This Company Supplies Car Parts & 2008 Flashbacks

The finance world is on edge because of an auto supplier that you’ve probably never heard of: First Brands, a midsize maker of spark plugs and other automotive accoutrement, is in the midst of a multibillion-dollar meltdown. Weeks after declaring bankruptcy, the company’s founder and CEO resigned yesterday amid suspicions around its accounting practices.

ICYMI: First Brands filed for bankruptcy late last month, revealing more than $10 billion in debt from loans that it took out over the past decade to fund ambitious acquisitions and expand quickly across five continents. But the company suddenly ran out of money, and now Wall Street financiers are clutching their IOUs:

• The investment bank Jefferies appears to be the most exposed. Its stock fell last week after it announced that one of its subsidiaries lent First Brands $715 million.
• Funds run by other major firms, including UBS and BlackRock, are also owed hefty checks that likely aren’t coming any time soon.

With as much as $2.3 billion in assets unaccounted for, federal officials are now investigating what exactly went wrong at First Brands. According to court filings, part of the problem was that the company would pledge the same invoiced revenues to several of its lenders, like when you promise your last slice of pizza to both your partner and your roommate.

Alarms sound in the private credit sector

Many of the companies that lent money to First Brands aren’t traditional banks, meaning their financing falls into the far less regulated world of private credit—a $3 trillion market that exploded after banks got more cautious with loans following the 2008 financial crisis.

Since private credit deals are often complex and inked off the public markets, “if something is going disastrously wrong, it might only be detected once it’s too late,” per Politico.

Zoom out: First Brands’ bankruptcy isn’t expected to be market-shattering, but some analysts think it suggests a growing risk that private credit-related collapses could ripple out into broader financial trouble.—ML