First Brands Collapse Exposes Private Credit Vulnerabilities

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Private Credit Vulnerabilities Exposed by First Brands Collapse

The financial distress of U.S. auto parts manufacturer First Brands Group has cast a spotlight on the intricate and often aggressive structures prevalent in the private credit market, triggering significant exposures for major financial institutions globally. This unfolding situation, involving complex debt arrangements with a diverse set of lenders and investment funds, underscores the inherent risks associated with innovative yet potentially opaque financing mechanisms that have proliferated in recent years.

The fallout from First Brands’ Chapter 11 bankruptcy filing has revealed substantial financial entanglements. Jefferies, through its Leucadia Asset Management unit’s Point Bonita Capital Fund, reported a $715 million exposure to the company, primarily invested in invoice receivables dating back to 2019. Similarly, UBS O’Connor, the private markets arm of the Swiss bank, faces over $500 million in aggregate exposure, with a significant portion dedicated to invoice financing through its Working Capital Finance Opportunistic Fund. Furthermore, UBS O’Connor also holds positions in the working capital fintech platform Raistone, whose financial performance was largely dependent on First Brands, and in which O’Connor is understood to have an equity stake.

In response to the developing situation, UBS stated, “This event affects many private credit and working capital providers across the industry. In this highly fluid situation, we are working to determine the potential performance impact on the small number of our affected funds and are focused on protecting the interests of our clients.” Jefferies is actively engaging with First Brands’ advisors to ascertain the precise impact on its Point Bonita fund, which manages approximately $3 billion in assets. The company’s bankruptcy filings have initiated an investigation into whether receivables were improperly transferred to third parties or factored multiple times, a crucial point for the protection of Point Bonita and its investors. Jefferies’ Apex Credit Partners business also holds a more modest $48 million exposure to First Brands’ term loans, representing a small fraction of its collateralized loan obligation (CLO) assets.

Weakening Lending Standards and Market Structure Concerns

Founded in 2014 and privately held, First Brands Group experienced rapid expansion through a series of acquisitions, financed by a blend of off-balance sheet private debt, syndicated bank loans, and alternative lending structures. These arrangements frequently relied on outstanding invoice receivables, factoring, and supply chain finance, often utilizing special purpose vehicles and CLOs. The company’s diverse product lines, including spark plugs, filters, and brake components, did not shield it from its financial collapse, which has drawn comparisons to previous high-profile defaults.

The significant growth of the private credit market, driven by a desire to fill financing gaps left by traditional banks and provide capital to riskier borrowers, has been accompanied by a notable easing of lending standards. Orlando Gemes, Founding Partner and CIO at Fourier Asset Management, commented on the prevailing market conditions: “We’re in a higher interest rate environment where leveraged companies have been using very aggressive financing structures.” He added that while the private credit market has successfully moved credit off bank balance sheets, “there’s very clear evidence that lending standards in the leveraged finance market are the weakest they’ve ever been.” Gemes specifically highlighted the prevalence of “covenant-lite loans” and a higher percentage of Payment-in-Kind (PIK) structures, both of which introduce increased risk.

Systemic Implications and Lessons from Past Crises

Industry observers suggest that the opacity inherent in certain private market transactions makes problems difficult to detect, even with enhanced due diligence. Gemes further noted that defaults and recovery rates may be lower than publicly reported, with a considerable number of deals in Europe lacking transparency due to their private nature. He cautioned that the First Brands episode is indicative of broader trends, stating, “This is not a canary in the coal mine — it’s not the first, and it’s not the last.”

While the immediate systemic risk stemming from First Brands’ collapse is assessed as low, owing to post-2008 financial crisis regulatory enhancements and improved CLO structural protections, the event’s complexity and reliance on trade receivables and aggressive borrowing have drawn parallels to the 2008 Global Financial Crisis and the 2021 Greensill Capital failure. Swiss firm Lalive observed that First Brands’ funding model, a hybrid of private credit and supply chain finance, resembles the Greensill approach, noting that the off-balance sheet nature of supply chain financing can obscure underlying weaknesses and increase distress risk. This parallels UBS’s experience with Greensill-linked funds through Credit Suisse. Patrick Ghali, Co-Founder and Managing Partner at Sussex Partners, contrasted public and private markets, stating, “In public markets, you can look on your screen and see where a company trades… In private markets you don’t have that.” He stressed the importance of thorough due diligence given the substantial capital flows into the private credit space.

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