In Bankruptcy Court, First Brands Creditors Demand Explanation for ‘Vanished’ Cash

Since it filed for bankruptcy on Sept. 29, auto-parts supplier First Brands has come under intense scrutiny for alleged accounting malpractice, opaque financing agreements, and late payments to suppliers.

In an effort to shed light into the company’s murky finances, one of First Brands’ largest creditors filed an emergency motion in bankruptcy court on Wednesday calling for an independent investigation into the beleaguered firm’s books.

As much as $2.3 billion in short-term financing has “simply vanished,” wrote Richard Jacobsen, counsel for Raistone, a fund that is partly owned by O’Connor, a UBS hedge fund. Raistone said it was owed at least $172 million.

The Department of Justice also opened an inquiry into the collapse, The Financial Times reported on Thursday.

For years, First Brands had received funding through a short-term lending strategy known as “factoring.” After the supplier delivered products to customers including Walmart and O’Reilly Autoparts, it sold the right to the customer invoices to outside investors, including units of UBS and Jefferies. The arrangement allowed First Brands to receive cash upfront, smoothing its inflows, while giving lenders the opportunity to earn interest.

Factoring, part of a broader credit strategy known as trade financing, isn’t unusual. Yet First Brands allegedly borrowed billions of dollars of the short-term loans, with much of the money kept off-balance sheet through a network of separate corporate entities. It may also have sold certain invoices more than once, according to court filings and transcripts.

When asked in court on Oct. 1 where roughly $2 billion of factoring cash was located, Sunny Singh, a lawyer for First Brands, said: “It’s not here. We don’t have it. Zero dollars. There’s $12 million in the bank account today. That’s it. There’s nothing else.”

Tricolor is another one. Missed or ignored?

“U.S. Banks Missed Warning Signs on Tricolor. Now, Their Losses Are Adding Up.”

“Chu’s Tricolor Auto Group had recently opened a 258,000-square-foot maintenance center outside Phoenix to repair and recondition the used vehicles it sold to its core market of Spanish-speaking immigrants. The facility—its second, after one in Texas—was to anchor a western-state expansion.

Rating firms had just graded Tricolor’s latest round of securities backed by its auto loans, pushing the total volume of its rated bonds past $2 billion. S&P Global Ratings gave the biggest slice of the security an AA rating, its second-highest ranking.

Previous baskets of Tricolor auto loans were bought by Wall Street giants JPMorgan Chase, Pimco, and AllianceBernstein. Among Tricolor’s backers was BlackRock, the world’s largest asset manager, which had cast the chain’s focus on the Hispanic community as consistent with its social-investing goals. JPMorgan and Barclays had provided the company with a line of credit.

“We have conviction that our differentiated approach enables us to deliver consistent, predictable and positive outcomes,” Chu said in a June 11 statement announcing the Barclays-led securitization.

Less than three months later, his auto empire lay in shambles. On Sept. 5, Tricolor abruptly closed its 65 lots across six states before filing for liquidation under Chapter 7 of the U.S. bankruptcy code. S&P put its auto-loan-backed securities on watch for downgrades before suspending its ratings entirely, and some of the company’s lenders have flagged their exposure in regulatory filings.

As Tricolor benefited from Wall Street’s largess, U.S. banks and ratings firms appear to have missed or overlooked warning signs. So too may have the U.S. government, which awarded Tricolor a special U.S. Treasury certification in 2019.”

https://www.barrons.com/articles/fifth-third-tricolor-jpmorgan-auto-dealer-bankruptcy-3aff3d4b?gaa_at=eafs&gaa_n=ASWzDAjKMHWd_3c4iZFw_OqqFCCwOtMdRj9eIzlHRZLyt7YdduOnUPQusrSFkP_k4lc%3D&gaa_ts=68e84a87&gaa_sig=jFG356HMc_z99tGvGdYGkJgRHsG8daqHUgr4crjaLAXoBSbwtp1PU_SJ7kbbLY-EG3Gtbhq708tkL6rVfvzUyQ%3D%3D

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