First Brands’ chapter 11 could be reflective of further things to come that may cause pain for a range of market participants
Cleveland—First Brands Group’s bankruptcy underscores a key gap in how investors and analysts assess corporate debt, revealing $4.6 billion in off-balance-sheet financing that wasn’t properly accounted for alongside $6.2 billion in traditional debt.
The case sheds light on broader risks in supply chain financing that could have implications for distressed investing and credit analysis across industries.
A new report from Octus, “First Brands Group After the Fall: Thoughts on a Post-Bankruptcy Future,” examines the First Brands Group bankruptcy in depth, analyzing how more than $11 billion in total debt could affect creditor recoveries and asset valuations as the auto parts company moves through its restructuring process.
The following are a few highlights.
- Post-Exit Capital Needs and Discounted Offering: Octus expects a year from now when the First Brands Group businesses exit bankruptcy (potentially leaving behind a litigation trust that will pursue recoveries for years) it may need to raise some capital in an offering that will likely be done at a discount to plan value, including considerable backstop fees that might be levied.
- On-Balance-Sheet Supply Chain Financing: The newly reorganized First Brands Group is likely to require some amount of supply-chain financing and this time it will have to be on the books.
- Trading Dynamics of Future Claims: These claims will likely be traded in the future. Octus states, “This has to be easier than buying tariff refund claims, after all — and it will be interesting to see their ultimate pricing in the context of where the DIP tranches trade.”
Parts distributors must also be wondering if their supply chains going forward could potentially be exposed to future financing liabilities. What’s the risk of this happening to other auto parts companies? How could it cause pain for the wide range of market participants?
Robert Streda, Morningstar DBRS’s senior vice president for Corporate Industrial Credit Ratings, told Aftermarket Matters that First Brands’ supplier relationships with OEMs is relatively small at approximately 10 percent of its revenues and sales and are “easily” manageable for the automakers. The aftermarket is different, however.
“The OEMs post COVID — and even with some other industry stresses, such as tariffs — have become much more vigilant in monitoring their respective supply bases,” he said. “I’d be definitely more concerned in the aftermarket space. I think First Brands could be reflective of perhaps further things to come. Very simply, from a high-level perspective, [aftermarket] balance sheets and liquidity positions are substantially weaker vis a vie the manufacturers. As such, they won’t be in a position to absorb those shocks or fund those shocks. From that perspective, they are considerably more vulnerable.”
Michael Driscoll, DBRS pro-rating officer, Global Financial Institutions Group, added, “From a banking funding perspective, if there’s more one-offs within the aftermarket parts business, then banks might get a little more gun shy. It might get a little harder to get bank loans and whatnot. Banks might pull back in the aftermarket space and put a bit more pressure on that sector, but we don’t expect that at this time.”
Comments are closed.