The First Brands Group debacle is getting to the stage where it is hard to follow the headlines, even for reporters in the thick of covering the chaotic unravelling of the Ohio-based auto parts manufacturer.

In scenes reminiscent of the spreading contagion during the 2008 financial crisis, but centred entirely around a bankrupt maker of spark plugs and carburettors based in Cleveland, this week alone the Financial Times and Bloomberg have reported that:

Jefferies earned undisclosed fees on financing it provided to First Brands 

A fund at UBS O’Connor holds 30 per cent exposure linked to First Brands

A Jefferies fund has $715mn of exposure to First Brands invoices

Cantor Fitzgerald is seeking to restrike its deal to buy O’Connor from UBS on the back of the fiasco

Western Alliance has exposure to the auto parts maker via leverage facilities it provided to Jefferies

BlackRock is seeking to redeem its cash from the Jefferies fund in question

A key First Brands creditor claims as much as $2.3bn has ‘simply vanished’

A JV between Japan’s Norinchukin Bank and Mitsui & Co. faces $1.75bn of exposure linked to First Brands

Insurers such as Allianz are preparing for a wave of potential claims relating to First Brands

And, on top of all the financial drama, it emerged that the Feds are watching. The FT reported on Thursday that the US Department of Justice had opened an inquiry into the company’s collapse (although the probe is at an early stage and does not necessarily mean any wrongdoing has occurred).

It doesn’t take a genius to figure out that something is rotten in the state of Ohio, the consequences of which are now being felt on Madison Avenue, Paradeplatz and Ginza. A little harder to follow are the questions of who is holding the bag, and just how odious its contents are.

Let’s focus on Jefferies. In a statement on Wednesday, the bank made a number of claims about the exposure linked to First Brands that lies in its Point Bonita Capital fund, which mainFT first revealed last month had provided opaque off-balance sheet financing to the group.

Jefferies is one of the hardest-charging banks on Wall Street. Its CEO Richard Handler, an acolyte of junk-bond king Mike Milken, has won over a generation of young financial professionals by extolling on X and Instagram the virtues of imbibing spicy margaritas when making critical risk-management decisions:

Jefferies’ corporate structure is not the simplest to unpack when it comes to assessing where the risk lies.

This is partly the consequence of jitters around its stability at the height of the Eurozone crisis, which pushed Jefferies to sell itself to meatpacking conglomerate Leucadia National Corporation in 2012. Jefferies is also not a deposit-taking bank. The institution’s balance-sheet capability largely relies on a tangle of joint-ventures and other complex structures.

The two headline numbers in Jefferies’ Wednesday release on its First Brands-linked exposure are as follows:

Point Bonita Capital has around $715mn invested in “receivables” tied to First Brands’ customers

Apex Credit Partners has $48mn of First Brands debt exposure across 12 CLOs and a warehouse line

This is very much not the risk to Jefferies Financial Group’s balance sheet, however. 

Point Bonita, a specialist trade finance fund named after a historic lighthouse in San Francisco, is supported by $1.9bn of “total invested equity”, of which $113mn came from Jefferies’ subsidiary Leucadia Asset Management. Apex, meanwhile, is owned by a joint venture between Jefferies and insurance group MassMutual.

Goldman Sachs analysts on Wednesday calculated “the risk of potential losses from these two investments at $45mn”. Here is their working:

Jefferies also had good news for investors in Point Bonita: while it may have sent money to First Brands, its exposure is primarily to its customers, which are generally blue-chip and often investment-grade rated corporations. Here’s the release, with our emphasis in bold: 

The purchase of receivables in this fashion is called factoring, and the Point Bonita portfolio has approximately $715 million invested in receivables that are almost entirely due from Walmart, AutoZone, NAPA, O’Reilly Auto Parts, and Advanced Auto Parts, with First Brands, as the servicer, responsible for directing the Obligors’ payments to Point Bonita.

This sounds reassuring. The money is not due from the now bankrupt First Brands, but from some of the largest retailers in America, including double-A-rated Walmart. That should be money-good.

