U.S. auto parts maker First Brands filed for bankruptcy protection on Monday after disclosing liabilities exceeding $10 billion, marking the collapse of a company whose rapidly deteriorating finances have shocked debt investors in recent weeks.
First Brands is expected to soon disclose an accounting irregularity amounting to nearly $2 billion, according to people familiar with the matter. The company's board is investigating the matter, one of these people said, confirming an earlier report in the Wall Street Journal.
The company, whose fortunes unraveled in recent weeks as it grappled with a debt pile from a flurry of acquisitions over the past few years, has obtained $1.1 billion in debtor-in-possession financing from its first-lien lenders to support ongoing operations, it said in a statement.
Financial troubles at the auto parts supplier, coupled with the recent bankruptcy of subprime auto lender Tricolor Holdings, have rattled debt investors and stoked fears of broader stress in corporate debt markets, according to bondholders and bankruptcy experts.
The high-profile collapse of First Brands has raised questions among investors about potential ripple effects across the automotive parts industry, although experts said automaker supply chains are not likely to be affected broadly since First Brands is primarily an aftermarket parts provider.
Ohio-based First Brands, which is owned by businessman Patrick James, said that its Chapter 11 cases pertain solely to U.S. operations, and expects its global operations to continue uninterrupted. In its Chapter 11 petition, First Brands estimated liabilities in the range of $10 billion to $50 billion, while its assets were estimated between $1 billion and $10 billion.
Bankers and creditors had been racing to restructure First Brands' debt as investor confidence eroded leading up to the filing, with several of its associated companies also declaring bankruptcy.
Privately held First Brands makes replacement components including filters, brakes and lighting systems for the automotive aftermarket, and emerged as a significant player through debt-financed acquisitions of rival auto parts makers.
Its well-known brands include Raybestos brake solutions, TRICO wiper blades, and FRAM filtration products.
Last week, ratings agency Fitch downgraded First Brands' credit rating, saying the company's options for managing its debt were increasingly limited to off-market solutions.
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Over the past week, First Brands' loans plummeted in value as its bondholders braced for the group's debt to be restructured.
Several Wall Street lenders and hedge funds, including Jefferies (JEF.N) and Millennium, are exposed to First Brands' supplier invoice-linked facilities.
More than a dozen companies affiliated with First Brands, including Carnaby Capital Holdings, filed for bankruptcy protection last week, according to court documents signed by First Brands' owner and CEO Patrick James.
The affiliated entities had secured loans that were backed by guarantees from First Brands, Reuters reported on Friday.
Carnaby Capital Holdings' petition listed assets of over $500 million and liabilities exceeding $1 billion.
In addition to its debt, the company has several billion dollars more in financing facilities that are tied to its customers and suppliers, Reuters has previously reported.
The latest filings reveal that First Brands and its related intermediaries had more than $8 billion of debt and inventory-backed financing. This figure is not linked to its customer and supplier invoices, with the company listing about 30 financing sources who were listed as unsecured creditors from whom it has borrowed more than $1 billion, according to the filings.
Ryan O'Malley, head of portfolio management at Ducenta Squared Asset Management, said the cases of First Brands and the poor second-quarter results of used-car retailer CarMax (KMX.N) had not sparked broader investor concerns over the asset-backed securities bond market.
However, he said, these two cases indicated some weakness in consumer auto spending, probably resulting from years of high interest rates.
Law firm Weil, Gotshal & Manges, investment bank Lazard, and consulting firm Alvarez & Marsal are advising First Brands on its bankruptcy proceedings. Gibson, Dunn & Crutcher and Evercore are advising the creditor group.
