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The $1.1bn loan First Brands secured to stabilise its business at the start of its bankruptcy dropped in value on Monday, in a sign that the company’s attempt to quickly reorganise its finances is foundering.
The so-called debtor-in-possession loan, provided by a cadre of existing First Brands senior lenders in September, was quoted by trading desks between 69 and 72 cents on the dollar, down 20 cents from Friday, according to people familiar with the matter.
Its rapid collapse signals that lenders are looking to pare back their exposure to the auto parts maker or get out entirely, as conflict over who has rights to what remaining collateral drags out an expensive bankruptcy process.
“Once you start untangling the Gordian knot, it gets murkier and murkier,” said one person familiar with the trading. “You’re getting more clarity on how little clarity you have as time goes on.”
Court filings showed Marathon Asset Management, Beach Point Capital Management and Redwood Capital Management were among the largest holders of the loan. But trading has intensified in recent weeks and some have cut or changed their initial positions.
A spokesperson for Marathon said the firm had sold its entire exposure to the loan at prices above 105 cents on the dollar.
Another investor said “people were panicking” and were dumping their positions, worried that the company would either need to secure a new senior loan or face further financial stress. If First Brands did strike a new loan, it could be entitled to repayment before the current rescue loan — further eroding the existing loan’s value.
First Brands and Beach Point declined to comment. Redwood did not immediately respond to a request for comment.
Debtor-in-possession loans, which have the highest claim on a bankrupt company’s assets, rarely trade below 100 cents on the dollar. Having traded well above 100 cents, the First Brands loan began to fall sharply late last week.
The group of First Brands lenders that made the September loan was expected to bid for the company’s assets using the value of the $1.1bn rescue loans as well as more than $3bn in loans they made to the company before it went bankrupt.
More than 80 asset managers and hedge funds own parts of the bankruptcy loan, which was hastily put together in the days leading up to First Brands’ bankruptcy in late September, according to court filings.
A committee of First Brands’ creditors, which is challenging the rescue loan terms, previously told the bankruptcy court that the loan would ultimately come with an annualised rate of return exceeding 70 per cent.
Last month, Scott Greenberg, a lawyer for the lenders, told the court his clients expected to be fairly compensated for contributing “into a black box without a bottom”.
Greenberg in October said his clients’ due diligence was roughly 10 to 20 per cent of what they would typically have done for a loan of “this size and complexity”.
The bankruptcy thus far has been marred by conflicts over claims on collateral between various stakeholders in the company’s roughly $12bn debt stack. The company’s advisers have told the court that several billion dollars of cash has gone missing.
The company’s new management has sued First Brands founder Patrick James for fraud, alleging he misappropriated hundreds of millions of dollars from the company for personal use and engaged in “fraudulent conduct”.
Customers are now freezing payments to First Brands until the court clarifies who they owe money to.
According to multiple people involved in the case, the fear is that the dwindling remaining value of the business, along with the missing cash, raises the risk that unsecured creditors and off-balance-sheet lenders will not be able to recover billions of dollars that they are owed.