Jefferies Financial Group is seeking to reassure investors and clients after the collapse of First Brands Group, a major auto-parts supplier, triggered scrutiny of the Wall Street firm’s exposure and risk management practices.
The bankruptcy, which left creditors bracing for steep losses, has also led to the resignation of First Brands’ founder and chief executive, Patrick James, amid ongoing investigations into the company’s finances.
First Brands, known for supplying spark plugs and other automotive components, filed for bankruptcy in late September with more than $10 billion in debt. The company’s rapid expansion, fueled by a series of acquisitions and complex financing arrangements, has come under investigation after advisers discovered that $2.3 billion owed to purchasers of customer invoices had “simply vanished,” according to bankruptcy filings.
Creditors, including Jefferies, have been left to assess the extent of their potential losses as special advisers probe whether some collateral was pledged multiple times.
Jefferies’ exposure to First Brands came primarily through its Point Bonita Capital investment fund, which had about $715 million invested in receivables purchased from the auto-parts group. The bank’s own indirect investment amounts to roughly $43 million, or 5.9% of Point Bonita’s accounts receivable, along with a $2 million interest in First Brands’ bank loans through another financing platform.
Jefferies has emphasized that these figures represent a small fraction of its overall balance sheet, which included $10.5 billion in total equity and $11.5 billion in cash as of August 31.
In a letter to stakeholders released on Sunday, Jefferies’ chief executive, Rich Handler, and president, Brian Friedman, said, “No matter what the ultimate outcome is, this episode, while extremely unfortunate and disappointing, is manageable and any losses will be readily absorbable.”
They added that the impact on Jefferies’ equity market value and credit perception was “meaningfully overdone, and we expect this to correct soon as the facts and range of outcomes are better understood.”
Jefferies’ shares fell 18% last week following the revelations, though the company has stressed that its financial condition remains sound. The firm also pointed to a recent agreement with SMBC, the commercial-banking subsidiary of Japan’s Sumitomo Mitsui Financial, which will increase its stake in Jefferies and extend up to $2.5 billion in new credit.
First Brands’ bankruptcy has also led to leadership changes. Patrick James, the company’s founder and sole equity owner, has stepped down as chief executive after accounting irregularities came to light. Charles Moore, a managing director at Alvarez & Marsal and First Brands’ chief restructuring officer, has taken over as interim CEO.
“Our immediate priority is to ensure stability and dependability for our employees, customers, and partners,” Moore said in a statement. “We remain laser-focused on operational execution while we take the necessary steps to conduct an investigation into the past use of various financing instruments and facilitate a sale process designed to deliver the best possible outcome for our stakeholders.”
Jefferies has maintained that it was not aware of any fraudulent activity at First Brands prior to the bankruptcy. The firm said it learned of the allegations at the same time as the public, after First Brands stopped remitting payments to Point Bonita. Jefferies also clarified that its management and incentive fees from Point Bonita are immaterial, totaling only 0.8% of net revenues over the past year.
The bank said it is working with Point Bonita investors to facilitate redemptions, which will be paid out quarterly over the next year. While the episode has drawn attention to the risks of complex trade-finance arrangements, Jefferies insists that its exposure is limited and that its core business remains robust.
Jefferies is set to address the situation further at its annual investor meeting on Thursday.
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