First Brands Flails as Customers Don’t Know Who to Pay
Bankrupt Auto Parts Supplier Asks Judge to Set Up Framework for Clients to Avoid Fear of Double Payment
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As First Brands Group makes its way through bankruptcy court, the auto parts supplier is bumping up against an unexpected snafu: Its customers don’t seem to know who to pay.
As the extent of First Brands’ opaque web of debt spilled into plain sight, investors who snapped up its receivables via so-calledfactoring deals— fearing a wipeout from allegedly fraudulent invoices — directed companies that sell its fuel pumps and wiper blades to pay them directly, rather than going through a First Brands account where they were historically made. That created “significant confusion,” according to restructuring advisory firm Alvarez & Marsal, which is running First Brands on a day-to-day basis.
As a result, some $150 million of customer payments have been withheld, even though there’s no evidence those invoices were ever factored, Alvarez & Marsal estimates. That money belongs to First Brands and is “desperately needed,” the company said in court documents.
First Brands is now asking the judge overseeing its bankruptcy to set up a framework that will give comfort to clients that they can send money to the company without risk of double payment. Time is of the essence: First Brands burned through about $128 million of cash in October, according tocourt papers.
In a sign of how dire the situation has become, First Brands’ $1.1 billion debtor-in-possession loan — typically first in line to be repaid in bankruptcy — was recently being offered at around 90 cents on the dollar, according to quotes seen by Bloomberg. That’s a highly unusual situation that signals traders expect the company to have difficulty paying back even its newest and most secure loan.
The behind-the-scenes struggles of First Brands show the lasting damage of its sudden implosion, which ensnared everyone from Wall Street banks to blue-chip companies. It also raises questions about whether the company can survive despite the widespread fraud that allegedly dominated its work in the murky world of trade finance.
In a typical factoring deal, a supplier sells its invoices to a financial firm, or “factor,” which pays upfront — minus a fee — and later collects the full amount from the supplier’s customers. That setup reduces the supplier’s profit margin, but speeds up its cash flow.
It also leaves the factor, instead of the supplier, exposed to the credit risk of the customer — often a large, stable buyer like Walmart Inc. In First Brands’ case, though, at least some factors allowed the payments to flow through the company before being passed on to them.
In addition to the $150 million that Alvarez & Marsal says First Brands is owed by customers, the company has collected another $106 million that’s now sitting in segregated accounts as the court sorts out the extent of the alleged fraud and who is owed how much. But nearly $102 million of that reflects non-factored receivables, according to the advisory firm — money the company should be able to access.
Cash Burn
How long First Brands can continue without access to additional funding remains uncertain.
In October, the company recorded $128 million in cash outflows, compared with $31.5 million generated from operations,court documentsshow. Based on cash-flow estimates submitted to the court, First Brands expects to have just $20.9 million on hand by the end of January, far short of the roughly $50 million per month itsaysit needs to keep operating.
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Much of its debt, meanwhile, trades at deeply distressed levels, reflecting expectations that First Brands will need to raise additional, more senior financing. Another $3.3 billion of debt that ranks behind the DIP in repayment priority was quoted between 16 and 21 cents, while the company’s first-lien term loan was quoted even lower, in the 5- to-7.5-cent range.
“Without unlocking the trapped customer cash, I believe the (company) would be forced to seek additional funding or face a liquidity shortfall,” First Brands co-chief restructuring officer Daniel Jerneycic, who is a managing director at Alvarez & Marsal, said in court documents.
