First Brands Files Ch 11: $2B in Factoring

U.S. auto parts giant First Brands Group filed for Chapter 11 bankruptcy, shocking debt investors and raising concerns about broader corporate credit market stress.

The filing, made in the U.S. Bankruptcy Court for the Southern District of Texas, revealed a staggering financial gap, with the company listing liabilities between $10 billion and $50 billion against assets of just $1 billion to $10 billion.

The Ohio-based company, owned by businessman Patrick James, sought court protection after its rapidly deteriorating finances, fueled by a debt-laden acquisition spree and opaque financing structures, finally unraveled.

The crisis reportedly accelerated when one of its banks seized cash, destroying creditor confidence and leaving the company with no choice but to file for bankruptcy.

At the heart of First Brands' downfall is its extensive use of off-balance-sheet financing, particularly invoice factoring. This practice, which involves selling future income for immediate cash, allowed the company to accumulate billions in debt-like obligations that did not appear on its balance sheet.

According to reports, the company has an estimated $2 billion in these factoring arrangements and as much as $4 billion in total off-balance-sheet liabilities on top of its already disclosed $6 billion in debt.

This hidden leverage created a distorted picture of the company's financial health. While Fitch Ratings had already downgraded First Brands to 'CCC' due to a debt-to-EBITDA ratio exceeding 10x, the undisclosed obligations meant the reality was far worse. "This is a case of debt getting ahead of reality," one analyst noted, highlighting the billions in opaque financing that will now be scrutinized in court.

The bankruptcy filing has exposed a wide array of creditors, from major Wall Street firms to non-bank funders. The list of the 30 largest unsecured creditors reveals claims topping $866 million, with a significant portion related to supply chain finance. Creditors include firms such as The CIT Group, Pemberton Capital Advisors, and Raistone, which is listed as the contact for claims totaling over $600 million. Investment firms like Jefferies' asset management arm are also exposed through the factoring deals.

The company's aggressive growth strategy, which turned it from a niche Ohio business into a multinational spanning several countries, was funded by this leverage. However, this expansion was strained by external pressures, including U.S. tariffs on Chinese imports that eroded profit margins. Earlier this month, a U.S. Congressional committee sent a letter to CEO Patrick James raising concerns that one of the company's suppliers, Qingdao Sunsong, was unlawfully transshipping goods through Thailand to evade Section 301 tariffs.

To manage the restructuring, First Brands has appointed Charles M. Moore of Alvarez & Marsal as Chief Restructuring Officer and secured $1.1 billion in debtor-in-possession (DIP) financing from a group of lenders to maintain operations. The company stated that the Chapter 11 filing applies solely to its U.S. entities, and its international operations are expected to continue without interruption.

The speed of the collapse has rattled investors. Just weeks ago, the company's loans were trading at levels suggesting relative calm, but by the time of the filing, its junior debt had collapsed to cents on the dollar. The case serves as a stark warning about the risks of high leverage and complex financial engineering, particularly in the private credit markets that fueled years of debt-funded corporate expansion.

Sources:
_{businesswire.com | First Brands Group Initiates Voluntary U.S. Chapter 11 Cases to Stabilize Financial Position and Facilitate Value-Maximizing Transaction
fitchratings.com | Fitch Downgrades First Brands Group's IDR to 'CCC'; Withdraws Ratings
weaver.com | Critical Red Flags in Financial Statement Reviews
tipranks.com | First Brands Bankruptcy Shocks Wall Street as Debt Gets ‘Ahead of Reality’
dagens.com | Auto Parts Giant First Brands Files for $10 Billion Bankruptcy
ainvests.com | The Impact of Fitch's Downgrade on First Brands: A Credit Risk Wake-Up Call for Auto Parts Investors
investing.com | First Brands files for bankruptcy, revealing billions of dollars in liabilities
thebrakereport.com | Confirmed: First Brands Group Files U.S. Chapter 11
gtreview.com | First Brands supply chain finance debt tops US$866mn
ionanalytics.com | First Brands factoring agreements a USD 2bn variable at play in potential Chapter 11 filing – Legal Analysis}

What Alternative Business Lenders Should Know about First Brands Bankruptcy?

The Chapter 11 filing of First Brands Group Holdings, LLC, and its numerous affiliates serves as a critical case study for alternative and institutional lenders, exposing how credit deterioration can be masked by complex financial structures.

The collapse of this Ohio-based auto parts supplier highlights significant vulnerabilities in traditional credit analysis, particularly in assessing true leverage, evaluating cash flow commitments, and detecting hidden financing arrangements.

Financial Structure: The Off-Balance-Sheet Problem

A central issue in First Brands' collapse was its extensive use of off-balance-sheet financing, which obscured the company's true leverage. The company accumulated an estimated $2 billion in off-balance-sheet factoring arrangements. These agreements, where future receivables are sold for immediate cash, create debt-like obligations that do not appear on standard balance sheets.

