclosed $715 million in receivables tied to First Brands, while UBS said its exposure exceeded $500 million.

In bankruptcy court, creditors have pressed for answers about the missing funds. Richard Jacobsen, counsel for Raistone – a trade-claims financier owed at least $172 million – filed an emergency motion seeking an independent investigation. “As much as $2.3 billion in short-term financing has simply vanished,” Jacobsen wrote in court filings.

During an October 1 court hearing, Sunny Singh, a lawyer for First Brands, addressed questions about the whereabouts of the factoring cash: “It’s not here. We don’t have it. Zero dollars. There’s $12 million in the bank account today. That’s it. There’s nothing else.”

The DOJ’s probe, reportedly led by the US Attorney’s Office for the Southern District of New York, is still in its early stages and is being described as a fact-finding mission. Such investigations do not necessarily result in charges.

First Brands has appointed two independent directors to investigate its finances, but some creditors argue that only an externally appointed examiner can ensure a thorough and impartial review.

“No matter how impartial any members of the Special Committee may appear, the debtors should not be permitted to appoint the very parties that will investigate their own potential misconduct,” Raistone wrote in its court motion.

The bankruptcy has amplified concerns among investors and analysts about the risks embedded in corporate credit markets, particularly as lending activity has surged in recent years.

One analyst, who declined to be named, said the exposure was “not ideal for UBS’s image and political perception” as the bank seeks to persuade Swiss policymakers to soften capital rules.

As the investigation unfolds, creditors and market participants are left to piece together what could have led to First Brands' financial implosion – and how much, if anything, can still be salvaged.

“We still have more questions than answers,” said Vincent Indelicato, a lawyer representing Evolution Credit Partners, which is owed $300 million.