First Brands Collapse Blindsides Wall Street, Exposing Cracks in a Hot Corner of Finance

(Bloomberg) — In hindsight, the telltale signs of trouble were piling up: the Zoom calls where the owner kept his camera off; the angry pushback from his brother when investors asked for invoices to back up their loans; the frequent late payments to suppliers; and the whispers of large off-the-books financing arrangements.

That so few outside of First Brands had a full view of all the red flags around the auto-parts supplier before it imploded spectacularly late last month, stands as a stark example of the growing risks of money flooding into the opaque world of private financing. How it operated, where it got its money and even the people running it were largely a mystery.

By the time it all came crashing down, the company’s sprawling network of auto-parts factories and distribution centers was on the hook for over $10 billion to some of the biggest firms on Wall Street: Jefferies, UBS and Millennium, among others.

While the full extent of the damage — and what exactly went wrong — remains unclear 11 days after First Brands declared bankruptcy, the stakes were raised on Wednesday night when one of First Brands’ financial partners made an emergency court filing calling for an independent investigation into $2.3 billion tied to the company it said had “simply vanished.” Federal prosecutors are now looking into the circumstances around the bankruptcy, though the inquiry is in the early stages, Bloomberg reported Thursday.

In the meantime, the repercussions are rippling through the financial industry and beyond.

Raistone, the company that called for the investigation, and that had facilitated First Brands’ short-term borrowing, derived 80% of its revenue from First Brands and has already cut roughly half of its employees. The O’Connor hedge fund unit owned by UBS is facing such significant losses that Cantor Fitzgerald is now trying to renegotiate the terms of its acquisition of the business.

Jefferies is facing redemption requests from investors who had money in a hedge fund arm of the bank, Point Bonita Capital, which had a quarter of one of its portfolios — some $715 million — tied to First Brands. The situation is a particular threat to Jefferies’ reputation because the bank also helped First Brands sell a significant chunk of its long-term loans over the past decade.

These firms are hardly blameless, industry observers say. Platforms like Raistone have come under scrutiny for giving risky companies such easy access to short-term funding, and asset managers have faced criticism for sending money through these platforms with too little oversight.

“There has been so much demand for these assets that people have lost sight of doing diligence before they invest,” said Joseph Sarachek, a bankruptcy lawyer who teaches at NYU Stern business school. “But diligence is perhaps more important than ever when the company is privately held.”

This article is based on interviews with more than a dozen investors, vendors and former employees who declined to be identified because many of the details are confidential. First Brands and Raistone did not respond to requests for comment. Jefferies, UBS, Millennium and Cantor declined to comment.

During the first bankruptcy hearing, a lawyer who said she represents certain directors, officers and owners of the business, Erica Weisgerber, argued the collapse was largely caused by “macroeconomic factors and other headwinds that were outside of management’s control.” She denied the allegations against the company and management and said they would be addressed at the appropriate time.

‘Black Box’

As more details come to light, investors are grappling with their role in a web of opaque financial transactions that suddenly fell apart once it became clear that the company’s liabilities were larger than disclosed. The “black box” as creditors have called First Brands, reveals the increasingly important world of closely-held companies that have grown up as investors shifted money away from public markets and into private deals that offer only scant details to regulators, credit ratings agencies and even their own investors. The rushed bankruptcy is the latest sign that cracks may be developing in the facade of this rapidly expanding corner of the financial industry.

These risks are no longer confined to Wall Street. First Brands got hundreds of millions in short-term funds through Yieldstreet, a firm that packages exotic, alternative assets into products for individual investors. Even curious customers who dug into the Yieldstreet documents only learned that their money was going to a “global conglomerate” nicknamed Mango. Yieldstreet said it stopped funding First Brands last year, and said their customers did not lose money.

“Counterparty confidentiality is standard in our offerings, and many similarly structured offerings from other firms, and commercial borrowers often require it as a financing condition,” the company said in an email.

