Jefferies Reveals Fund’s $715 Million Exposure to Failed First Brands Amid Relationship Scrutiny 

Auto parts supplier First Brands’ bankruptcy is proving a first-class pain in the camshaft for Wall Street.

On Wednesday, Jefferies became the latest high-profile firm to disclose exposure to the smoke billowing from the company’s engine failure, in its case via one of its credit funds. The investment bank is also getting side-eyed by other lenders after reports that Jefferies made undisclosed fees from financing First Brands, which may have violated credit agreements.

Private Company’s Public Unraveling

Ohio-based First Brands, which makes everything from fuel and water pumps to brake hardware, wiper blades and spark plugs, grew rapidly through debt-fueled acquisitions. As a private company, it tapped the thriving private credit market. When the company filed for bankruptcy last month, in part due to the crushing pressure of auto parts tariffs, it listed over $10 billion in liabilities and nearly $6 billion in long-term debt.

And, when people started looking under the hood, it soon became obvious there was more to the story. It turned out First Brands had billions in poorly disclosed liabilities tied up in off-balance sheet financing, an accounting practice in which companies keep some liabilities off their main balance sheet. It’s legal when disclosed under the Financial Accounting Standards Board’s Generally Accepted Accounting Principles (GAAP) and can be used to improve metrics like debt ratios, but critics have argued that it can obscure a company’s true risk profile. Then comes the potential loophole: First Brands’ off-balance accounting was tied up mostly in invoices along its supply chain, and GAAP standards don’t require companies to classify trade payables, or what they owe to suppliers. First Brands’ bankruptcy filing revealed that a dozen of its 30 largest non-insider creditors have claims related to “trade payables.” As a creditor, Jefferies is taking a hit, but its relationship with First Brands has also come under the microscope:

• Jefferies pitched a failed $6 billion refinancing for First Brands to investors earlier this year, but it stalled when they asked for more information on the company’s accounting. The investment bank said Wednesday that one of its credit funds has a $715 million exposure to First Brands, more than Swiss investment bank UBS’s $500 million exposure. Shares in Jefferies, which Morgan Stanley analysts estimate has a direct exposure of $44 million, fell nearly 8% on the day.
• Other lenders were not pleased when the Financial Times approached them about a “side letter” Jefferies inked with First Brands to earn undisclosed fees exceeding the interest rate caps in its loan covenants. This, they said, may have violated their own credit agreements.

Credit Questions: The due diligence standards of the booming, $1.7 trillion private credit industry are also likely to come under scrutiny. Private credit lenders were one of the last lifelines for First Brands as it neared collapse, and are owed a total $276 million, but are behind more than six dozen creditors in the line to get their money back.