First Brands: Are The Cockroaches Coming Home to Roost?

A combination of billions of dollars of opaque financing, shady management and Wall Street’s demand for deals creates a spectacular explosion

Illustration by Daniel Medina

There are still two months left in 2025 but unless something intergalactically stupid happens soon, the collapse of First Brands Group Holdings will take home the prize of 2025’s most embarrassing moment of the year for Wall Street.

First Brands, an owner of 24 auto-supply companies, including Fram oil filters, Anco windshield wipers, Autolite spark plugs, and Centric brakes, managed to create a financial disaster that might exceed $10 billion in losses. Major players in commercial bank lending, private credit lending, investment banking, fund management, credit insurance and public accounting have taken a bite of the rotten apple.

First Brands built its auto parts supply empire over the past 11 years in no small part by tapping the private credit market. I wrote about private credit over the summer and asked:

Has PC become just another way to feed Wall Street’s Private Market deal beast and overload the economy with debt?

First Brands may prove to be the poster child of private credit gone wild.

Private credit is essentially commercial bank lending, without the stringent regulatory capital requirements of federally and state chartered banks. Instead, they are backed by investor capital. Private credit funds, sometimes called Business Development Companies, are usually managed by companies that have a private equity arm as well. Companies such as Bain, KKR, Apollo, and Carlyle manage multi-billion dollar private equity and private credit funds.

The sales pitch for private credit firms is that they are more nimble and more knowledgeable than banks for specialized lending. Unlike banks, private credit funds do not take deposits and are not subject to the same safety and soundness checks as federal and state banks are, and hence, can take more risk.

Interestingly, Moody’s recently reported that commercial banks have increased their exposure to private credit funds as they have lent nearly $300 billion to private credit companies (described in the report as Non-Depository Financial Institutions (NDFIs). According to Moody’s:

Over the past decade, non-bank lenders have steadily expanded their footprint in the US corporate loan market, often stepping in where traditional banks have pulled back because of tighter credit standards and regulatory capital constraints.

Unwilling or unable to loosen credit standards in light of these constraints, banks have responded to the loss of loan market share to non-banks by increasing their lending to these same entities — making loans to NDFIs the fastest-growing category in US banking. Loans to NDFIs are now roughly 10.4% of total bank loans, nearly three times the 3.6% of a decade ago.

One of the chief criticisms of private credit is its opaque nature. Public companies have more stringent financial reporting requirements than private ones. Investors have access to timely regulatory financial disclosures, as well as multiple levels of regulatory oversight. Private companies, on the other hand, are not subject to the same requirements, which can prevent potential investors and lenders from getting a true and timely picture of their financial condition.

First Brands’ finances were opaque enough for its primary backer, Jefferies Financial Group, to completely whiff on the amount of debt that was “on” and “off” First Brands’ books. From The Wall Street Journal:

First Brands’ unraveling has raised questions about who could have seen it coming. Jefferies had worked with First Brands for several years without issues when its bankers set out to help the company refinance corporate loans over the summer. Jefferies initially told prospective lenders that First Brands had roughly $5.9 billion of debt, according to materials viewed by The Wall Street Journal. First Brands’ bankruptcy advisers have since said its debt actually exceeds $11.6 billion.

This is what happens when money pours into both the private and public credit markets by the billions, seemingly every month. Whether it’s a private credit lender, a collateralized loan obligation (CLO) manager, a high-yield loan fund manager, or a hedge fund, the need to invest all that new money in order to earn management and performance fees is paramount. Due diligence more or less flies out the window, “hot” deals are chased and we end up with a First Brands.

At least we are getting some good dark comedy out of this debacle. The Financial Times produced perhaps the best headline of 2025:

Raistone, one of First Brands’ largest creditors and a self-described “Non-Bank Trade Finance Provider,” has claimed that $2.3 billion owed to them by First Brands “has simply vanished.”

Also, we had a bit of a bank versus private credit pissing match last week between JP Morgan CEO Jamie Dimon and business development company (fancy name for a private credit company) Blue Owl CEO Marc Lipschultz. JP Morgan is not caught up in First Brands’ collapse, but said in an earnings call that it should serve as a warning of what’s to come: “I probably shouldn’t say this, but when you see one cockroach, there are probably more.”

Still, on JPMorgan’s earnings call, Dimon narrowed in on some risks from non-bank lenders. If the economy starts to falter, there could be “higher-than-normal downturn-type of credit losses in certain categories,” he said, highlighting business development companies, a popular fund structure for housing private credit.

Au contraire, countered Lipschultz:

Banks might want to look at their own books for any “cockroaches,” Blue Owl Capital Inc.’s co-chief executive officer, Marc Lipschultz, said on Tuesday, standing in fierce defense of private credit. “I guess he’s saying there might be a lot more cockroaches at JPMorgan, I’m not sure I know what he’s saying,” Lipschultz said. “It’s not a private credit issue. It’s a liquid credit market.”

