The collapse of US auto parts manufacturer First Brands Group has reverberated through the banking sector on both sides of the Atlantic. The rapid demise of the company – which is now unraveling a maze of complex debt deals with a range of lenders and investment funds worldwide – highlights the risks associated with the often 'aggressive' private credit financing structures. Jefferies said Wednesday that its Leucadia Asset Management unit has $715 million exposure to the stricken Ohio-based company through its Point Bonita Capital Fund, which invests in invoice receivables. UBS O'Connor – the Swiss bank's private markets, hedge funds and commodity-focused asset management unit – has a total of more than $500 million in exposure. The UBS Working Capital Finance Opportunistic Fund has an estimated 30% exposure through invoice financing. The bank's funds also have positions in working capital fintech platform Raistone – whose revenue came mainly from First Brands, and in which O'Connor also reportedly has an equity stake, the Financial Times said. “This event affects many private lending and working capital providers in the sector. In this highly fluid situation, we are working to determine the potential impact on the performance of the small number of our affected funds and are focused on protecting our clients' interests,” UBS said in a statement. In an update Wednesday, Jefferies said it is communicating with First Brands advisors to determine what the impact could be on Point Bonita. The Point Bonita strategy – which manages approximately $3 billion in total assets – has had exposure to First Brands dating back to 2019, the report said. The $715 million exposure is invested in receivables from a number of companies, including Walmart, Autozone and NAPA. “In its bankruptcy filings, First Brands indicated that its special advisors were investigating whether claims had been assigned to third parties upon receipt and whether claims had been considered more than once,” Jefferies said. “We have not yet received any information regarding the results of that investigation. We intend to do everything in our power to protect the interests and enforce the rights of Point Bonita and its investors.” Jefferies separately revealed Wednesday that its Apex Credit Partners business, which focuses on collateralized loan obligations (CLOs) consisting of broadly syndicated loans, has a smaller exposure of $48 million through First Brands' term loans – about 1% of CLO assets managed by Apex. Millennium, the $79 billion multi-strategy hedge fund, previously wrote down $100 million due to exposure to First Brands' debt. A spokesperson for Millennium declined to comment on the matter. Weaker credit conditions First Brands, founded in 2014 and privately owned by Singapore-born investor Patrick James, grew quickly through acquisitions of other auto parts companies in the US. It was fueled by an assortment of off-balance sheet private debt and broadly syndicated bank financing, as well as other non-traditional credit structures, much of which was supported by outstanding invoice receivables, factoring and other supply chain financing, often involving special purpose vehicles and collateralized loan obligations. The group — whose subsidiaries made spark plugs, windshield wipers, filters, brake parts and other replacement parts — filed for Chapter 11 bankruptcy on Sept. 28. An earlier aborted refinancing prompted scrutiny of the company's debt arrangements, which were estimated at about $10 billion, according to the original bankruptcy filing. The private credit market has boomed in recent years and has become an increasingly important source of financing for the real economy, especially for smaller companies, start-ups and other borrowers with a riskier credit profile. Private lenders and other alternative investment funds have stepped in to fill the financing gap left by traditional investment banks, whose lending standards have tightened in the wake of the 2008 global financial crisis. The level of the stock market and tight credit spreads may have created a kind of optical illusion that all elements of the world are in a better place. Founder and CIO, Fourier Asset Management. Orlando Gemes Questions are now being asked about how the demise of a relatively unknown auto parts supplier has spread across the global banking and fund management industries, where potentially billions of dollars are entangled in the collapse. “None of this should come as a surprise: we are in a higher interest rate environment where leveraged companies have used very aggressive financing structures,” said Orlando Gemes, founder and chief investment officer at Fourier Asset Management. “The level of the stock market and tight credit spreads may have created some kind of optical illusion that all elements of the world are in a better place.” Gemes said that overall the private credit market has been “doing well” in moving credit off banks' balance sheets and into more appropriate capital structures with longer maturities. But he warned that the sector's market structure has changed. “There are very clear indications that credit conditions in the leveraged finance market are the weakest they have ever been,” Gemes told CNBC. “Private credit has been very aggressive in offering covenant-lite loans, but also a higher percentage of loans with a payment-in-kind structure, creating even more risks.” First Brands implosion 'not the last' Industry insiders say the nature of some private market transactions is making problems increasingly difficult to spot, despite intensified investor due diligence, often involving private investigators. Gemes said there are more defaults and lower recoveries than are publicly reported, noting that there are a number of high-profile deals in Europe where very little information is available due to the private nature of the deals. “This isn't a canary in the coal mine — it's not the first, and it's not the last,” he said of the First Brands episode. While the broader systemic risk of the First Brands implosion is considered low – mainly due to stricter lending regulations following the global financial crisis and improved structural protections in CLOs – the debacle is already drawing comparisons to both the 2008 blowout and the 2021 collapse of Greensill Capital, due to the presence of complex financial engineering, risky loans and trade receivables. Swiss litigation and dispute resolution firm Lalive said the mix of private credit and supply chain financing in the First Brands financing model is reminiscent of the Greensill approach. Lalive, who worked for a large group of institutional investors on a successful recovery during the Greensill scandal, said the off-balance sheet nature of supply chain financing can mask “latent weaknesses” in financing models and increase the risk of distress. It also compared UBS's quagmire at First Brands to Credit Suisse's $10 billion exposure to Greensill-linked funds. “The structural similarities between the two cases suggest that this could be more than just a credit event,” Lalive wrote in a note. “In public markets you can look at your screen and see where a company is trading – you can see what the liquidity is, what the volumes are, you can stress test it. In private markets you don't have that,” Patrick Ghali, co-founder and managing partner at Sussex Partners, told CNBC. “There are some real risks.” In an FT interview, high-profile short seller Jim Chanos said that private credit has “put an extra layer between the actual lenders and the borrowers”, comparing such structures to the subprime mortgage-backed securities that were at the center of the 2008 crisis. Ghali, meanwhile, said: “There are a lot of people who probably don't remember 2008 as it was almost twenty years ago, but there lessons can be learned. I understand the disintermediation of the banks, I understand why this exists. I'm just really concerned that people need to do their homework. So much money has gone into that space, and so much money that may still end up in that space, and that's a little scary.”
