Bankruptcy filing of First Brands Group represents far more than the failure of a single auto parts manufacturer; it constitutes a potentially systemic event that has exposed critical vulnerabilities in the private credit and corporate debt markets. With liabilities potentially reaching $50 billion against assets of just $1-10 billion, this collapse has triggered substantial losses for major Wall Street institutions, including Jefferies and Millennium Management, while revealing the dangers of opaque financing structures like reverse factoring and invoice financing that allowed debt to accumulate outside traditional balance sheets. The rapid deterioration of a company that had over $800 million in cash just months earlier has shattered investor confidence, with senior debt trading as low as 33 cents on the dollar and junior debt becoming nearly worthless. This analysis examines the transmission mechanisms through which First Brands’ failure could propagate through financial markets, the exposure of major banks and private funds, and the broader implications for similarly structured credit products in an environment of increasing macroeconomic uncertainty.

The First Brands Collapse

First Brands Group, an Ohio-based automotive parts manufacturer, filed for Chapter 11 bankruptcy protection on September 29, 2025, in the Southern District of Texas, disclosing assets exceeding $1 billion against liabilities surpassing $10 billion, with some reports indicating potential liabilities as high as $50 billion when accounting for off-balance-sheet obligations. The company, owned by Malaysian-born businessman Patrick James, had grown aggressively through debt-financed acquisitions of rival auto parts makers, evolving from a niche Ohio concern into a multinational corporation spanning Romania, Mexico, and Taiwan. First Brands’ well-known portfolio includes iconic automotive brands such as FRAM filtration products, TRICO wiper blades, and Raybestos brake solutions.

The bankruptcy filing follows the financial deterioration of numerous First Brands-affiliated entities, including Carnaby Capital Holdings, which filed for bankruptcy protection the previous week with over $500 million in assets and more than $1 billion in liabilities. These affiliated entities had secured loans backed by guarantees from First Brands, creating a complex web of intercompany liabilities that amplified the parent company’s financial distress. The collapse has drawn comparisons with the recent bankruptcy of subprime auto lender Tricolourr Holdings, with the two failures within a single month raising concerns about broader stress in credit markets and potential contagion effects across the financial system.

Chronology of a Corporate Failure

The rapid descent of First Brands into bankruptcy protection reveals much about the underlying vulnerabilities that had been accumulating within the company’s financial structure, despite outward appearances of stability. The timeline of key events demonstrates how quickly confidence can evaporate in highly leveraged companies dependent on continuous market access.

Table: First Brands Bankruptcy Chronology

The company’s financial deterioration began in earnest in early August 2025 when First Brands suddenly paused a proposed refinancing of all its existing indebtedness, which included nearly $5 billion in first lien debt set to mature in March 2027. This refinancing pause was ostensibly to allow time for a quality earnings report on the company’s past acquisitions and provide additional disclosures around its accounts receivable factoring programs at the request of potential lenders. This failure to refinance represented a critical inflexion point, as the company’s entire business model depended on continuous access to debt markets to support its aggressive acquisition strategy and manage its substantial debt load.

The situation deteriorated rapidly throughout September 2025, with Moody’s issuing a series of downgrades that culminated in a Ca corporate family rating on September 26, indicating that default was imminent. The speed of this collapse shocked market participants, with one analyst noting that “just two weeks ago, its loans were trading at levels that suggested relative calm. By Friday, senior debt was changing hands at a third of its face value, while junior loans had collapsed to cents on the dollar”. This rapid repricing reflects how quickly market confidence can evaporate when investors begin questioning the transparency of financial reporting and the sustainability of complex financing arrangements.

Anatomy of a Complex Debt Structure

First Brands’ financial architecture represents a textbook case of how modern corporate finance techniques can be used to obscure true leverage levels and create potentially systemic risks. The company employed a multi-layered debt strategy that combined traditional term loans with more complex and opaque financing arrangements, ultimately creating a financial structure that proved unsustainable when market conditions shifted.

The Components of First Brands’ Debt

• Traditional Term Debt: First Brands had approximately $5.9 billion in long-term debt resulting from its debt-financed acquisition strategy, including nearly $5 billion in first lien debt scheduled to mature in March 2027. This traditional debt structure was already highly leveraged relative to the company’s underlying earnings capacity, with Moody’s previously criticising the company’s “aggressive financial policy of pursuing fully debt-financed acquisitions”.
• Supply Chain Financing Arrangements: Beyond its traditional debt, First Brands utilised complex financing facilities tied to its customers and suppliers, estimated to total several billion dollars. These arrangements included both traditional factoring (where a company sells outstanding customer invoices to banks and investors to raise cash) and the more controversial reverse factoring (where an investor pays the company’s suppliers and then collects the money from it later). These techniques are generally not included in a company’s published accounts and are considered “off-balance sheet,” allowing the company to effectively hide liabilities from traditional credit analysis.

