Patrick James, founder and chief executive officer of US-based auto parts supplier First Brands, resigned on Monday, weeks after the company filed for bankruptcy protection amid an alleged accounting scandal that left lenders chasing more than $2 billion in missing funds, according to AP.
The Cleveland-headquartered firm, which owns industry names such as Fram filters, Autolite spark plugs and Anco wiper blades, named Charles Moore as interim CEO. Moore, who joined last month as chief restructuring officer, has been leading efforts to stabilise operations and prepare the company for a potential sale. “Our immediate priority is to ensure stability and dependability for our employees, customers, and partners,” Moore said in a statement, adding that the company had begun investigating the “past use of various financing instruments.”
James, a Malaysian-born entrepreneur, founded First Brands in 2013 and expanded the company through a string of debt-financed acquisitions, buying at least 15 competitors over the past decade. The company, which reported $5 billion in annual sales and employed 26,000 people as of last year, rebranded from Crowne Group to First Brands about five years ago.
However, the aggressive acquisition strategy has since unravelled. According to bankruptcy filings, First Brands disclosed liabilities of between $10 billion and $50 billion, against assets worth less than $10 billion.
$2.3 billion unaccounted for
Court documents revealed that as much as $2.3 billion had “simply vanished,” according to one of the company’s creditors, Raistone Capital, which has sought the appointment of an independent examiner. At a recent hearing, First Brands’ attorneys told the court: “There’s $12 million in the bank account today. There is nothing else.”
The company’s collapse has rattled Wall Street lenders who financed its debt spree. Shares of Jefferies Financial Group, one of the financiers, have lost nearly 25% of their value since the bankruptcy filing on 29 September.
Jefferies, which lent funds to First Brands through investment manager Point Bonita, said the auto-parts firm had stopped remitting payments on 15 September. Point Bonita, in turn, was owed $715 million under a factoring arrangement tied to First Brands’ receivables from major retailers such as Walmart, AutoZone and Napa.
In a letter to shareholders, Jefferies CEO Rich Handler and president Brian Friedman said the firm’s direct exposure was $43 million, calling the market sell-off an “overreaction.” They maintained that “any losses or expenses… can readily be absorbed and do not threaten our financial condition or business momentum.”
Private credit scrutiny
The First Brands debacle has also renewed scrutiny of the private credit market, growing rapidly over the past decade with limited oversight. While First Brands carried about $6 billion in high-yield or “junk” debt, the current crisis is believed to have stemmed from off-balance-sheet borrowings from private lenders.
When the company hired Jefferies this summer to renegotiate terms of its debt, lenders discovered billions of dollars in additional undisclosed loans, with some receivables allegedly pledged to multiple creditors.
First Brands has since received court approval to access $500 million from a $1.1-billion debtor-in-possession facility to fund operations, make payroll and pay suppliers. The next bankruptcy hearing is scheduled for 29 October.