Navigating the Crossroads: First Brands' Restructuring Risks and Distressed Debt Opportunities

The auto parts industry, long a bellwether for industrial resilience, now faces a pivotal moment as First Brands Group, LLC (FBG) teeters on the brink of restructuring or bankruptcy. With a $6 billion debt pile and a Fitch Ratings downgrade to 'B'—four steps into junk territory—the company's financial fragility has sparked a frenzy among distressed debt investors. This article examines the interplay of risk and opportunity, drawing on historical case studies and current market dynamics to outline strategic positioning for investors.

A Debt-Driven Perfect Storm

FBG's financial distress stems from a combination of structural and cyclical challenges. Fitch's downgrade in September 2025 followed a March 2024 rating cut from 'BB-' to 'B+', reflecting deteriorating leverage metrics and a debt structure exacerbated by off-balance sheet financing. According to Bloomberg, 70% of FBG's revenues are funneled through third-party factoring arrangements, obscuring true liquidity and amplifying creditor concerns Troubled Auto-Parts Firm First Brands Goes Quiet as Loans Plunge^[2]. The company's $2 billion 2027-due term loans, now trading at under 50 cents on the dollar, exemplify the market's skepticism. Meanwhile, junior debt has plummeted to below 20 cents, signaling a potential cascading failure in its capital structure Troubled Auto-Parts Firm First Brands Goes Quiet as Loans Plunge^[2].

The company's reliance on off-balance sheet financing has compounded its challenges. As noted by Fitch, FBG's aggressive acquisition strategy and high leverage have left it vulnerable to refinancing risks, particularly with $4.5 billion in debt maturities scheduled for 2027 First Brands, Creditors Explore Financing Options With Advisers^[1]. This “maturity wall” has forced FBG to pause refinancing efforts and engage advisors like Weil Gotshal & Manges and Lazard to explore restructuring options UPDATE 1: First Brands Working With A&M as FA^[5].

Investor Strategies: From CDS Bets to QoE Scrutiny

Distressed debt investors are adopting a spectrum of strategies to navigate FBG's uncertainty. Apollo Global Management, a key player in the space, has maintained a year-long credit default swap (CDS) short position, effectively hedging against potential defaults without directly shorting equity First Brands, Creditors Explore Financing Options With Advisers^[1]. This move, which has cost Apollo significant premiums, underscores the firm's conviction in FBG's credit risk. Similarly, an ad hoc group of term lenders, advised by Gibson Dunn & Crutcher, is preparing for restructuring scenarios, signaling a shift from passive observation to active contingency planning Troubled Auto-Parts Firm First Brands Goes Quiet as Loans Plunge^[2].

A critical juncture for FBG—and its creditors—lies in the Quality of Earnings (QoE) report being prepared by Deloitte. Expected by late October 2025, this report will assess the company's financial health and operational viability, potentially determining its access to debt markets Troubled Auto-Parts Firm First Brands Goes Quiet as Loans Plunge^[2]. Investors are closely monitoring its release, as a weak QoE could accelerate restructuring timelines or trigger bankruptcy filings.

Lessons from the Auto Parts Sector

Historical case studies in the auto parts industry offer instructive parallels. In 2018, Tenneco's $5.4 billion acquisition of Federal-Mogul—a troubled supplier with $6 billion in debt—demonstrated how strategic buyouts can unlock value. By integrating Federal-Mogul's assets and later spinning off part of the business as Driv, Tenneco generated substantial returns for Carl Icahn's enterprise Distress Investing: A Tale of Two Case Studies^[3]. Similarly, Blackhawk Automotive Plastic's 2022 bankruptcy, guided by MorrisAnderson, resulted in a full repayment of senior debt and a sale to a Canadian supplier, preserving 800 jobs and operational efficiency Selling a Distressed Auto Supplier in a Contentious Bankruptcy^[4]. These examples highlight the importance of flexible financing and proactive restructuring in distressed scenarios.

Conversely, the 2007 Terra Firma acquisition of EMI Music—a $4.2 billion leveraged buyout—serves as a cautionary tale. Over-leveraged and structurally impaired by digital disruption, EMI's debt-heavy profile left it unable to adapt, culminating in asset sales by Citibank by 2011 Distress Investing: A Tale of Two Case Studies^[3]. This case underscores the risks of conflating cyclical dislocation with structural disruption—a distinction critical for investors evaluating FBG.

Strategic Positioning in a High-Yield Environment

For 2025, distressed debt strategies in the auto parts sector are evolving. Passive approaches, such as purchasing deeply discounted debt with the expectation of recovery, remain viable given FBG's tangible asset base (factories, equipment). Active strategies, including debt-to-equity conversions or operational turnarounds, require deeper engagement but offer higher potential returns. Deloitte's 2025 Restructuring Outlook notes that rising interest rates and regulatory shifts are likely to increase demand for restructuring solutions, particularly in industrials and consumer discretionary sectors Turnaround and Restructuring Outlook 2025 | Deloitte US^[6].

Investors should also consider the role of private credit managers and active lenders. Bridge loans and covenant-light financing, as seen in the Ontex case study, can provide distressed companies with breathing room to restructure Distress Investing: A Tale of Two Case Studies^[3]. For FBG, a preferred equity raise or liability management exercise (LME) could restructure its 2027 maturity wall without triggering bankruptcy. However, such efforts depend on creditor cooperation and a credible QoE report.

Conclusion: A Calculated Crossroads

First Brands' situation embodies the dual-edged nature of distressed debt investing. While its financial risks are acute, the auto parts sector's tangible assets and historical precedents suggest opportunities for value creation. Investors who act early—whether through CDS positions, QoE analysis, or restructuring partnerships—stand to benefit from a potential turnaround or orderly reorganization. However, structural challenges, such as the transition to electric vehicles and supply chain disruptions, necessitate a nuanced approach. As Deloitte notes, the 2025 restructuring landscape will be shaped by macroeconomic pressures and sector-specific dynamics, making due diligence and flexibility paramount Turnaround and Restructuring Outlook 2025 | Deloitte US^[6].

For now, the market watches FBG's October QoE report with bated breath. The outcome could redefine not only the company's trajectory but also the broader strategies of distressed debt investors in an era of heightened industrial volatility.