The opacity of these arrangements proved particularly damaging when the company attempted to refinance its debt in August 2025. Potential lenders requested “additional disclosures around its accounts receivable factoring programs,” suggesting that even sophisticated market participants could not adequately assess the company’s true financial condition without greater transparency. This lack of transparency ultimately scuttled the refinancing effort and precipitated the company’s collapse.

Creditor Exposure and Potential Losses

Table: Financial Institution Exposure to First Brands

The collapse has exposed several major financial institutions to substantial potential losses. Several Wall Street lenders and hedge funds, including Jefferies and Millennium, are exposed to First Brands’ supplier invoice-linked facilities. The company’s top-rated loans were trading at less than 50 cents on the dollar just before the bankruptcy filing, with senior debt collapsing to approximately 33 cents on the dollar and junior debt becoming nearly worthless. This rapid repricing has forced institutional investors across the financial system to mark down holdings and recognise substantial losses, creating a ripple effect that extends far beyond First Brands’ immediate creditors.

Systemic Vulnerabilities in Modern Credit Markets

The First Brands collapse has exposed several structural vulnerabilities in contemporary credit markets that could amplify the initial shock and propagate distress throughout the financial system. These vulnerabilities reflect the evolution of credit markets since the 2008 global financial crisis, with risks migrating from the regulated banking sector to less transparent corners of the financial system.

One of the most significant systemic concerns raised by the First Brands bankruptcy involves the interconnections between traditional banks and private credit funds. A report from Moody’s in collaboration with the Securities and Exchange Commission earlier this year warned that the private credit system had become so intertwined with the banking system that it could be a “locus of contagion” in a future financial crisis. This concern stems from the fact that while banks have been constrained by tighter regulations following the 2008 crisis, they continue to lend money to hedge funds and other private credit providers that finance riskier ventures like First Brands. The opacity of this system creates substantial monitoring challenges for regulators and market participants. As noted in the search results, “financial regulators are concerned over this increase because, as numerous reports, including from the International Monetary Fund, have made clear, they have little knowledge, let alone control over, the activities of private credit funds and their connections to the major banks, describing these links as ‘opaque'”. This lack of transparency means that the full extent of counterparty exposures and potential contagion pathways may not become apparent until after a triggering event like the First Brands collapse has already occurred.

The Dangers of Factoring and Supply Chain Finance

First Brands’ extensive use of receivables factoring and supply chain financing represents another systemic vulnerability that could amplify the impact of its bankruptcy. These financing techniques, while legitimate when used appropriately, can obscure a company’s true financial condition and create sudden liquidity demands when market confidence erodes. The company had previously disclosed $5.9 billion in long-term debt and nearly $1 billion in cash, but creditors now fear the true scale of its obligations is far higher due to complex financing tied to invoices and inventory. The crisis escalated after one of its banks seized cash, forcing the group to seek Chapter 11 protection. This sequence of events demonstrates how seemingly routine financing arrangements can quickly become triggers for liquidation events when counterparty confidence collapses.

Market Contagion Channels and Transmission Mechanisms

The First Brands bankruptcy has the potential to propagate through financial markets via several distinct transmission mechanisms, creating the potential for broader contagion across credit markets and financial institutions. The rapid repricing of First Brands’ debt instruments has created substantial losses for holders and raised concerns about similar repricing in other highly leveraged companies. The psychological impact of seeing senior loans trading at less than 50 cents on the dollar has made investors increasingly cautious about extending credit to similarly structured companies, potentially creating a broader refinancing crisis for firms dependent on continuous market access. This shift in market sentiment represents a classic credit cycle phenomenon where periods of easy credit are followed by sudden retrenchment and widening spreads.

