Financial problems at the maker of spark plugs, wiper blades, brake calipers, brake shoes, tow hitches and motor oil has caused intense anxiety on Wall Street in recent weeks.<\/p>\n
Car parts are not usually something that causes finance chiefs to lose much sleep. But the potentially multi-billion dollar financial crisis surrounding First Brands has them rattled.<\/p>\n
As ever in finance, it\u2019s what investors don\u2019t know that scares the most, and with First Brands, there appears to be plenty.<\/p>\n
What is First Brands?<\/p>\n
First Brands was founded by the Malaysian-born businessman Patrick James. Starting life as Ohio-based Crowne Group, James acquired Trico, best known for windshield wipers, and went on a debt-fueled acquisitions spree, snapping up auto-focused parts makers. James rechristening the company as First Brands Group in 2020. It now owns 24 automotive-related companies, according to the group\u2019s website<\/a>.<\/p>\n \u201cIf your car is 10 years old, odds are good that parts from these companies are already on there,\u201d notes the auto website CarBuzz.<\/a> \u201cAnd they were probably half the cost of original equipment parts sold through dealerships.\u201d<\/p>\n Seems like a sensible business. Why did it collapse?<\/p>\n The company filed for bankruptcy protection in the southern district of Texas on 29 September due to creditor concern over the company\u2019s use of opaque off-balance sheet financing, listing liabilities \u2013 what it owed \u2013 between $10bn and $50bn against assets \u2013 what it owned \u2013 of between $1bn and $10bn.<\/p>\n But the speed of the First Brands implosion has spooked investors, and the more that\u2019s known, the more they are spooked.<\/p>\n The company had until recently had a decent cash buffer, but it was using private debt or \u201cshadow banking\u201d to borrow against invoices, effectively keeping debt off its balance-sheet disclosures, and turning a company with 26,000 employees into finance company more than the supplier of an auto parts supplier.<\/p>\n That system, known as factoring, is not unusual. But when the size of that debt, and who is holding it, becomes obscure, problems can rapidly accumulate, as the financial industry saw with the collapse of UK fintech Greensill <\/a>Capital in 2021 and London-listed firm Carillion<\/a> in 2018.<\/p>\n On Thursday, technology group Raistone, which arranged some off-balance sheet financing, claimed that as much as $2.3bn has \u201csimply vanished\u201d as part of the bankrupt auto supplier\u2019s failure.<\/p>\n Jim Chanos, who predicted the Enron disaster in 2001, told the Finacial Times <\/a>that complex financial systems tend to flourish at the tail end of a boom when everyone wants in. \u201cAs long as everything works nobody asks questions,\u201d he said. \u201cIt isn\u2019t until something stumbles, or the markets stumble, that people say, \u2018Wait a minute, what are we doing here? This doesn\u2019t make any sense.\u2019\u201d<\/p>\n Why is Wall Street so worried?<\/p>\n Just as in other financial crises \u2013 most recently the housing crisis that led to the 2008 financial meltdown \u2013 Wall Street is worried that the issues at First Brands are a sign of worse to come.<\/p>\n Texas auto lender Tricolor \u2013 which specialized in lending to low-income \u201csub-prime\u201d lenders \u2013 collapsed last month amid fraud allegations<\/a>.<\/p>\n