Jefferies gives investors clarity about the First Brands bankruptcy

By Steve Gelsi

Jefferies's stock is set to snap a long losing streak after CEO writes letter to shareholders to provide some transparency, while First Brands' CEO resigns

Jefferies office building in Manhattan.

Jefferies Financial Group Inc. moved to soothe a growing fear among investors over the fallout from the bankruptcy of its client, auto-parts seller First Brands, by saying any impact to its finances can be readily "absorbed" and wouldn't impact its business.

It seemed to work, at least for now, as investors were looking for any clarity on the situation. The stock (JEF) rallied 4.9% in afternoon trading on Monday. A close in positive territory would snap a 10-session losing streak, which was the longest such streak since a 13-day stretch that ended May 18, 2012.

Jefferies's stock had tumbled 23.7% during the losing streak, while the SPDR S&P Bank ETF KBE 6.4% fell over the same time, and the S&P 500 index SPX declined 1.4%.

Jefferies was a provider of receivables financing for First Brands through its Bonita Point Capital asset-management unit, and its Apex Credit Partners business handled leveraged loans and collateralized loan obligations involving the company.

First Brands filed Chapter 11 bankruptcy on Sept. 29 with more than $10 billion of debt. It was that news that triggered the losing streak for Jefferies's stock.

Gil Mermelstein, chief executive of consulting firm West Monroe, told MarketWatch the actual impact of the bankruptcy on Jefferies appears to be more about what investors didn't know than what they did know. The letter from Jefferies Chief Executive Brian Friedman to investors over the weekend helped to clear things up.

"The market is punishing Jefferies not for the magnitude of the impact to their financials, which appears manageable, but rather a general nervousness as to the lack in of transparency into private-credit portfolios, a rapidly growing space," Mermelstein said.

However, he said he sees no "systemic risk" posed by First Brands.

"I see the large private credit players deploying capital responsibility," Mermelstein said.

Bank analyst Christopher McGratty told MarketWatch he expects questions on credit strength from analysts to emerge as a theme during the third-quarter earnings season, kicking off on Tuesday, with updates from JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Wells Fargo & Co. (WFC) and Goldman Sachs Group Inc. (GS). Any bankruptcies involving private credit appear to be idiosyncratic at the current time, he said.

See: Deal mania is back on Wall Street. Here's what it means for JPMorgan - and for banking-sector earnings.

Jefferies Chief Executive Rich Handler said in the letter to shareholders that the bank's potential losses on its investments in First Brands could amount to about $45 million over time and that these investments pose no threat to its financial condition or business momentum.

As of Aug. 31, Jefferies had $10.5 billion in total equity and tangible equity of $8.5 billion, with $11.5 billion in cash, Handler said.

"We believe there has been an impact on our equity market value and credit perception that is meaningfully overdone, and we expect this to correct soon as the facts and range of outcomes are better understood," Handler said.

The situation First Brands now finds itself in resulted from "decisions and actions" by the company, including "possible fraudulent or otherwise improper activity that is under investigation," Handler said. "Those actions and decisions drove First Brands ... to need bankruptcy protection."

Jefferies did not earn any undisclosed fees for side-letter financing between Jefferies and First Brands, he said.

Market and economic cycles "always" result in failures, but the sector is not currently facing any widespread problems, said West Monroe's Mermelstein.

First Brands on Monday named Charles Moore, a restructuring expert from Alvarez & Marsal, as its interim CEO, replacing Patrick James.

-Steve Gelsi

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10-13-25 1444ET