Point Bonita fund documents seen by the FT show that, as of June, its second- and third-largest exposures were to First Brands customers Walmart and O’Reilly. The two retailers accounted for 9.5 per cent and 8.6 per cent of the fund’s net assets, respectively.

In other words: these aren’t really First Brands’ invoices, they’re Walmart invoices.

But when is a Walmart invoice not a really Walmart invoice? Let us explain…

Multiple factors

One answer is when the invoice has been factored several times. 

From a statement First Brands’ new chief restructuring officer, Alvarez & Marsal managing director Chuck Moore, filed in the Southern District Of Texas bankruptcy court last week (again our emphasis):

Following diligence performed by the Company’s Advisors, the Debtors believe that an unpaid prepetition balance of approximately $2.3 billion has accrued with respect to the Third-Party Factoring arrangements as of the Petition Date. The Debtors’ factoring practices are subject to the Special Committee’s ongoing Investigation including (i) whether receivables had been turned over to third party factors upon receipt, and (ii) whether receivables may have been factored more than once

To be clear: Moore has not disclosed any specific findings or confirmation of invoices being factored multiple times. First Brands has not been accused of fraud. But the disclosure is troubling to the providers of over $3bn of invoice-linked financing to the Ohio-based group (that $2.3bn number is in addition to $800mn in so-called “supply-chain financing”, often dubbed “reverse factoring”).

While commonly known as “double pledging”, prior alleged instances of this form of misconduct in trade finance facilities have centred on invoices factored umpteenth times. It is akin to taking out nine mortgages against your house, with the lenders all blissfully unaware that eight other banks also have a claim on the property.

As you can imagine, when the brown stuff hits the fan, it all gets rather messy.

Which party has a claim on the invoices? Is it the first institution that filed a UCC-1? Does an asset-backed loan facility trump a factoring facility? Can trade credit insurers pay out several claims linked to the same invoice?

Determining the answers to these knotty questions will doubtless allow a generation of white-shoe lawyers to add new wings to their second homes in the Hamptons.

Jefferies this week had this to say on the investigation into factoring facilities that is under way as part of First Brands’ bankruptcy:

We have not yet received any information regarding the results of that investigation. We are in communication with First Brands’ advisers and are working diligently to determine what the impact on Point Bonita might be. We intend to exert every effort to protect the interests and enforce the rights of Point Bonita and its investors.

But the other way of determining the identity of your true counterparty on Schrödinger’s invoice lies in who actually paid you. 

“$0”

FTAV readers might naively assume that if you factor an invoice to be paid by Walmart, you receive the money from Walmart.

However, the eagle-eyed readers may have noticed that one of the prior excerpts from Jefferies’ statement described First Brands as the “servicer” on its factoring facility with Point Bonita. That implies First Brands was handling cash collection on behalf of its customers.

To remove any potential ambiguity, Jefferies went on to say the quiet-part loud in its statement:

For almost six years until September 15, 2025, Point Bonita always had been paid by the Obligors on time and in full. On September 15, 2025, First Brands stopped directing timely transfers of funds from the Obligors on Point Bonita’s behalf.

So, Point Bonita was sending money to First Brands. And First Brands was sending money back to Point Bonita. It seems as if the fund never received a dime from Walmart directly.

This may seem intuitively problematic to even the most casual reader, but there are technical reasons it is particularly problematic for Point Bonita.

There are several mechanisms for cash collection used in asset-backed loan and factoring facilities. We’ve boiled it down to four main varieties, ranging from safest to riskiest, as follows:

A fully segregated collection account in the name of the lender

A fully segregated collection account in the name of the company, but over which the lender has continuous control or “dominion”

A fully segregated collection account with a “springing” mechanism, that allows the lender to step in and take control if certain triggers are breached

A collection account fully in control of the company 

The first on the list is the most secure from a lender’s perspective, but naturally companies do not enjoy fully relinquishing control of their cash. The most creditworthy companies in the world can often negotiate the freedom afforded under the final option. Companies such as First Brands, which was rated firmly in junk territory at single-B even before its nosedive into bankruptcy, are not typically afforded this luxury. 