At the center of the drama is the elusive owner and CEO of First Brands, Patrick James, who creditors have been scrambling to get a handle on in recent weeks. The few public records that mention James indicate that he grew up in Kuala Lumpur and came to the US to attend the College of Wooster in Ohio. When he took over the bar on campus, Ichabod’s, the student newspaper reported that back in Malaysia he had run “his own disco service, supplying lights, music, and DJ’s for the annual parties of large firms.”

A lawyer for Patrick James did not respond to requests for comment. Efforts to reach James through emails and phone numbers associated with him were unsuccessful.

After a post-graduate stint at a mergers and acquisitions firm in Dayton, Ohio, James began buying up local manufacturing companies in the auto industry through a burgeoning network of holding companies and subsidiaries.

Elusive Owner

In 2011, a unit of Fortress Investment Group sued some of the companies and claimed that they had obscured James’ controlling interest and the fact that all the companies “share employees and management, do not have separate books and records, have the same address in Solon, Ohio, and are grossly undercapitalized.”

James and his businesses denied the accusations but paid to settle the case and another one alleging fraud two years earlier.

The lawsuits did not stop Wall Street from fueling James’s growing ambitions. The company, which was then known as Crowne Group, began tapping the syndicated loan market in 2014 with $380 million in loans. In 2020, it was rechristened as First Brands and borrowed more than $1 billion to fund another run of acquisitions, eventually taking the company’s long-term debt load to around $6 billion.

Nevertheless, several investors who considered lending decided to stay away after unearthing the previous litigation or hitting up against the dearth of information about the CEO, according to the investors, who declined to be named because they weren’t authorized to speak publicly.

Public records show that James had taken out mortgages for homes in suburban Cleveland and set up a foundation that gave to churches and schools in the area, but he left almost no trace of his involvement on the internet.

Lakshmi Ganapathi, the founder of Unicus Research, which conducts forensic investigations of corporate controversies, said that she looked into the First Brands situation for clients and concluded that the CEO had taken steps to obscure his online footprint and personal residence.

“It seems like he went above and beyond to hide himself and his assets,” Ganapathi said. “All of this should be a huge red flag for investors.”

Trade Finance

The opaqueness of First Brands’ operations was amped up by its growing use of a number of short-term borrowing techniques, known broadly as trade finance, that allowed it to take out what amounted to corporate payday loans, often tied to expected shipments or inventory.

These arrangements generally did not show up on the company’s balance sheet, in part because some of them were run through separate financing entities owned by James, with names like Carnaby Capital and Eagle Casting Holdings.

Trade finance is a time-honored financial practice, but it became hot on Wall Street in the wake of the financial crisis, driven in no small part by the rise of a British startup called Greensill Capital that set up a pipeline of money between big Wall Street banks and hardscrabble industrial companies. First Brands tapped these markets in part through Raistone, whose founder had been one of Greensill’s first employees.

The perils of these arrangements became clear when Greensill collapsed in 2021, facing accusations that it had understated the risks of the short term lending it facilitated and obscured the nature of the underlying loans.

But First Brands was too attractive to resist for many investors, paying what amounted to an interest rate of around 30% for some of its short-term borrowing, Goldman Sachs analysts later estimated. In some cases, Raistone and its investors would buy outstanding invoices from First Brands’ suppliers at a discount while obtaining a commitment from First Brands that they would be paid in full on their due date, pocketing the difference.

Point Bonita Capital, a unit of Jefferies’ Leucadia Asset Management, invested hundreds of millions of dollars in the trade finance products, the company said this week. Various UBS funds, including O’Connor, held over $500 million of exposure.

Unanswered Questions

Since the bankruptcy, an independent board committee has been investigating roughly $2.3 billion in off-balance sheet financing and looking into competing claims to some of the company’s inventory due to “irregularities” and the potential “commingling” of collateral backing its main asset-based lending facility and other inventory-backed loans.

