Red flags at First Brands ignored by creditors

[Jefferies.]
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Auto-parts maker First Brands declared bankruptcy a couple of weeks ago and left investors and creditors with billions of dollars in potential losses, yet it remains unclear what exactly went wrong.

With many investment firms eager to offer private market investment opportunities to retail clients, the failure of the large private company underscores the need for firms and investors to research closely held businesses, which, by their nature, are hesitant to open their books to outsiders. That rising demand for stakes in private companies also broadens the network of lenders and investment firms that stand to hold the bag when a private company fails.

Point Bonita Capital, a division of Jefferies' (JEF [https://seekingalpha.com/symbol/JEF]) Leucadia Asset Management that manages trade-finance assets on behalf of third-party institutional and other investors, has some $715M invested [https://seekingalpha.com/news/4502610-jefferies-tallies-161m-of-exposure-to-bankrupt-auto-parts-maker-first-brands] in receivables owed to First Brands. Western Alliance Bancorporation (WAL [https://seekingalpha.com/symbol/WAL]) faces exposure [https://seekingalpha.com/news/4502721-western-alliance-stock-slides-after-report-on-risks-from-first-brands] through a leveraged facility with a fund associated with Jefferies. Swiss lender UBS Group (UBS [https://seekingalpha.com/symbol/UBS]) was also left with potential losses from First Brands.

What's more, the U.S. Department of Justice opened an inquiry into the collapse of First Brands, as many of its finances were murky. It was reported that one of the company's largest creditors to First Brands alleged as much as $2.3B [https://seekingalpha.com/news/4503116-justice-department-launches-inquiry-into-first-brands-bankruptcy] "simply vanished" amid the company's implosion. It appears the firm had used complex off-balance sheet financing and may have pledged the same receivables and inventory to multiple creditors -- a financial practice known as rehypothecation -- leaving its real collateral uncertain.

First Brands CEO Patrick James formed the company by buying local manufacturing firms through a web of holding firms. But, in 2011, a Fortress Investment Group unit filed [https://www.govinfo.gov/content/pkg/USCOURTS-ohnd-1_11-cv-00200/pdf/USCOURTS-ohnd-1_11-cv-00200-0.pdf] a lawsuit, alleging he hid his control and ran undercapitalized, overlapped entities. James settled that case and an earlier fraud suit.

Even so, his company, then Crowne Group, managed to raise $380M in 2014, as Wall Street continued to back him. From there, it rebranded to First Brands in 2020, and borrowed over $1B for more acquisitions, pushing its long-term debt to about $6B in subsequent years.

Not everyone was on board. After learning about the prior litigation and the company's elusive CEO, several investors who explored lending decided not to engage, Bloomberg reported, citing unnamed investors. First Brands' reliance on short-term trade finance, essentially corporate payday loans backed by future shipments or inventory, often stayed off its balance sheet because they ran through James's separate financing firms, such as Carnaby Capital and Eagle Casting Holdings.

For at least two years before bankruptcy, First Brands struggled to pay vendors and deliver orders, racking up penalties, vendors, former staff and other people familiar told [https://www.bloomberg.com/news/articles/2025-10-09/norway-on-edge-over-trump-ahead-of-nobel-peace-prize-verdict?srnd=homepage-americas] Bloomberg. Early this year, a James-owned affiliate failed to make $200M in monthly payments to a financing firm that had purchased some equipment from First Brands, a problem most creditors didn't see because it occurred outside the main company, court filings showed.

Trouble deepened in the summer, when Jefferies (JEF [https://seekingalpha.com/symbol/JEF]) was working up new lenders to refinance about $6B in syndicated debt, but the effort never came together before the bankruptcy.

Many investors in First Brands' first-lien loans tapped the refinancing right away, though several second-lien investors hesitated, demanding details about the company's off-balance sheet debt and questioning its choice not to hire a Big Four accounting firm, people familiar with the matter said, Bloomberg reported.

Jefferies (JEF [https://seekingalpha.com/symbol/JEF]) was said to have paused the refinancing in early August, pledging a comprehensive review of First Brands' finances by a major auditor. By early September, the company's lawyers were calling creditors to warn that First Brands was running out of cash.

_Seeking Alpha editor Liz Kiesche contributed to this story._

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