Jefferies Aims to Reassure Investors—Again—Over First Brands Mess

Jefferies said its exposure to auto-parts supplier First Brands, which collapsed last month, was limited. (DreamstimE)

Key Points

• Jefferies Financial Group says potential losses from its exposure to First Brands through Point Bonita Capital are ‘readily absorbable.’
• Point Bonita Capital purchased approximately $715 million in receivables from First Brands, which collapsed with about $10 billion in debt.
• Jefferies’ indirect investments in First Brands include $43 million, or 5.9%, of Point Bonita’s purchased receivables and a $2 million interest in bank loans.

Shares of Jefferies Financial Group rose Monday after the firm’s top brass said its exposure to doomed auto-parts supplier First Brands would be manageable, and that any losses would be “readily absorbable.”

The message underscored the intense scrutiny Jefferies and other firms—including Swiss banking giant UBS —have come under for their ties to privately held First Brands, which filed for Chapter 11 bankruptcy protection in late September.

First Brands was little-known outside the worlds of car parts and auto financing, but has captured overwhelming attention because its failure appeared to blindside sophisticated investors.

It has raised questions about financiers’ lending standards at a time when extending credit has leapt outside the banking system and into more loosely regulated corners of Wall Street such as private credit.

The decline of First Brands also comes after Tricolor, a Texas subprime auto lender that had yearslong relationships across big financial firms, filed for Chapter 7 bankruptcy protection.

In a letter Jefferies released on Sunday evening—the second update it has made in the past week about First Brands—the bank said its indirect investments in the bankrupt company were multifaceted.

A Jefferies-owned asset manager called Point Bonita lent to big customers of First Brands, including AutoZone and Walmart , and Point Bonita’s portfolio has some $715 million of exposure to First Brands.

Jefferies said Sunday its investments amount to $43 million, or 5.9%, of Point Bonita’s accounts receivables bought by First Brands, in addition to a $2 million interest in First Brands’ bank loans.

Jefferies Chief Executive Officer Rich Handler and President Brian Friedman said relative to the firm’s size, they are confident losses and expenses stemming from First Brands “do not threaten our financial condition or business momentum.” Management and incentive fees from Point Bonita are immaterial to the firm, they said, with fees in the year through Aug. 31 amounting to 0.8% of net revenue during that time.

Jefferies shareholders pushed the stock higher by 4% as the S&P 500 rose 1.6%. It was a reprieve from months of volatility for the shares.

Through last Friday’s market close, the stock had paced for its worst year since 2008 and capped off its largest weekly decline—a drop of 18%—since March 2020. Last month, the New York firm reported quarterly per-share earnings and revenue that topped analysts’ forecasts.

Creditors of both Tricolor and First Brands are still working to make sense of how they unraveled.

First Brands collapsed with some $10 billion in debt last month and said Monday its CEO, Patrick James, resigned from the company effective immediately. Charles Moore, a longtime turnaround specialist in the auto field who had been serving as First Brands’ chief restructuring officer, was named interim CEO.

As part of its public note on Sunday, Jefferies disputed that it had earned undisclosed fees for financing it provided First Brands through a so-called “side letter” agreement. The Financial Times first reported on those fees and other previously unreported details about the fallout of First Brands, including certain winners that may emerge: Apollo Global Management amassed a short position against First Brands’ debt.

When First Brands filed for bankruptcy, advisers discovered that $2.3 billion was owed to purchasers of receivables that hadn’t been paid, saying the amount had “simply vanished.”

“Nobody at Jefferies was aware of fraudulent activity at First Brands,” Handler and Friedman said in their letter on Sunday. “We learned of the fraud allegations when the rest of the public learned, and then only after First Brands ceased remitting to Point Bonita cash collected in respect of the accounts receivable owned by the fund.”

A news release from a major Wall Street firm addressing disclosures about an individual client and lending arrangements is uncommon and highlights the voracity of public scrutiny in the matter.

Jefferies is likely to field more questions about the fiasco when it hosts its annual investor meeting on Thursday.

Write to Rebecca Ungarino at rebecca.ungarino@barrons.com and Mackenzie Tatananni at mackenzie.tatananni@barrons.com