Jefferies and First Brands: What the Trade Debt Means

"Jefferies Fund Has $715 Million in First Brands Group, LLC’ Trade Debt"... but what does that exactly mean?

This Bloomberg headline is causing market turmoil about Jefferies, but let's cut through the noise and disambiguate what kind of exposure Jefferies actually has here. [1]

First, a quick summary of the story so far. First Brands is an auto parts conglomerate which expanded aggressively by taking on debt through trade financing, which allows the company to be immediately compensated for future receivables by a fund (in this case, Point Bonita Capital) which takes on that risk.

When Jefferies pitched a $6 billion refinancing deal to First Brands in July, it triggered scrutiny into First Brands' books, causing its slow implosion into bankruptcy. (The full story of First Brands' bankruptcy is still unfolding and is a very interesting read [2])

Jefferies was quick to open their books and clear up their exposure to First Brands. In the process, they showed the kind of decisions that led to this bankruptcy. In one instance, Point Bonita accepted "side letter" deals with First Brands which allowed them to raise funds at a higher interest rate beyond what the loans allowed, increasing financing costs for Point Bonita. [3] This event shows the risk of trade financing, especially in the dark world of private credit.

I've created a diagram showing how Jefferies is exposed. In short, they have a $113MM equity stake in Point Bonita Capital, which is the fund exposed to the eye-popping $715MM in receivables. But according to analysts at Morgan Stanley, estimated losses to Jefferies top out at about $45MM, which is definitely manageable.

Some investors, like BlackRock, have pulled out of Point Bonita as a result, causing Jefferies stock to tumble by ~8% yesterday [4].

But I think this fear is unwarranted. Jefferies is in the market for high risk, high reward borrowers, and blowups like this are a cost of doing business. Headline hysteria might cause their stock price to fluctuate, but Jefferies' meteoric rise from boutique to multinational bank is no accident. When you play with fire, you're bound to get singed now and then... but I say "let them cook!"

What do you think? How big of a deal is the First Brands' bankruptcy for Jefferies?

[1] https://lnkd.in/eD89yvGd Jefferies Fund Has $715 Million in First Brands' Trade Debt

[2] https://lnkd.in/e-MkP49W First Brands Creditor Seeks Investigation of "Vanished" Cash

[3] https://lnkd.in/e-MWFVhs First Brands’ Go-To Bank Jefferies Opens Books as Fallout Builds

[4] https://lnkd.in/eQfcRXFi BlackRock Seeks Cash From Jefferies Fund Exposed to First Brands