First Brands bankruptcy may impact Jefferies-managed portfolios

NEW YORK - Jefferies Financial Group, Inc. (NYSE:JEF), a $12.19 billion financial services firm currently trading below its InvestingPro Fair Value, disclosed on Wednesday that a Chapter 11 bankruptcy filing by First Brands Group, LLC could potentially affect investment portfolios managed by its divisions. Despite recent challenges, the company maintains strong fundamentals with a 15.29% revenue growth over the last twelve months.

First Brands, an aftermarket auto parts manufacturer, filed for bankruptcy protection on September 29. The filing has raised concerns about a $715 million portfolio of trade-finance assets managed by Point Bonita Capital, a division of Jefferies’ Leucadia Asset Management (LAM). This exposure represents approximately 5.9% of Jefferies’ total managed assets, while the company maintains a debt-to-equity ratio of 3.4.

Since 2019, Point Bonita has purchased accounts receivables from First Brands arising from sales to major auto-parts retailers including Walmart, Autozone, NAPA, O’Reilly Auto Parts, and Advanced Auto Parts. This practice, known as factoring, had operated without incident until September 15, when First Brands stopped directing timely transfers of funds from the retailers.

In its bankruptcy filings, First Brands indicated its advisors were investigating whether receivables had been properly turned over to third-party factors or potentially factored multiple times.

LAM owns $113 million, or 5.9%, of the equity in the affected portfolio, which totals approximately $3 billion in trade-finance assets supported by $1.9 billion in invested equity.

Additionally, Apex Credit Partners LLC, a subsidiary of Jefferies Finance LLC (50%-owned by Jefferies), manages CLOs with approximately $4.2 billion in assets. These CLOs own about $48 million of First Brands’ term loans, representing approximately 1% of the CLO assets under Apex’s management.

Jefferies stated it owns no other securities or obligations issued by First Brands and is "working diligently to determine what the impact on Point Bonita might be," according to the company’s press release statement. While InvestingPro data shows the company is currently burning through cash, it has maintained dividend payments for 16 consecutive years, demonstrating long-term financial resilience. For deeper insights into Jefferies’ financial health and additional ProTips, visit InvestingPro.

In other recent news, Jefferies Financial Group has been the focus of several significant developments. The company reported better-than-expected results in its non-compensation expense ratio, achieving 30.9% compared to the consensus estimate of 33.6%, as noted by Morgan Stanley. This positive performance led Morgan Stanley to raise its price target for Jefferies to $74, maintaining an Equalweight rating due to strengths in its Equities Trading, Debt Capital Markets, and Equity Capital Markets businesses. Additionally, Sumitomo Mitsui Financial Group is looking to increase its economic ownership in Jefferies to up to 20% through open market purchases, although its voting interest will remain below 5%.

This expanded alliance between Jefferies and Sumitomo Mitsui aims to enhance their global reach and deepen their strategic partnership. The potential stake increase could involve acquiring preferred stock in a deal exceeding $677 million, according to reports. Meanwhile, BMO Capital has initiated coverage on Jefferies with a Market Perform rating and a $69 price target, acknowledging the firm’s promising long-term positioning despite near-term challenges. These developments highlight the ongoing strategic maneuvers and financial assessments surrounding Jefferies Financial Group.

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