What did First Brands do to create such a mess?

Formed in 2013, CEO Patrick James built First Brands (then called Crowne Group) by gobbling up auto supply companies in private transactions.

James tapped into the red-hot high yield loan market and the booming private credit market to fuel his company’s expansion. With regard to the latter, the private credit markets afforded First Brands what is called “off-balance sheet” financing, which generally involves a company selling short-term receivables, or invoices, from customers such as Walmart to a third party to immediately receive payment. This is often referred to as “invoice factoring.” Here is a theoretical example:

1. First Brands sells windshield wipers to Walmart and invoices them. Walmart promises to pay First Brands in one month. This creates a receivable for First Brands. Let’s assume the receivable is $100,000.

2. First Brands wants its cash today as opposed to a month later. First Brands will go to a financier, often a private credit company that specializes in receivable financing. The financier pays First Brands $98,000 for the invoice. The $2,000 is essentially the financing charge that First Brands is paying.

3. On the invoice due date, Walmart pays the financier $100,000.

This type of business has been done for centuries so that companies such as First Brands can manage their supply chain cash flow timing. Because the transactions involve the sale of an asset (the receivable or invoice), the transaction is not recorded as debt, hence, “off-balance sheet financing.”

It has been alleged but not proven yet that First Brands “double pledged” invoices. This would be akin to pledging your house as collateral to two or more different mortgage lenders, with each lender unaware of the other’s lien on the property.

And it gets worse. Again from the Financial Times:

Investors in some funds claimed they were unaware how much of their exposure was linked to James’s patchwork of auto-parts makers. Firms such as UBS O’Connor and Point Bonita said the risk primarily lay with the many blue-chip customers named on its invoices, such as Walmart. But after the bankruptcy, Raistone and Point Bonita revealed that they never received funds from such customers directly. Instead, the funds were returned to them via First Brands.

It appears that alarms should have been ringing loudly for O’Connor, Point Bonita and Raistone once the first invoice payment came from First Brands as opposed to the blue-chip companies such as Walmart. Many of the invoice factoring transactions had double-digit yields, which may have helped muffle these financiers’ alarm bells.

First Brands also used a borrowing strategy referred to as supply chain financing (sometimes called “reverse factoring”) whereby the financier pays First Brands’ payables (bills) directly, and then receives the payment invoice from Walmart later. I’m really not sure how that doesn’t end up as a liability on the balance sheet, but it doesn’t.

First Brands also had a large amount of debt labeled as off-balance-sheet inventory, which seems like something that could have been dreamed up by Enron’s infamous CFO Andy Fastow. Special Purpose Vehicles (SPVs) housed a portion of First Brands’ inventory and were then borrowed against with the lenders being private credit firms. Because the inventory was sold to the SPVs, the approximately $2.3 billion was not recorded as debt on the balance sheet.

Meanwhile, CEO James seems to have all the trappings of a fraudster. The Financial Times reports:

Lawsuits and local newspapers from the 2000s are littered with accounts of closed plants and bankruptcies, leaving aggrieved lenders chasing him through courts to seize his assets. Worthington Steel, one of Ohio’s largest steelmakers, claimed James put $1.2mn of his personal wealth on the line in 2005, in exchange for “forbearance” on an alleged default. Worthington leveled fraud allegations against him after his business allegedly defaulted once again, including that he had “instructed employees” to “shred” books and records to hide his “gross mismanagement”.

It’s probably no surprise that James lives the lifestyle of a Roman emperor. His estate in Chagrin Falls, Ohio, includes five houses and two tennis courts. He also has two farms with stables of prized horses, oceanfront homes in Malibu and the Hamptons, a fleet of vintage cars and a private security team made up of ex-military to provide around-the-clock protection for James and all his goodies.

Downfall

Jamie Dimon’s cockroaches came pouring out from First Brands’ floorboards this past June when Jefferies began marketing a new $6 billion loan for First Brands to refinance an existing loan of around the same size. First Brands’ outside auditor, BDO, gave the company an unqualified opinion or a clean bill of health in March. Existing investors in First Brands’ loan asked for and got a “Quality of Earnings” review from public accounting firm Deloitte, and that review made it apparent that First Brands had nearly twice the level of debt than what was represented on its financial statements. Things quickly unraveled from there as First Brands declared bankruptcy September 29th and Patrick James stepped down as CEO October 13th.

It is still too early to tell what the final loss total is for First Brands. With nearly $12 billion in debt, the losses will be substantial and will hit CLO managers, private credit fund managers, insurance companies, which insured some of the off-balance sheet transactions, investment banks (primarily Jefferies), and public accounting firms (BDO). All will get a dose of pain and humility.