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The blow-up of car-parts maker First Brands is a tale of big names, and big numbers. The US company collapsed owing about $12bn across various kinds of loans. For those affected, that’s clearly unpleasant. How unpleasant, exactly, will depend on three things.
Jefferies is one that has been drawn into the blast radius. On Wednesday it revealed that one of its asset management subsidiaries is owed $715mn, after buying some of First Brands’ customer IOUs. Then there is UBS: funds linked to the Swiss lender have $500mn of nominal exposure to the ill-fated company.
For any involved party the first question, after the size of the exposure, is whether the impact is purely financial or reputational too. As well as any potential lending losses weathered by its funds, Jefferies also had a separate investment banking relationship with First Brands; its share price has fallen by 15 per cent in the past month, wiping off $2bn of value.
The second question is “whose money?” There is a big difference between asset managers that deploy capital on behalf of others and players that put their own balance sheet dollars on the line. At UBS, exposure came through a fund managed by its O’Connor subsidiary. In Jefferies’ case, it’s a bit of both: an affiliated asset manager itself contributed 6 per cent of the fund’s $1.9bn of equity.
The third question is how deep the entanglement went compared with the size of the institution. For both Jefferies and UBS, the numbers are so far small; Jefferies has $10bn of book equity, a proxy for its ability to absorb losses. The same is not true for smaller, previously little-known groups that have emerged in the First Brands saga. Those would include Raistone and Onset, both speciality supply chain financiers. A majority of Raistone’s revenue is linked to First Brands, the FT has reported. As it happens, a UBS hedge fund unit was also one of Raistone’s investors.
For these smaller firms, the many uncertainties of First Brands’ financial condition could prove existential. Raistone has asked for an independent investigation, arguing that $2.3bn of cash is, by First Brands’ advisers’ own admission, simply unaccounted for.
The deceptive thing about big numbers in debt blow-ups is that investors can end up recovering money later, a process that can take years. Collateral, equity cushions, hedging and litigation all play into the eventual outcome for each investor concerned.
As lawyers and investors pick through the wreckage of First Brands, what will emerge is a study in how byzantine modern debt markets have become, how shrewd companies are at spreading their risk and how clever they are at utilising the law to get their money back.
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