Over the years, some potential investors asked First Brands for invoices that could validate the receivables investors were planning to buy, according to people with knowledge of those discussions who asked not to be identified because the conversations were private. Patrick James’ younger brother, Ed, was the point person for many of these deals, but he rarely showed his face on Zoom calls with potential partners, and he was dismissive and impatient when investors asked for more information, the people said.

Efforts to reach Ed James through emails and phone numbers associated with him were unsuccessful.

Chad Hildebrant, a former trade finance banker, said that the high returns promised by Raistone, and the sheer volume of the deals, were enough to raise alarms when he considered the deals.

“Based on how much of that paper was going around and how high the numbers got, it seemed unsustainable,” Hildebrant said. “At a certain interest rate, I no longer feel comfortable with your ability to repay me,” he said.

First Brands’ aggressive maneuvers allowed James to build a company that had 26,000 employees on six continents and revenues of around $5 billion in 2024, according to a presentation to investors. But the underlying business, selling replacement auto parts to the likes of AutoZone and Walmart, did not offer up tremendous growth potential once the acquisitions stopped. Between 2023 and 2024, while its revenue only rose 1.3%, the cost of servicing its debt went up 38%, the investor presentation showed.

Behind the scenes, the company was struggling to deliver to customers or pay vendors on time for at least two years before it filed for bankruptcy, leading to additional penalty fees, according to vendors, former employees and other people familiar with the situation.

“First Brands is a clear case of a company with a very aggressive founder and very bad financial disclosures that don’t give you enough information as an investor,” said Michael Gatto, a partner at Silver Point, a credit-focused investment firm that looked into First Brands loans but is not invested. “They were constantly making acquisitions, and that way they could mask problems because it gives the idea that the business was constantly growing.”

Court filings show that some of the first signs of serious stress showed up early this year when one of the affiliates owned by James failed to make $200 million in monthly payments to a financing firm that had bought some of First Brands’ equipment and then leased it back.

Most First Brands creditors didn’t find out about these problems because they did not happen at First Brands itself, according to several investors. But the problems grew in the summer, when Jefferies went out looking for lenders willing to help refinance its $6 billion in syndicated loans.

Failed Refinancing

While many investors in First Brands’ first-lien loans quickly signed up for the refinancing, some holders of the second-lien loans stalled and asked for more information about the off-balance sheet borrowing, complaining that the company didn’t use one of the big four accounting firms, according to people familiar with the negotiations.

Scott Caraher, the head of senior loans at the investment manager Nuveen said his firm submitted diligence questions for more information, which were never answered. They didn’t place an order.

Jefferies put the process on hold in early August and promised a “fulsome” report on First Brands’ financial status from a bigger accounting firm. In early September, lawyers for First Brands called the company’s creditors during the weekend and said “they were in desperate need of capital,” a lawyer representing the group, Scott Greenberg, said in bankruptcy court.

Many of the funding problems were happening at the James-owned financing affiliates and Greenberg said his clients had not seen the problems coming.

In the weeks leading up to the bankruptcy, First Brands tried to secure funding from existing creditors. This would often be a process led by a CEO, but Patrick James only showed up at one meeting, this time with his camera on, people on the calls said.

After the Chapter 11 filing, the lawyer for one creditor, Evolution Credit Partners, said that his client was repeatedly caught off guard by the information coming out of First Brands, at one point learning that some of the collateral tied to his client’s loans was also pledged to different First Brands lenders.

“How in the world that possibly could happen within a sophisticated multibillion enterprise is a mystery to us and to our client,” the lawyer, Vincent Indelicato, said.

–With assistance from Anders Melin, Aaron Weinman, Anthony Lin, Chester Dawson, Miguel Ambriz, Todd Gillespie and Myriam Balezou.

(Updates with information about the Department of Justice starting an inquiry into First Brands in the fourth paragraph.)

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