First Brands' Loan Value Sinks to 30¢; Rescue Seen as Critical
The Finger-Pointing Has Been Swift, and Some Are Fretting About the Urgent Need for New Money
Key Takeaways:
- First Brands’ $1.1 billion super-senior rescue loan plunged to as low as 30 cents on the dollar in early December, an unusually rapid collapse for court-approved financing.
- The drop reflects confusion over alleged balance-sheet fraud, slow progress in the company’s investigation and mounting liquidity needs as suppliers demand stricter terms.
- Creditors were told the company urgently needs new higher-priority financing and a working-capital facility by January, with missed milestones risking asset sales.
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Days after First Brands Group collapsed into bankruptcy, Marathon Asset Management founder Bruce Richards laid out a plain case for a rescue loan: “Great company, bad balance sheet.”
Two months later, Marathon and others that provided the auto parts supplier with $1.1 billion are seeing the super-senior debt crater at a speed that bankruptcy experts say is virtually unprecedented.
And as the loan plunged from 100 cents on the dollar to as low as 30 cents on Dec. 10, the finger-pointing has been swift. It’s also left some fretting about the urgent need for new money.
Some blame big creditors for stoking panic by putting stakes up for sale. Others have blasted restructuring adviser Alvarez & Marsal for what they consider to be a slow progress untangling a web of alleged fraud that saw billions of dollars “vanish” from the balance sheet. Alvarez & Marsal, which has also been investigating the company’s finances, has argued that separate First Brands investors created confusion and fueled a cash shortfall by directing companies that sell its goods topay them directly.
Put together, the developments suggest a deeper misread of the full scope of issues facing the company, and of how quickly it can stabilize operations. After a Dec. 9 lender call, people close to the situation view the prompt injection of new, higher-priority money as critical, helping explain why senior lenders are seeing the value of their debt plunge, and why those with lower-priority positions have been effectively wiped out.
“I’ve never heard of that happening this close to the actual approval of the loan by the court,” Bruce Markell, a former bankruptcy judge and lawyer with more than two decades of experience who now teaches at the Northwestern University Pritzker School of Law, said of the plunge.
Any new senior financing would require the approval of two-thirds of current rescue loan holders, advisers to creditors said on the lender call. The company needs the additional debt to purchase inventory under the stricter terms suppliers are now demanding, people on the call were told. It’s alsoseeking to line upa new working-capital facility, potentially by January, which executives hope will help ease its supply chain bottlenecks.
A source close to the lending group leading negotiations with the company said they were confident creditors would ultimately provide fresh rescue funds. Another person familiar with the matter said 95% of First Brands’ most important vendors are working with the company.
Others have expressed concern that First Brands may struggle to meet the milestones tied to its existing rescue facility, which are crucial to unlocking the full allotment and could hold up any new capital raise. Failure to access that cash may ultimately leave the company with little choice but to sell its brands piecemeal, they said, then figure out how to distribute the proceeds.
Even if it can secure new financing, First Brands’ outlook remains murky. Creditors say they’ve gained little insight into the state of its operations or finances since the company filed for bankruptcy more than two months ago.
That lack of visibility is one of the key reasons why the value of its rescue loan has slumped in recent days. Runs circulated by traders showed bids as low as 30 cents early Dec. 10. By late in the session the debt had rebounded to around 47 cents, but remained deeply impaired. Bids were around 42 cents on Dec. 11.
First Brands filed for bankruptcy in late September, with more than $10 billion owed to some of Wall Street’s biggest names. The company sells a range of auto parts, including wiper blades and oil filters to retailers, such as Walmart Inc., AutoZone Inc. and O’Reilly Automotive.
Walmart ranks No. 1 on the Transport Topics Top 100 list of the largest private carriers in North America. AutoZone ranks No. 13 on the wholesale/retail carriers sector list.
Distressed Funds
Brokers noted that hundreds of millions of dollars of the paper has traded hands over the past week. As money managers offloaded chunks of the loan, a number of distressed funds have been stepping in at steeply discounted levels.
Among the buyers are King Street Capital Management and Mudrick Capital Management, according to people familiar with the matter. Both are now part of the lead creditor group, the people said, asking not to be named because they’re not authorized to speak publicly. Strategic Value Partners is also now involved in First Brands, founder and chief investment officer Victor Khosla said in an interview on Bloomberg TV on Dec. 11.
A representative for First Brands declined to comment. Representatives for Alvarez & Marsal didn’t immediately respond to a request for comment. Representatives for King Street, Mudrick and Marathon declined to comment.
Marathon sold its entire stake in the new-money portion of the bankruptcy loan at or above 105 cents on the dollar, a spokesperson for the firm has previously said. It is still a holder of other debt that became part of the bankruptcy loan.
Written by Reshmi Basu, Eliza Ronalds-Hannon and Steven Church
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