Corporate Cash Flow Misrepresentation and Supply Chain Vulnerabilities: Lessons from the First Brands Collapse

The collapse of First Brands Group, a major supplier of automotive parts, in September 2025, has exposed a systemic crisis in corporate finance and investor due diligence. The company's bankruptcy, with liabilities estimated between $10 billion and $50 billion against assets of just $1 billion to $10 billion, underscores the dangers of opaque financial structures and the illusion of strength in balance sheets according to K2 Partners analysis. This case study reveals how supply chain financing mechanisms, when misused, can conceal catastrophic risks, while also highlighting the urgent need for rigorous cash flow scrutiny in manufacturing sector investments.

The Hidden Risks of Off-Balance Sheet Financing

First Brands' financial architecture relied heavily on off-balance sheet tools such as invoice factoring and supply chain finance. These arrangements allowed the company to secure immediate liquidity by selling receivables to third parties or using fintech platforms like Raistone to defer liabilities as documented by K2 Partners. By classifying these obligations as "Customer Factoring" and "Third-Party Factoring," the firm avoided traditional debt reporting, creating a false impression of financial health according to DocCredit research. For instance, its accrued liabilities from third-party factoring alone reached $2.3 billion, while unsecured supply chain financing totaled over $3 billion as reported by DocCredit.

Such practices, however, masked a precarious reality: First Brands' annual debt servicing costs ($900 million) exceeded its EBITDA ($1.133 billion), signaling a liquidity crisis long before bankruptcy according to DocCredit analysis. The company's reliance on off-balance sheet financing also created a "debt-securitization pyramid," where layers of opaque debt magnified contagion risks across its network of lenders, including UBS O'Connor and Jefferies as detailed in Economy AC reporting. This structure, as one expert notes, "allowed the firm to borrow against receivables it could not collect, turning collateral into a house of cards" according to Economy AC analysis.

Investor Due Diligence: A Systemic Failure

The collapse of First Brands was not merely a corporate failure but a failure of investor oversight. Lenders and creditors, including the UBS O'Connor working capital fund (30% exposure) and Jefferies ($715 million in direct exposure), relied on fragmented borrowing base reports and borrower-produced collateral data rather than real-time control over cash flows according to Rithm Capital reporting. As Rithm Capital observed, the absence of a "consistent control framework" around ownership evidence and servicing oversight left lenders vulnerable to misrepresentation as Rithm Capital detailed.

Compounding this, the complexity of First Brands' financing arrangements-spanning multiple jurisdictions and involving over 200 lenders-made it impossible to aggregate exposure or verify collateral integrity as Carta reported. The firm's use of bankruptcy-remote special purpose vehicles further obscured accountability, enabling disputes over the legitimacy of its filings according to Cov.com analysis. This lack of transparency, as the Financial Accounting Standards Board's 2022 reforms failed to address, allowed the firm to conceal its true liabilities according to K2 Partners.

Regulatory Responses and the Path Forward

The fallout from First Brands' collapse has spurred regulatory action. In the EU, the Corporate Sustainability Reporting Directive (CSRD) now mandates detailed disclosures on environmental and social risks within supply chains according to Tradeverifyd. Similarly, the U.S. Uyghur Forced Labor Prevention Act (UFLPA) requires importers to verify their supply chains for forced labor, pushing firms to adopt digital tools like Tradeverifyd for compliance as Tradeverifyd reports. These measures, while focused on ethical sourcing, also enhance financial transparency by forcing companies to map and standardize supplier data according to Tradeverifyd analysis.

However, regulatory efforts remain insufficient. Experts argue for stricter accounting standards to mandate the inclusion of off-balance sheet liabilities in financial reporting according to K2 Partners. Additionally, calls for shared collateral registries-systems that track duplicate pledges and aggregate lender exposure-have gained traction to prevent future crises as Carta reported. For instance, Rithm Capital advocates for "portable control stacks" that embed real-time monitoring of collateral across facilities, reducing the risk of double financing according to Rithm Capital.

Conclusion: A Call for Vigilance

The First Brands collapse is a stark reminder of the fragility of modern supply chains and the perils of financial opacity. Investors must now prioritize cash flow scrutiny over balance sheet metrics, leveraging AI-powered invoice verification and continuous collateral monitoring according to ABF Journal. Regulators, meanwhile, must close loopholes in accounting standards and enforce transparency in private credit markets. As the manufacturing sector grapples with the aftermath, the lesson is clear: in an era of complex financing, the true measure of a company's health lies not in its balance sheet but in the clarity and integrity of its cash flows.