The shadow lenders behind First Brands' collapse
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First Brands Group’s collapse at the end of 2025 marked a grim reality for the automotive parts powerhouse, especially as bankruptcy filings proceed and advisors scramble to determine the priority of lenders.First Brands Group, with a major presence in Cleveland, Ohio, is an automotive specialty company that caters to and develops auto parts including brakes, wipers, filters, and lights, under well-known automotive brands.First Brands acquired iconic brands such as Autolite, Raybestos, and Fram before the company’s plunge intoChapter 11 bankruptcy revealed a complex web of deception that had eluded auditors for years.“Shadow lending,” which Investopedia defines as a specific, overlapping invoice factoring arrangement, allowed executives to mask the company’s weakness while reaffirming its financial health.The complexity of First Brands' layered capitalA capital structure in the First Brands debacle was built for a more aggressive yield, Neuberger Berman notes, as the company used a layered approach to financing rather than facilities at traditional banks.With asset-based lending (ABL) lines and standard term loans, First Brands had two simultaneous factoring programs, according to the American Bar Association.Related: Auto parts maker First Brands expands layoffs across U.S.In these arrangements, the company sold its accounts receivable to third parties at a discount, per Trade Treasury Payments. Why? Liquidity.Within distressed entities, multiple creditors, includingfintech platforms and private credit funds, are all staking claims to the same customer invoices. As a result, the bankruptcy structure becomes a nightmare.When borrowers pledge the same asset to multiple creditors under varying agreements, as in the case with First Brands, the priority of these claims within the classic debt waterfall becomes tedious and difficult to verify, leaving lenders in tense situations.CategoryAffiliated Entities (Debtors)Core EntitiesFirst Brands Group, Autolite FRAM Group, Trico ProductsManufacturing/OpsDalton Corporation, Cardone Industries, Brake Parts Inc., UCI InternationalHolding/Investment VehiclesGlobal Assets LLC, Carnaby Capital, Broad Street Financial, Heatherton HoldingsInventory/Finance SPVsStarlight Inventory, Patterson Inventory, Viper AcquisitionFirst Brands fallout sparks debate about risk assessmentsThe First Brands collapse raises an important question among private credit and non-bank lenders regarding risk assessments."Rigorous lender due diligence" is essential for deals with multiple layers within their financing agreements, emphasized Octus Head of Special Situations Jared Muroff.The scrutiny matters even more, Muroff says, for entities controlled by families or a single owner, which often lack the institutional compliance that keeps sponsor-backed borrowers at bay.However, it seems that what happened at First Brands is atypical.Now let's dissect First Brands' very own disclosures.According to the company's 10-K, the company identifies three prongs of its debt obligations.Operational cash flow (the cash cow): First Brands admits its ability to pay its debtors depends on future financial performance, categorizing it as subject to factors “beyond our control.” In accounting terms, if operations miss their projections, it will be difficult for them to restructure their debt obligations.Capital markets dependency: First Brands relies on refinancing, which, in the distressed-debt world, leaves it vulnerable to interest-rate volatility and credit risk.Covenant triggers: Its ability to borrow more cash under the loan agreement depends on the covenant's compliance. So covenants allow lenders, such as banks, to basically stop providing liquidity before a company like First Brands (the borrower) runs out of cash.Alvarez & Marsal, First Brands' primary financial advisor, has worked to untangle its debt waterfall and undertake restructuring, but the impact has led to many layoffs as facilities in Ohio continue to shut down.Related: Bankrupt auto parts giant cuts 1,267 jobs