Unlock the Editor’s Digest for free

An investigation into First Brands Group’s off-balance sheet financing is examining whether the company pledged the same invoices multiple times, in a review of its books and records that has already uncovered that debt collateral may have been “commingled”. 

First Brands, whose more than $10bn collapse has rattled private debt markets and threatens multibillion-dollar losses on Wall Street, this month appointed a so-called “special committee” to carry out an investigation of its financing arrangements.

This committee, which is comprised of two independent managers, is working with restructuring advisers at Alvarez & Marsal and Weil Gotshal & Manges to look at off-balance sheet debt, including “factoring” facilities, according to a statement filed in the Southern District of Texas courts by A&M’s Charles Moore, First Brands’ new chief restructuring officer.

First Brands made extensive use of factoring — where companies sell outstanding customer invoices to banks or investors in return for upfront cash.

The investigation is probing “whether receivables may have been factored more than once”, according to Moore’s statement, a practice sometimes referred to as double-pledging. 

Receivables refer to money due under customer invoices. So-called factoring lenders only provide cash if they believe they have sole claim over the invoice in question, with double- or multiple-pledging of customer bills typically violating these agreements.

Pledging the same invoice more than once can also enable companies to raise financing beyond the amount actually due from a customer.

While there is no indication from Moore’s statement that multiple pledging of invoices has been specifically identified or confirmed, the probe will add to the questions that have for weeks swirled around First Brands’ billions of dollars in invoice-linked financing.

First Brands, which sells car parts such as windscreen wipers and brake components, also raised billions of dollars of debt secured against inventory sitting in its warehouses with multiple lenders.

Separately, Moore wrote that First Brands’ restructuring advisers “recently” became aware that inventory backing a debt facility with a credit fund “may have been commingled with collateral securing” a separate bank loan.

Boston-based Evolution Credit Partners is named as the fund whose loan is subject to the “collateral dispute”, which is also subject to the special committee’s investigation.

The probe into multiple-pledging and the discovery of potentially commingled collateral could raise further concerns among debt investors already shaken by the collapse of subprime auto lender Tricolor.

Recommended

Before Tricolor’s bankruptcy, its lenders were probing potential double-pledging of car loans as collateral. The US Department of Justice is probing fraud allegations following the lender’s collapse.

The FT has previously reported that First Brands’ low-profile owner, Patrick James, and other companies linked to him were previously sued by two lenders that alleged that fraudulent conduct had exacerbated their losses. 

In one of the cases, a bank accused James and other defendants of making “misrepresentations and omissions” relating to their “accounts receivable” — money due under customer invoices — and “inventory”. James strongly denied the allegations of fraud in the two cases, which were both dismissed after settlements were reached.

James, who also acted as First Brands’ chief executive and has remained on its board following the bankruptcy, has not been accused of any wrongdoing in relation to the investigation into the group’s invoice- and inventory-backed debt.

Recommended

Moore’s statement also paints a fuller picture of First Brands’ chaotic descent into bankruptcy, including the revelation that it had only $14mn of cash in its bank account at the start of last week.

Moore also confirmed an earlier FT report that the group’s cash crunch was exacerbated when one of First Brands’ banks seized much of its cash.

Florida-based SouthState Bank last week moved to secure bank accounts containing $27mn in “working capital funds” — described as “the last remaining liquidity” of First Brands’ US subsidiaries — alleging that a failure to repay its debts allowed it “to remove the total amount of funds”.

Moore’s statement also estimates the group’s debt, including so-called “supply-chain finance” and off-balance sheet, inventory-backed debt, at $9.3bn, a higher figure than previously disclosed. This debt number does not include additional sums outstanding under factoring facilities, which are estimated at $2.3bn in the same filing.

First Brands, Evolution and SouthState did not immediately respond to requests for comment.