Yet Jefferies’ statement makes it sound as if Point Bonita had some flavour of the final two options. First Brands was able to turn off the cash when its difficulties grew. Was Jefferies able to then step in?

Jefferies declined to comment on the matter, but a person familiar with Point Bonita’s financing arrangements confirmed it had similar rights to another creditor, Raistone.

The fintech founded by a former Greensill Capital executive, which helped arrange a significant portion of First Brands’ off-balance sheet financing, shed some light on how its cash collection mechanism worked in a legal filing earlier this week.

Raistone has called for the Southern District of Texas bankruptcy court to appoint an “independent examiner” to probe the circumstances of First Brands’ downfall. From an emergency motion it filed in Texas late on Wednesday, evidencing why it believes this step is necessary: 

According to the sworn declarations of the Debtors’ representatives and the representations of counsel, as much as $2.3 billion attributable to Third-Party Factoring arrangements has simply vanished. 

Raistone’s lawyers explain that, as with Point Bonita, First Brands acted as “Collection Agent and Servicer” on the fintech’s factoring facility. The agreement offered some protection, as it allowed Raistone to terminate First Brands’ role servicing these factoring facilities “at any time by written notice”.

The legal filing continues:

On September 25, 2025, pursuant to and as permitted by Section 4(a) of the Receivables Purchase Agreement, Raistone notified the Debtor Sellers by letter (the “Replacement Notice”) that, among other things, the Debtor Sellers’ role as servicer had terminated effective immediately, and Raistone had been appointed as the Servicer under the Receivables Purchase Agreement.

But days after Raistone stepped into the shoes of First Brands as the servicer, the Ohio-based manufacturing firm filed for bankruptcy. The person familiar with Point Bonita’s set-up said the firm also exercised this right “around” the time of the bankruptcy.

To further illustrate the scale of cash vaporisation, Raistone’s counsel, Orrick, Herrington & Sutcliffe, appended this darkly amusing email exchange with First Brands’ counsel, Weil, Gotshes & Manges as an exhibit:

October 2 email from Orrick October 2 response from Weil

If the likes of Jefferies and Raistone are viewed as unsecured creditors to First Brands’ bankruptcy estate, with no valid claim against Walmart and other customers, recovering their missing cash will not be easy. In its Chapter 11 petition, First Brands listed the two firms’ claims as “contingent”, “unliquidated” or “disputed”:

Where are the customers’ invoices?

Jefferies may well have limited its own financial exposure to this mess. But the damage to its reputation is rather harder to quantify.

The precedent here, albeit on a larger scale, is Credit Suisse.

The now-defunct Swiss bank poured $10bn of client money into invoice-backed investment products brokered by Greensill Capital, a SoftBank-backed financing firm that claimed it was “democratising capital” through the magic of supply-chain finance. After Greensill went bust in 2021, it instead democratised losses to the sorts of people rich enough to afford a Swiss private wealth manager. Billions of dollars went missing. 

The affected Credit Suisse clients included Qatari royalty and other high-net-worth individuals who believed that the Gnomes of Zurich would carefully watch over any money placed in Swiss investment funds. In this instance, the customers had yachts. And the means to hire expensive legal counsel.

UBS, which rescued Credit Suisse from the brink of failure in 2023, ended up stumping over cash from its own balance sheet to recompense some of these client losses and draw a line under pending litigation.

Jefferies’ misadventure in trade finance may prove to be less costly. Point Bonita, which employs leverage to boost its firepower, holds around $3bn of assets, of which $715mn are linked to First Brands. The net amount invested is around $1.9bn. These are smaller numbers than the money at stake in the Credit Suisse affair.

But the general peril has not escaped the notice of sell-side analysts. Again, from Goldman Sachs’ note on Wednesday:

JEF could face additional risk of losses if there are legal issues arising from the situation over the course of the bankruptcy, as can be the case in bankruptcies. However, we cannot accurately size this potential risk. Our estimates do not reflect any potential losses. 

Rich Handler may need a few more spicy margaritas before this one is through.