Listen to the latest episode of Credit Exchange with Lisa Lee
Published in London & New York
10 Queen Street Place, London
1345 Avenue of the Americas, New York
Creditflux is an
company
© Creditflux Ltd 2025. All rights reserved. Available by subscription only.
News
After fall of First Brands, investors point to signs of trouble stretching back years
by Kunyi Yang, Sam Weisberg & Ayse Kelce
When First Brands attempted to tap markets in August this year to issue USD 6bn in debt, it marketed an attractive financial picture with net first lien leverage of just 1.9x, based on EBITDA of USD 2bn in the first quarter of 2025. By late September, the US auto parts company had filed for bankruptcy.
CLOs held over USD 2.5bn of First Brands’ USD and EUR term loans as of August, according to Creditflux data. Some CLO managers shed their holdings prior to bankruptcy, while others have decided to ride out the restructuring.
“It was a high coupon investment, which was super attractive for CLOs,” said a credit fund investor. “The company had a good track record before this, good valuation. No one realised it could be this way.”
Yet Creditflux’s sister publication Debtwire has spoken to many on the buyside who seemed to be aware of problems at the company — in particular its opaque off-balance-sheet factor financings.
“The numbers were always too good to be true,” said one investor at a credit fund.
The growth story
In part, it seems institutional investors swallowed their uneasiness about funding successively larger term loan facilities because First Brands was acquiring and turning around dozens of auto parts brands.
But in hindsight those acquisitions always looked suspect. “The issue is how do they keep buying awful businesses at 3x and instantaneously these businesses look like amazing [investment grade] businesses,” said one buysider.
A private equity executive in the auto space wonders if First Brands was creating genuine value, or if it was simply assembling a “bigger rockpile” of distressed assets. “A bigger rockpile is no better than a little rockpile,” they said.
“They bought things no one wanted to buy for years, and they may be fantastic operators, but they can’t fight the challenges they have.”
First Brands USD 1.725bn first lien term loan due 2027
Central to First Brands’ business model was factoring — an off-balance-sheet financing mechanism that allows a company to collect cash on sales of goods much faster than it receives payment on the receivables. It also relied on reverse factoring, or supply chain finance, which allowed it to delay cash outlays to its suppliers.
While the practice didn’t initially raise eyebrows, few understood the sheer scale of it. “It is a bit of a black box,” admitted one buysider.
Yet again, some had seen warning signs. When one credit fund sought to provide factoring financing and invest in the credit facilities of First Brands a few years ago, the fund made a routine request to access data rooms for each of the facilities. The response was telling.
“We were told ‘no’ very quickly after we made the requests,” said an investor at the fund. “Probably because they didn’t want us to compare information in the two different data rooms. We thought that was an instant red flag.”
Factoring is a common practice in the aftermarket auto parts industry. Major retailers such as AutoZone have increasingly pushed suppliers for extended payment terms.
Average days outstanding on accounts receivables for auto parts suppliers have grown from 37 days to 276 days since 2012, according to data from Raistone, a provider of factoring to auto parts companies, including First Brands.
The numbers were always too good to be true
Credit fund investor
Central to First Brands’ business model was factoring — an off-balance-sheet financing mechanism that allows a company to collect cash on sales of goods much faster than it receives payment on the receivables. It also relied on reverse factoring, or supply chain finance, which allowed it to delay cash outlays to its suppliers.
While the practice didn’t initially raise eyebrows, few understood the sheer scale of it. “It is a bit of a black box,” admitted one buysider.
Yet again, some had seen warning signs. When one credit fund sought to provide factoring financing and invest in the credit facilities of First Brands a few years ago, the fund made a routine request to access data rooms for each of the facilities. The response was telling.
“We were told ‘no’ very quickly after we made the requests,” said an investor at the fund. “Probably because they didn’t want us to compare information in the two different data rooms. We thought that was an instant red flag.”
Factoring is a common practice in the aftermarket auto parts industry. Major retailers such as AutoZone have increasingly pushed suppliers for extended payment terms.
Average days outstanding on accounts receivables for auto parts suppliers have grown from 37 days to 276 days since 2012, according to data from Raistone, a provider of factoring to auto parts companies, including First Brands.
When interest rates started to rise in 2022, these dynamics created a vicious cycle for the businesses First Brands acquired, according to another private equity executive.
“As rates go up, the cost of discounting your receivables goes up, the amount you get paid goes down, and [First Brands’] own cost of debt is going up,” the executive said.
If factoring providers lose confidence, everything falls apart. “If they stop buying those receivables, what will fund the cash into First Brands to pay its vendors?” they added.
The Trump challenge
Another difficulty for First Brands has been the Trump administration’s tariff policies. According to S&P Global Ratings, the company ramped up inventory ahead of the tariff announcement this spring and invested to relocate a business to North America.
The credit rating agency said it expected First Brands to have negative cashflow for the next several quarters after a substantial cashflow deficit in the second quarter. Working capital outflows were further pressured by suppliers exiting its supplier finance programme.
Margin questions
Perhaps giving investors comfort were First Brands’ robust margins, which it reported at levels that exceeded some investment grade-rated auto parts companies, according to Fitch.
But some sources said the margins were almost too high for the aftermarket auto parts industry. And a former executive at a company First Brands acquired told investors that they questioned First Brands’ accounting practices, according to another buysider.
Clearly, as First Brands restructures, CLO managers will be eager to discover how it made itself an attractive investment. At the same time, they may question their own buying and selling decisions.
A representative for First Brands did not reply to requests for comment.
