First Brands Group After the Fall: Thoughts on a Post-Bankruptcy Future

As investors comb through the First Brands Group wreckage trying to decide what it’s all worth, we would argue that the asset valuation question is only half of the equation, and the less interesting half at that. Investors must consider how that value is ultimately going to be allocated across the various creditors. We would expect 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 no doubt be done at a discount to plan value – not to mention the generous backstop fees that might be levied.

Alas, we get ahead of ourselves, and there is plenty of time for analyzing that issue. Meanwhile, value leakage must be a concern at every point of the process. We should not lose sight that there is over $11 billion in debt consisting of $6.2 billion in on-balance-sheet funded debt and $4.6 billion in off-balance-sheet financing tied to affiliate debtors.

As part of its restructuring, the estate will have to satisfy these claims while convincing the auto parts market that it is a reliable counterparty for “supply-chain financing.” Beyond that, this is shaping up to be a case with multiple constituencies that will need representation and advising, financial and otherwise. These services, as well, will create fees and expenses that the estate will also have to satisfy.

As a start, let’s think about how much this group of businesses might be worth. Usually, this is where one would dive into financial statements and earnings transcripts looking to mine nuggets of financial information to fill a host of spreadsheets. Over $11 billion in actual debt when the books show only $6 billion plus a now-famous $2 billion hole likely mean you’re better off looking elsewhere.

The company showed investors $5.86 billion in annual sales for 2024, but that was booked at what the customer would pay in a year to 18 months, and money has a cost. The company previously disclosed the cost of its lower-cost nonrecourse factoring at 6%, and using that as an adjustment is being generous. Recall the higher-cost factoring was higher cost for a reason. So let’s say a 10% discount or top line of $5.25 billion, but it could be higher or lower.
 

How much cash flow can First Brands generate on $5 billion in auto parts sales? As a guy who knows nothing about auto parts but thinks he’s the smartest guy in every room he walks into, $500 million seems reasonable. Anyway, we’re all just guessing until the financial analysts get their work done and we can dig into some monthly operating reports. (Note: Your correspondent would really appreciate a column in the monthly operating reports for consolidated results.)

A 10% cash flow yield seems reasonable and would be a good result in this industry, but clearly is far from where we are as the company filed for bankruptcy with just $14 million in cash, clearly a sign that the assets are not yet earning their cost of capital on a cash basis.

Fifteen percent, the distressed investors’ benchmark as it were, seems as good a discount rate as any to use here. Half a billion dollars a year discounted at 15% gets you $3.3 billion and another 15% on top of that (after all, we’re a year away from getting at the company) takes you to $3 billion.

You might think that $3 billion isn’t bad, especially in light of the $1.1 billion in new-money DIP and $3.3 billion in a rollup DIP. But there is another creditor waiting in the wings. The company was using $4.6 billion in off-balance-sheet financing to finance something, right? And just because First Brands Group went bankrupt doesn’t mean the aftermarket auto parts industry will change its ways. The newly reorganized First Brands Group is likely to require some amount of supply-chain financing and this time, in our opinion, it will have to be on the books.

The size and the cost of the reorganized company’s supply-chain financing is certainly an important issue in trying to calculate where the market is creating First Brands’ enterprise value. However, there is a more immediate impact that investors should be considering. The debtors entered bankruptcy with $4.6 billion in off-balance-sheet liabilities. For all the talk of double-pledged inventory, there was no mention made of unpledged inventory.

These supply-chain lenders will have claims against the value of the estate. We would imagine that these claims will be traded in the future – 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.

Importantly, the off-balance-sheet facility claims are not primed by the DIP; they’re just on different collateral and must be considered in any priority waterfall investors consider as they try to understand what First Brands Group debt is worth.

It is also somewhat telling that the debtors were unable to report Sept. 28 petition date balances for these financing vehicles, with the outstanding balances of each of the Aequum, CarVal and Evolution facilities’ outstanding balances listed only as of July 31 (which values the debtors have generally stipulated to in their interim adequate protection stipulations).

Further, the debtors are unable to report on the current disposition of $1.9 billion received by the debtors in connection with their factored receivables despite their obligation to segregate the funds. Together, these reporting deficiencies lend credence to the idea that there was at least “small-f” fraud at the prepetition debtors and that these creditors’ claim on the assets of the reorganized debtors likely need to be thought of as pari with the DIP claims.

After all, at least a good chunk of them have interim adequate protection liens on the inventory, which First Brands will need to honor if it wants to continue to build inventory. The ultimate scope of the current adequate protection agreements with the SPV lenders are subject to the terms of a final adequate protection order, which we expect will be addressed at the debtors’ upcoming final DIP hearing on Oct. 29.

Nonetheless, once you start talking about fraud, substantive consolidation has to be front of mind as a possible risk. Factoring creditor Raistone Capital has moved to appoint an independent examiner in the cases, while First Brands Group founder and CEO Patrick James resigned from the company yesterday morning, Oct. 13, in the face of these financial irregularities, with Chief Restructuring Officer Charles Moore now serving as the interim CEO.

With this in mind, we now have $4.4 billion of DIP claims and $4.6 billion of off-balance-sheet claims that will be looking at the same business to generate their recovery on the way out of bankruptcy court. In our opinion, the quantum of value provided to each cohort of creditors will be the subject of negotiations during the pendency of the case and investors would be wise to make sure they do not repeat the previous mistake of not accounting for supply-chain financing (both pre- and post-exit) in their investment analysis.