(Bloomberg) — Creditors to First Brands Group are tallying paper losses in the billions of dollars and trying to assess the widening damage from the unanswered questions swirling around the auto-parts supplier.
Investors watched in horror, some of them staying up all night, as the value of First Brands’ $6 billion debt pile fell roughly in half in the space of a few days. That drop was triggered by concerns about the company’s use of off-balance sheet financing tied to its future revenues, according to people with knowledge of the matter.
Some lenders, worried about the lack of communication from First Brands, which sells parts like windshield wipers, water pumps and filters, decided to sell the loans and cut their losses in recent days, some of the people said.
Advisers are holding talks into the weekend to assess the company’s needs, while investors are taking steps to organize in the event of a restructuring, according to people with knowledge of the matter.
First Brands did not respond to a request for comment.
The problems hit at a time when credit investors are already facing sudden, unexpected losses from a number of large borrowers including Saks, New Fortress Energy, and, most recently, subprime auto lender Tricolor Holdings, which declared bankruptcy last week amid allegations of fraud.
Along with the broader fears of credit market disruption, the situation with First Brands plays into longstanding concern among investors about the opaque arrangements that companies rely on to borrow against future cash flows, creating debt that often remains off their balance sheets.
Supply-chain financing was at the center of the collapse of Greensill Capital and contributed to the demise of Credit Suisse Group AG and its takeover by UBS Group AG.
The decline of First Brands has already been precipitous enough that Apollo Global Management Inc. and Diameter Capital Partners have closed out the short bets they had made against First Brands, Bloomberg previously reported.
A $2 billion loan that First Brands is due to pay back in 2027 plummeted to under 50 cents on the dollar on Friday, according to broker notes seen by Bloomberg. That’s down from over 90 cents just over a week ago, a spectacular fall in such a short time. The company’s riskier, junior loans, fell below 20 cents.
First Brands is owned by Patrick James, a businessman with a limited public profile. The company has grown through debt-funded acquisitions of products that are sold through mainstream retailers like Walmart and O’Reilly Auto Parts, according to Moody’s. It mostly borrowed in the leveraged loan market.
First Brands has been under close scrutiny since the beginning of August, when it paused a proposed refinancing of its debt. Investors asked the company to obtain a so-called quality of earnings report, which involves a third-party reviewing the accounts, Bloomberg reported. Moody’s Ratings described the company’s moves as credit negative.
Jefferies Financial Group Inc. was arranging the refinancing that got paused. More recently, the bank has told investors that it has had trouble getting information from First Brands, people familiar said. Jefferies declined to comment.
Many of the concerns swirling around the company are tied to its use of a financing practice known as factoring that allowed it to get paid up front, by a third party, for money that it is expecting from customers. Some 70% of the company’s revenues were channeled through factoring, people familiar with the company’s finances said.
Factoring can create balance sheet problems when the funds received up front come in the form of debt that has to be paid back, or when it’s used by a company to delay paying its own suppliers.
“The company has around $6 billion in debt financing, and that, in addition to the off-balance-sheet factoring and supply chain financing, is a sizeable amount of debt for a company of its size,” Stephen Brown, a senior director at Fitch Ratings, said on Friday. Fitch rates First Brands at B , four steps into junk territory.
“It’s a solid business with a diversified customer base, so the question marks now are around the refinancing challenges and that very large sum of debt coming due all at once in 2027,” Brown added.
A number of the largest creditors to the company, which include collateralized loan obligation managers, have hired advisers and signed non-disclosure agreements, according to separate people with knowledge of the discussions.
Distressed investors are examining the company and its businesses to get a sense of what value may remain once claims are sorted and the noise fades, the people said.
–With assistance from Olivia Fishlow, Aaron Weinman, Rachel Graf and Eliza Ronalds-Hannon.
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