The sudden implosion of First Brands, a major U.S. auto-parts supplier, has turned into one of the most revealing and chaotic bankruptcies in recent memory. On paper, First Brands carried roughly $5.8 billion in leveraged loans. In reality, the company appears to have amassed far more obligations through a thicket of off-balance-sheet financing—most notably receivables factoring, supply-chain finance, and inventory-backed lending routed through special-purpose entities. As advisors and creditors sift through the wreckage, they’re investigating whether the same receivables were pledged to multiple lenders and whether collateral was commingled across facilities. In short: a rehypothecation nightmare.
This is not just a story about one distressed borrower. It’s a window into how the expansion of private credit and trade finance has outpaced transparency and oversight, creating hidden interconnections that only become visible when the music stops.
What went wrong
First Brands filed for Chapter 11 protection in late September, listing liabilities between $10 billion and $50 billion against assets of $1 billion to $10 billion. That gap alone raised eyebrows. But the real shock has been the scope of off-balance-sheet financing uncovered since the filing.
- Factoring of receivables: At the end of 2024, First Brands had about $2.3 billion of factored customer invoices outstanding—roughly 70% of its annual sales by some accounts. In factoring, a company sells invoices to a lender at a discount for immediate cash. It’s common, but when done at this scale, it becomes core funding rather than supplemental liquidity.
- Supply-chain finance (reverse factoring): About $682 million was outstanding at the end of 2024. Here, a financier pays suppliers early and collects from the company later. Again, standard in many industries—but opaque when not clearly disclosed.
- Inventory finance via SPVs: The company also tapped inventory-backed facilities structured through special-purpose entities, distributing collateral claims across specialist lenders.
Allegations now under investigation include whether the same pools of receivables were pledged to multiple funding vehicles and whether cash flows were diverted or commingled. In one telling court exchange cited by a creditor, advisors could not confirm whether roughly $1.9 billion was ever actually received, and segregated accounts tied to factored receivables were reportedly at zero. If substantiated, the implications range from documentation failures to potential fraud.
Who’s exposed
The creditor list reads like a cross-section of modern credit markets: hedge funds, CLO managers, private credit funds, specialty finance firms, and bank-affiliated asset managers.
- UBS O’Connor and UBS affiliates reportedly had more than $500 million of exposure spanning direct and indirect funding tied to invoices. One O’Connor strategy had about 30% of its portfolio tied to First Brands.
- Millennium Management is said to face around $100 million in losses, largely in short-term, inventory-related loans.
- Onset Financial, a specialty lessor and financier, claims about $1.9 billion of exposure, making it one of the largest known creditors.
- CLOs and loan funds that bought broadly syndicated First Brands loans have seen first-lien debt reportedly trade down toward the teens on the dollar, with managers like PGIM, CIFC, and Blackstone listed among holders.
- Jefferies and Point Bonita: Jefferies’ asset management arm has an equity stake in Point Bonita Capital, a trade-finance fund that reportedly held about $715 million of receivables owed by First Brands’ large customers. Payments allegedly stopped in mid-September. Jefferies’ maximum direct loss may be modest in the context of its balance sheet, but the reputational blow could be meaningful given its role in arranging First Brands’ debt over the years and its attempt to lead a $6 billion refinancing that stalled when lenders demanded clarity on the trade-finance structures.
Not everyone lost money. Apollo and Diameter Capital reportedly shorted First Brands’ debt and took profits before or around the bankruptcy. But those wins are the exception in a broader story of value destruction.
Why this matters beyond one company
First Brands is a case study in how financial engineering can create the illusion of liquidity and solvency—until it doesn’t. Three structural lessons stand out:
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Off-balance-sheet doesn’t mean off-risk. Receivables factoring, supply-chain finance, and inventory facilities can be powerful tools to optimize working capital. But when they become primary sources of funding, they effectively replace traditional debt without the same level of disclosure. Investors focused on headline leverage may drastically underestimate total obligations and structural subordination.
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Rehypothecation risk is real in private markets. Using the same collateral pools across multiple funding lines—intentionally or unintentionally—creates overlapping claims that are hard to untangle in distress. The opacity of documentation and siloed SPVs complicate verification, making it surprisingly difficult to answer the most basic question in a bankruptcy: Who owns what?
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Incentive misalignment in intermediated finance. In trade finance chains, originators, arrangers, and funds can be paid on volume and yield, not on asset durability through a cycle. Without robust, independent, ongoing collateral audits, risks metastasize under the surface. When counterparties are numerous and documents are bespoke, the system relies on trust and reputation—until those prove insufficient.
The private credit backdrop
Over the past few years, private credit has filled the gap left by banks retrenching from certain forms of corporate lending. That evolution has benefits—speed, flexibility, and bespoke structures for complex borrowers. But it’s also created pockets of opacity, especially in areas like working-capital finance where cash flows are dynamic and collateral rotates quickly.
As yields compressed in safer assets, capital chased complexity and illiquidity premia. Strategies that rely on invoice-level data integrity, waterfall priorities, and strict servicer controls can function well—if governance is tight. If not, the hunt for yield can morph into a blind bet on documentation quality.
What to watch next
- Examiner appointment and findings: Creditors have asked for an independent examiner to investigate the alleged “vanishing” funds and collateral pledging. The scope, mandate, and timeline of that review will be pivotal.
- DIP financing covenants and reporting: The court approved DIP financing with tighter oversight. Expect enhanced cash management controls, segregation of proceeds, and detailed reporting on receivables and inventory flows.
- Cross-verification of collateral chains: A painstaking reconciliation of purchase orders, invoices, lockbox accounts, and payment instructions should clarify how many times specific receivables were pledged and to whom.
- Contagion to similar structures: Other issuers heavy in factoring and inventory finance may face higher funding costs, tougher diligence, and reduced advance rates. CLOs and private credit funds will scrutinize off-balance-sheet reliance in new deals.
- Regulatory interest: Even without new rules, expect supervisors and standard-setters to revisit disclosure around factoring and supply-chain finance, potentially pushing for clearer presentation and reconciliation in financial statements.
Practical takeaways for investors and lenders
- Demand transparency on working-capital programs. Require detailed schedules of factored receivables, concentrations by counterparty, aging, and true sale status. Validate lockbox control and cash application processes.
- Map structural subordination. Trace where each dollar sits in the capital stack, including SPVs. Understand intercreditor agreements, step-in rights, and servicer replacement triggers.
- Test for double-pledging. Randomized invoice sampling with third-party confirmations and bank account tracing can detect overlapping liens and commingling risks.
- Price complexity. Advance rates, eligibility criteria, and monitoring cadence should reflect asset churn, concentration, and governance strength—not just headline yields.
- Reassess manager diligence. For funds that buy into trade finance or inventory structures, evaluate the operational rigor of originators and servicers, not just their track records.
The bottom line
First Brands is more than a bankruptcy; it’s a stress test of the modern private credit and trade-finance ecosystem. It exposes how far market practice has evolved beyond the neat confines of GAAP presentation and how quickly confidence unravels when documentation, controls, and transparency fall short. Whether this proves to be a one-off debacle or the first in a series will depend on how aggressively lenders, managers, and regulators move to tighten standards.
Either way, one conclusion is already clear: in a market awash in creative financing, the scarcest asset isn’t yield—it’s verifiable collateral.
