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Years before the implosion of First Brands sparked huge losses for some of the biggest names on Wall Street, Apollo Global Management endured a less well-publicised fiasco involving a smaller car parts supplier. 

Apollo took a hit in 2019 from the collapse of Vari-Form, a chassis and roof rail maker to which its private credit funds had lent more than $130mn.

But rather than taking the loss and moving on, the ordeal gave rise to a new trade idea for the $840bn-in-assets private capital firm. Apollo last year began shorting the debt of a larger business owned by Vari-Form’s sole shareholder, Patrick James: First Brands.

While Apollo was one of the few Wall Street firms to profit from the First Brands debacle, a larger cohort including the family office of investor George Soros identified red flags around James’s sprawling empire and avoided losses by refusing to lend or cutting their exposure.

James now faces accusations of fraud and embezzlement — allegations he denies — and First Brands’ $12bn debt pile is set for hefty writedowns in its bankruptcy.

Some burnt lenders have insisted the collapse came without warning — Brian Friedman, president of First Brands’ longtime banker Jefferies, told investors last month that “fraud is conventionally not detectable in the real world”. But other creditors that dug deeper were able to avoid the fiasco.

Donald Clarke, a veteran of so-called “field examinations” for asset-backed lenders, said serious financial issues at First Brands were “right there in plain sight”. His firm Asset Based Lending Consultants conducted due diligence on First Brands in 2022 on behalf of a private capital firm that was considering extending a $200mn bridging loan to the company.

“The first red flag,” according to Clarke, was First Brands’ refusal to grant him access to one of its storage sites where he wanted to inspect the collateral underpinning the prospective loan. “They said to us, ‘you will not go to the warehouse’,” Clarke said. “Really? we’re going to lend you $200mn but you can’t go see the inventory? I mean, are you kidding me?”

This meant ABLC had to rely on financial statements provided through a data room. Clarke said he soon noticed that the company was “chronically” behind on payments due to its suppliers, which had shut down many of its open credit facilities in favour of cash on delivery, cash in advance or letters of credit, and that the money it owed them had shot up. When his team tried to speak to someone at First Brands about it, he added, the conversation kept getting delayed. 

The fact First Brands had needed a $200mn loan also seemed bizarre, Clarke recalled, given it had recently disclosed holding more than $800mn of cash. In audited annual accounts for 2021, First Brands had also reported $2.6bn of revenue and profits of $53mn.  

“Why then, if you’re that liquid, and you’re creating all this cash flow, do you need this loan?” Clarke said, adding that the company seemed like a “paper tiger”. 

Based on his advice, Clarke’s client turned down the loan.

Other lenders were also puzzled by First Brands’ willingness to raise debt at such a high cost despite reporting healthy cash balances, as well as the fact the group’s reported margins were far higher than those of peers.

A senior manager at one large US investment firm told the FT that when their team met James last year to quiz him on these issues, they had been surprised to find that First Brands’ headquarters occupied a single floor of a Cleveland office building, which was “strange for a $5bn revenue company”.

The credit fund manager said James seemed “very knowledgeable” on stripping costs from the underlying business but gave a “really woolly answer” on why his company was willing to pay such high interest on its debt, while responses about its high cash balance also did not stack up. 

His firm had been one of First Brands’ largest lenders but cut its entire position in the company’s debt in the months after the meeting. The manager added that they feared there was “no equity value” left in a business that had “become dependent on constantly making new acquisitions”.

Falcon Group, a London-based inventory management company, met First Brands in 2022 and spoke to the company a few times about extending it roughly $200mn.

Founder Kamel Alzarka said the first warning sign was First Brands offering to pay fees in the mid-teen percentages for the inventory finance, when Falcon would typically expect 5-8 per cent for such lending.

The structure of the deal was another red flag. In a typical inventory finance deal, the client would get access to parts in bulk for a discount, but would not want it all at once on its balance sheet. An inventory finance firm would come in, buy the parts, keep them on its balance sheet and dole them out “just in time” as the client needed them. 

But in this case, Alzarka said, First Brands suggested selling its existing inventory to the firm and buying it back — a “repo” transaction — and wanted to act quickly.

The deal was too risky for Falcon, which found the urgency and offer of high fees confusing. “It didn’t add up,” Alzarka said, “and we didn’t see why they would be coming to us.”

“We’re very happy we didn’t do that deal,” he added. “You might do nine deals that work, but then you have one deal like First Brands, and you lose everything you’ve done.” 

Soros Fund Management, the $25bn family office of billionaire investor George Soros, traded in and out of First Brands customer invoices between 2019 and 2023, according to people familiar with the matter. It ultimately sold out in 2023 because of concerns over the company’s management, one of the people said, netting a profit on its investment.

For Apollo, Vari-Form’s collapse proved instructive in building up a picture of allegations of financial mismanagement against James. Lawsuits alleged that the company had failed to honour employee severance agreements or to pass on tax refunds that were payable to its former owner. The employee severance lawsuit was ultimately dismissed, while James’s holding company did not file a response to the tax refund suit.

Apollo’s thesis was also informed by other publicly available lawsuits against James relating to previous corporate collapses, according to people familiar with the trade. Several lenders had accused him of fraudulent conduct, including allegations that his companies had made “misrepresentations” relating to customer invoices and inventory pledged as collateral.

James denied allegations of fraud and the cases were settled before reaching trial. His spokesperson has previously told the FT that claims of “improper dealings by Mr James were categorically false”. A US bankruptcy judge on Wednesday overturned a freeze on James’s personal assets that First Brands had argued was necessary to prevent “potential dissipation of funds”.

Apollo’s structured products division Atlas, which it acquired from Credit Suisse in 2023 before the bank’s rescue, had also provided financing to First Brands prior to the US private capital firm’s takeover, according to people familiar with the matter.

Away from investment firms, some bank chiefs have also publicly stated that they eschewed lending to First Brands.

Tim Spence, chief executive of Fifth Third Bank, a regional lender based in First Brands’ home state of Ohio that previously lent to the company, told investors last month it had cut off First Brands a few years ago because of “some issues that were identified during the collateral reviews we were doing”.

He added that Fifth Third retained a residual exposure of just $51,000 of operating leases secured with a forklift and a printer, quipping that after discovering the printer did not have wheels he decided that, “if necessary, we’re going to use the forklift to get the printer out of there”.