Key issues with these arrangements include:

1. Exclusion from Traditional Leverage Calculations: Factoring is often structured to fall outside of conventional debt covenants, allowing borrowers to appear compliant with metrics like debt-to-EBITDA while taking on significant cash flow burdens. Fitch Ratings noted that First Brands had approximately $4 billion in off-balance-sheet liabilities on top of $6 billion in total debt.

2. Priority Confusion in Bankruptcy: A critical legal battle in the bankruptcy will be to determine if these factoring agreements were "true sales" of receivables or disguised financing arrangements. If deemed true sales, the assets belong to the factors; if classified as financing, the receivables become part of the bankruptcy estate, potentially expanding the asset pool for all creditors, though the factors may then assert secured claims.

3. Compounding Cash Flow Pressure: Reliance on factoring creates a "refinancing treadmill," where new receivables must be constantly generated to secure liquidity. This system becomes fragile when business performance declines, as seen when one of First Brands' banks seized cash, accelerating the collapse and forcing the company into bankruptcy.

Leverage Analysis and Financial Red Flags

First Brands' disclosed financials already showed signs of distress. Fitch Ratings had downgraded the company to 'CCC' from 'B', citing a debt-to-EBITDA ratio exceeding 10x, well above investment-grade thresholds. However, the hidden leverage made the situation far worse. The bankruptcy petition listed assets between $1 billion and $10 billion against liabilities of $10 billion to $50 billion, confirming a severe insolvency position.

Red flags that were present or that lenders should watch for include:

• Excessive Debt Levels: High debt-to-equity ratios can signal financial instability. First Brands' growth was fueled by debt-financed acquisitions, which ultimately became unsustainable.

• Significant Off-Balance Sheet Items: These arrangements, like factoring, can obscure a company's true liabilities and distort enterprise value calculations.

• Inconsistent Cash Flow: A significant gap between reported profits and actual cash flow can indicate that earnings are being consumed by undisclosed obligations, a key issue in the First Brands case.

Bankruptcy Filing Details

First Brands Group and certain U.S. affiliates filed for voluntary Chapter 11 protection in the U.S. Bankruptcy Court for the Southern District of Texas.

• Key Filers: The main petition was filed by First Brands Group Holdings, LLC, with dozens of affiliated entities also filing. The filings for some non-operational entities occurred on September 24, 2025, with the main operating companies filing on September 28, 2025.

• Debtor-in-Possession (DIP) Financing: The company secured $1.1 billion in DIP financing to maintain operations for its U.S. entities during the restructuring. International operations are not part of the court-supervised process and are expected to continue without interruption.

• Leadership: The company appointed Charles M. Moore of Alvarez & Marsal as Chief Restructuring Officer (CRO) to oversee the process. Such an appointment often signals a loss of creditor confidence in existing management.

• Creditor Exposure: Court filings revealed significant creditor concentration, with the 30 largest unsecured creditors holding claims over $866 million. Many of these claims are related to supply chain finance and factoring, involving firms like Raistone, The CIT Group, and others.

Operational Pressures and Industry Factors

First Brands' financial weaknesses were amplified by external macroeconomic pressures.

• U.S. Tariffs: Tariffs on imported auto parts, particularly from China, increased production costs and compressed profit margins. A letter from the U.S. Congress to CEO Patrick James highlighted concerns that one of the company's suppliers, Qingdao Sunsong, was unlawfully transshipping goods through Thailand to evade Section 301 tariffs.

• Supply Chain Disruptions: Global supply chain issues created a liquidity crunch, forcing companies to carry more inventory while simultaneously increasing cash needs.

• Industry Vulnerabilities: The automotive aftermarket sector faces risks from demand cyclicality, competition from original equipment manufacturers (OEMs), and inventory obsolescence, all of which put pressure on highly leveraged companies.

Risk Management Lessons for Lenders

The First Brands collapse demonstrates that conventional credit analysis is insufficient for today's complex capital structures. To mitigate future risks, lenders must adapt their due diligence processes.

Recommended changes to credit underwriting include:

1. Mandatory Off-Balance-Sheet Disclosure: Credit agreements must require borrowers to disclose all financing arrangements, including factoring and supply chain finance, regardless of their accounting treatment.

2. Continuous Operational Monitoring: Lenders should move beyond reviewing quarterly financial statements and gain real-time visibility into cash positions, accounts receivable aging, and supplier payment patterns to detect distress early.

3. Comprehensive Legal and Lien Searches: Diligent UCC searches can reveal security interests related to factoring facilities that may not be apparent on the balance sheet, helping lenders understand what assets are truly unencumbered.

4. Integrated Sector and Company Analysis: Credit analysis must evaluate a company’s specific financial health in the context of broader sector-wide pressures to accurately assess risk.

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