Instrument Spillover Effects

The auto parts sector represents just one of many industries that have relied heavily on debt-financed acquisitions and financial engineering to drive growth in a low-interest-rate environment. The collapse of First Brands, following closely on the heels of Tricolour Holdings’ bankruptcy, has raised concerns that other sectors with similar business models could face comparable stresses. Particularly vulnerable are companies that have employed aggressive financial policies, including high leverage resulting from debt-funded acquisitions, weak interest coverage, and extensive use of off-balance-sheet financing techniques. The specific financing instruments utilised by First Brands, particularly reverse factoring and receivables financing, are widely used across multiple industries. The problems at First Brands have triggered broader questions about the transparency and accounting treatment of these instruments, with potential implications for the thousands of companies that employ similar techniques to manage their balance sheets and working capital. The collapse of First Brands has significant implications for financial regulators and policymakers who are tasked with maintaining the stability of the financial system. The event has exposed several potential blind spots in the post-2008 regulatory framework and highlighted emerging risks that may not be adequately addressed by existing regulations.

Regulatory Concerns About Private Credit

The growth of the private credit market has been identified by regulators as a potential source of systemic risk. Economists at the Boston branch of the Federal Reserve noted in a May 2025 report that “banks’ extensive links to the private credit market could be a concern because those links indirectly expose banks to the traditionally higher risks associated with private credit loans“. This concern is particularly acute given that loans to non-bank financial institutions, which include private credit funds, had increased to $1.2 trillion by the end of March 2025, representing a 20 per cent increase in just one year. The fundamental regulatory challenge lies in the fact that rules established after the 2008 crisis sought to discourage banks from lending to highly leveraged companies that had difficulties servicing their debts. In response, banks began lending to private credit funds that then made the loans to these highly leveraged companies, effectively circumventing the regulatory intent while maintaining economic exposure to the same underlying risks.

Accounting and Disclosure Gaps

The First Brands collapse has also highlighted significant accounting and disclosure deficiencies related to modern financing techniques. The widespread use of reverse factoring and other supply chain financing arrangements that remain off-balance-sheet has made it increasingly difficult for investors and regulators to assess companies’ true financial condition. As one analyst commented in reference to First Brands, “This is a case of debt getting ahead of reality,” pointing to billions in opaque off-balance-sheet financing that will now come under investigation by a special bankruptcy committee. These accounting gaps have prompted calls for greater transparency around companies’ use of factoring and supply chain financing, with potential implications for financial reporting standards and disclosure requirements. The request from potential lenders for additional transparency around First Brands’ accounts receivable factoring programs during the attempted refinancing suggests that market participants are increasingly recognising these risks and demanding greater visibility into these arrangements.

The bankruptcy of First Brands Group represents a significant inflexion point for credit markets that have enjoyed relatively benign conditions for much of the past decade. The collapse has exposed critical vulnerabilities in the private credit ecosystem and highlighted the dangers of excessive reliance on opaque financing techniques that obscure companies’ true financial condition. In the immediate term, the focus will remain on the bankruptcy proceedings themselves and the recovery rates for various classes of creditors. First Brands has obtained $1.1 billion in debtor-in-possession financing from its first-lien lenders to support ongoing operations, and the company has indicated that its Chapter 11 cases pertain solely to U.S. operations, with global operations expected to continue uninterrupted. However, the ultimate recovery for creditors remains highly uncertain, particularly for holders of junior debt instruments that have already been marked down to pennies on the dollar.

Looking forward, the First Brands collapse is likely to have several lasting impacts on credit markets and financial regulation:

• Increased Scrutiny of Private Credit: Regulators are likely to intensify their focus on the links between traditional banks and private credit funds, with potential implications for capital requirements and exposure limits.
• Greater Transparency Demands: Investors and lenders are likely to demand enhanced disclosure of off-balance-sheet financing arrangements, potentially leading to changes in accounting standards and reporting requirements.
• Repricing of Credit Risk: The events at First Brands have demonstrated the speed with which credit deterioration can occur, suggesting that markets may have been underpricing risk in similarly structured credits.
• Sectoral Vulnerabilities: Companies that have pursued aggressive, debt-fueled acquisition strategies while utilizing complex financing techniques may face increased funding costs and reduced market access.

The true test of the financial system’s resilience will be whether the contagion effects remain contained within specific sectors and instruments or whether the interconnections within the modern financial system propagate the shock more broadly. What is already clear is that the First Brands bankruptcy has served as a powerful reminder of the ongoing evolution of credit risk and the perpetual challenge of maintaining stability in a financial system characterised by constant innovation and adaptation.

https://www.reuters.com/legal/litigation/companies-tied-first-brands-file-bankruptcy-2025-09-26