When the whole mess of First Brands Group is greater than the sum of its car parts - Trade Treasury Payments

Liquidity tools, not dirty words

To be clear: factoring and supply chain finance (SCF, or reverse factoring) are not inherently problematic. Indeed, they are indispensable instruments of global commerce. From Mittelstand manufacturers in Germany to electronics exporters in Shenzhen, companies rely on these techniques to smooth cash flow, fund working capital, and underpin domestic and cross-border trade.

Factoring allows suppliers to sell invoices at a discount, unlocking liquidity without waiting 60, 90, or 120 days for payment, while mitigating debtor non-payment risk via non-recourse structures. Reverse factoring (SCF) enables buyers to extend their payment terms while offering suppliers faster, cheaper access to funds thanks to the buyer’s stronger credit rating.

Done properly, these practices enhance resilience, reduce counterparty risk, and keep supply chains moving. They became particularly vital during the pandemic and current tariff turmoil, when supply disruptions, rising interest rates and increased duties threatened the financial viability of entire sectors.

A legitimate tool, distorted by aggressive use

Where concern arises is not in the instruments themselves but in their overextension or abuse. As the collapses of Greensill Capital and Stenn demonstrated, the line between innovative finance and reckless opacity can be perilously thin. Those cases carried the taint of fraud and misrepresentation at the platform level. By contrast, FBG has not been accused of misconduct in arranging (not the lenders in providing) financing — but the suspicion is that the company’s aggressive, possibly excessive reliance on these tools may disguise deeper fragilities.

The Financial Accounting Standards Board (FASB) has recognised the potential for obfuscation. Its Accounting Standards Update No. 2022-04 now requires companies to disclose their use of SCF programmes. The aim is straightforward: if a financing mechanism functions like debt, investors deserve to see it as debt.

Under the Hood: Patrick James

Much of FBG’s funding has been associated with the efforts of Patrick James, a figure of Malaysian birth notable as much for his privacy as his prominence. Publicly available information is strikingly sparse: few, if any, personal photographs exist online, and James has faced previous fraud accusations unrelated to FBG. This veil of secrecy only deepens the unease over a financing web already described by some lenders as “impenetrable”.

Private credit’s wall of money

The timing is no accident. Private credit funds — non-bank institutions managing trillions in dry powder — have filled the void left by regulated banks retreating from SME and mid-market lending. Attracted by the asset-backed nature of trade and inventory finance, these investors perceive a chance to capture high, uncorrelated returns.

FBG, however, has reportedly been willing to pay 30 per cent interest on inventory finance and 15 per cent or more on factoring and reverse factoring. For some, this looks less like efficient working capital management and more like a distress signal. As one investor put it: “When a borrower pays that much for liquidity, the question isn’t what the yield is, but whether you’ll ever get repaid.”

Double financing?

Allegations have also surfaced of possible double financing of invoices, a red flag in any trade finance structure. Standard due diligence — checking lien filings and secured collateral positions — should guard against this. That such suspicions even exist underscores the difficulty of navigating FBG’s convoluted corporate structure, populated by special purpose entities (SPEs) and intercompany transactions that leave observers likening the web to a “dog’s breakfast”.

Debt, debt, and more debt

At the strategic level, FBG’s debt-funded acquisition spree raises its own concerns. Using leverage — on balance sheet and off — to assemble a patchwork of aftermarket auto businesses may create scale, but also fragility. For a prudent credit committee, the reliance on opaque financing and off-balance sheet obligations should have spelled “caveat emptor”. Yet in a world where private lenders must deploy capital, caution often loses out to the pressure of yield.

Lessons from Greensill, without the taint

FBG is not Greensill. Nor is it Stenn. The company’s lenders have not faced allegations of fraud, nor has the broader trade finance industry been discredited by its actions. But the case may nevertheless prompt a pause in the growing popularity of SCF and factoring, much as Greensill’s collapse did in 2021.

That would be unfortunate. These tools, when applied responsibly, remain among the most important liquidity-enhancing and risk-reducing mechanisms in modern commerce. The danger is not in their existence, but in their exploitation by borrowers willing to pay usurious rates and investors eager to capture yield without sufficient scrutiny.

A canary for private credit

In the final analysis, First Brands Group may prove to be more than a struggling roll-up of car parts. It may become a canary in the coal mine for the private credit boom. The industry prides itself on rigorous structuring and risk-adjusted returns uncorrelated to equities. But if investors find themselves financing labyrinthine entities at 30 per cent interest — and questioning whether collateral is even singular — the promise of “uncorrelated yield” may give way to the reality of correlated losses.

When the whole mess is greater than the sum of its car parts, the lesson is not to abandon trade finance. It is to deploy it with transparency, discipline, and respect for its proper purpose. Otherwise, the next credit debacle may be built not in banks, but in the shadows of private credit’s vast, eager wall of money.