First Brands crashes into banks

First Brands probably won’t be the last cautionary tale showcasing the dark side of a private credit web gone wrong.

Let’s start from the beginning: First Brands, an auto parts supplier that sells things like oil filters to customers like Walmart and AutoZone, entered bankruptcy late last month. Not only did the company file for Chapter 11 with an eye-popping $10 billion in liabilities, but it’s now under investigation by its own self-appointed directors for the dubious financial practices that got the company into this situation in the first place.

First Brands' massive crash is reverberating through the entire financial system, as its creditors, investors, and customers are wondering WTF happened—leaving several big banks to bear the brunt of the company’s downfall.

Who’s losing $

Point Bonita Capital, an asset manager controlled by Jefferies, saw roughly a quarter of its $3 billion trade finance portfolio disappear after First Brands went under, Bloomberg reported. Jefferies’ total losses related to First Brands could reach $44.6 million, according to Morgan Stanley analysts.

Jefferies isn’t the only bank on the hook for First Brands’ losses. UBS reportedly has a $500 million exposure to First Brands through its own complex web of funds, including the O’Connor hedge fund unit it recently sold, according to the WSJ.

Why this all matters: First Brands relied on obscure financing practices from private lenders to keep itself afloat, and its collapse has exposed the private credit “magical machine,” according to hedge fund legend Jim Chanos. The company’s position at the center of a web of layered, complex financial interactions has stoked fears that this kind of trade finance has gotten too opaque.

It’s a movie we’ve all seen before. First Brands’ situation echoes the worst scandal in the industry, when Credit Suisse ultimately collapsed after Greensill Capital similarly declared insolvency in 2021—though at least this time it doesn’t seem like Jefferies or UBS will go out of business.

When the S&P 500 is flying to new heights, it feels like the good times will last forever. But the world of corporate credit has to stand up to scrutiny, otherwise the entire house of cards could fall.—LB