First Brands Group is the latest car crash in credit markets drawing a crowd of rubberneckers.
The rapid unravelling of the US maker of spark plugs, brake components and windscreen wipers ticks a lot of boxes for an intriguing financial fiasco story: the potential for multibillion dollar losses; a mysterious owner; questions marks over its use of off-balance sheet financing.
On Thursday, mainFT broke news that revealed that at least some of those off-balance sheet structures now appear to be collapsing:
Entities tied to First Brands Group and its founder Patrick James have filed for bankruptcy protection in the US, compounding issues at the car parts supplier whose troubles have roiled credit markets.
Carnaby Capital Holdings and several entities that raised debt linked to First Brands filed for Chapter 11 proceedings on Wednesday, raising the likelihood that the business is itself on the brink of bankruptcy.
First Brands, a US maker of windscreen wipers and fuel pumps, has come under intense scrutiny for its use of off-balance-sheet debt tied to invoices and inventory. Some lenders fear this financing was poorly disclosed in the main operating entity’s balance sheet, making it difficult for creditors to know how much debt it had in total.
To get a sense of just how messy this could get, the Carnaby bankruptcy filing states the companies involved have estimated liabilities of between $1bn and $10bn, against assets of just $500mn-$1bn.
The owner of Carnaby is listed in the petition as Viceroy Private Capital, LLC. A public notice from Romania’s competition council describes Viceroy as a US entity that is “part of the group of companies controlled by Patrick James, which owns the Romanian subsidiary Trico Wipers Ploiești SRL”. Trico is part of First Brands Group.
The bankruptcy petition also lists a number of “SPE Subsidiaries”; presumably an acronym for “special purpose entities”:
FTAV readers are a smart bunch, so we won’t have to say out loud the various corporate scandals that have involved creative financial engineering using SPEs.
The SPE naming convention might be based around places in Ohio, the US state that Malaysian-born James set down roots in decades ago, given that Broad Street is in the city of Columbus and other names match areas of the Buckeye State.
While First Brands has made liberal use of invoice factoring and reverse factoring — financing techniques made (in)famous during the 2021 collapse of Greensill Capital — the names of many of the entities indicate that they were likely used for inventory finance. This is another part of the corporate finance tool kit that is also often lumped under the umbrella of “working capital finance”, where credit is typically raised against stock in warehouses and such.
You may be wondering: just what kind of yield can you earn on this stuff?
You might assume that interest would be modest given that these forms of financing are typically secured and short-term in nature. But, if fund filings are any indication, you would be wrong.
Filings for AB CarVal’s Credit Opportunities Fund showed that at the end of last year it held a few million dollars of short-dated facilities for both First Brands and Carnaby Inventory III:
The footnotes show that these were Level 3 assets — essentially, that a market price was not used to determine their valuation. Instead, AB CarVal determined their “fair value”. That all suggests that these are not easily tradable assets.
Elsewhere in its SEC filings, AB CarVal confirms that Carnaby Inventory III is related to First Brands, describing its debt as a “First Brands Revolving Loan Facility”:
FTAV readers may have already spotted the coupon on the First Brands exposure listed in AB CarVal’s fund: 14 percentage points over three-month SOFR, the loan market’s commonly used floating-rate benchmark. That made for an all-in coupon of nearly 19 per cent.
While no coupon is listed for the Carnaby note — with a footnote explaining that the “coupon rate will be determined at the time of settlement” — fund filings from a year earlier show a rate of 13.63 percentage points over SOFR on prior debt from the same entity. Again, that made for an all-in coupon of nearly 19 per cent.
It doesn’t take a working capital finance expert to work out that’s a very high rate for short-term debt. In fact, it is far higher than the rates on the auto parts maker’s long term loans that sit at the corporate level.
First Brands’ $2bn first-lien loan maturing in 2027 — which was originally raised in 2021 — has a coupon of 5 percentage points over SOFR. Even its second-lien loan, which ranks lower in the queue in a bankruptcy and is now quoted at around 15 cents on the dollar, only carried an 8.5 percentage point spread over SOFR.
Filings from other funds indicate that some investors could be booking even higher returns on Carnaby paper.
The Keystone Private Income Fund, managed by Utah-based private credit firm Keystone National Group, reported exposure at the end of March to securities from Carnaby Inventory IV.
Interestingly, while this entity follows the same naming convention as the Carnaby Inventory II and III entities included in Wednesday’s bankruptcy filing, Carnaby Inventory IV is not part of the petition. It would seem a strange coincidence if this entity is not also linked to First Brands, but FTAV will keep an open mind until that detail is confirmed.
The “coupon rates” listed are as high as 50 per cent:
Crucially, however, a footnote to these line item reads: “Rate shown is determined by internal rate of return calculation, and is not a true interest rate.” So this appears to be a calculation of the all-in return Keystone is booking on these deals rather than the headline interest rate.
The Carnaby debt is listed under “Equipment Leasing” in Keystone’s portfolio. The same segment also holds debt under Trico Products Corporation, a First Brands subsidiary:
In this instance, the 12.5 per cent and 14.5 per cent coupon rates carry no footnote, so we presume they are headline interest rates.
Readers may also have spotted that AB CarVal’s First Brands exposure was due to mature in May, followed by its Carnaby position in July. A later filing showing AB CarVal’s portfolio at the end of June shows no exposure First Brands. It does, however, show nearly $4mn of exposure to to Carnaby Inventory III and Carnaby Inventory II (also part of the bankruptcy) now maturing at year-end:
Keystone’s filings, meanwhile, indicated that it held a total $60mn of Carnaby Inventory IV exposure and nearly $26mn of Trico paper. Neither of these entities is in bankruptcy and the former entity’s link to First Brands is still tbd. The FT has reported that Trico Products Corporation’s parent company First Brands Group is rapidly hurtling towards its own Chapter 11 filing, however.
AB CarVal’s parent company AllianceBernstein declined to comment. Keystone did not respond to requests for comment. We will update the story if we hear back.
While we’ve focused on the Carnaby debt, a quick scan shows exposure to some of the other stricken SPEs in other funds. Do tell us if you see (or know) anything interesting, either below line or on email.