Systemic Risk in Auto Supply Chains: Lessons from UBS and Jefferies' Exposure to a Failing Supplier

The recent collapse of First Brands Group, a major auto parts supplier, has exposed a critical vulnerability in the financial architecture of supply chain financing. This case, involving significant losses for UBS and Jefferies, underscores the underappreciated credit risks embedded in sector-specific portfolios, particularly those reliant on opaque, off-balance-sheet structures. As the automotive industry grapples with the fallout, the broader implications for private credit markets and systemic stability demand urgent scrutiny.

The First Brands Crisis: A Case Study in Fragility

Jefferies' exposure to First Brands was staggering: its subsidiary, Point Bonita Capital, held $715 million in receivables tied to the supplier, sourced from retailers like Walmart and O'Reilly Auto Parts. When First Brands abruptly halted payments on September 15, 2025, and filed for Chapter 11 bankruptcy, Jefferies faced not only the loss of these receivables but also an additional $48 million in loans through its joint venture, Apex Credit Partners. UBS, too, was deeply entangled, with over $500 million in financing linked to First Brands, including claims through its O'Connor hedge fund.

The root of the crisis lay in First Brands' financial engineering. The company leveraged $6 billion in on-balance-sheet debt and an additional $2.3 billion in off-balance-sheet arrangements, including $800 million in unsecured supply chain facilities. These structures, designed to mask liquidity constraints, created a false sense of security for creditors. As one analyst noted in Inside the Black Box, "The complexity of First Brands' financing made it impossible to assess true risk until the payments stopped."

Systemic Risks in Private Credit: A Fed Warning

The First Brands case is not an isolated incident but a symptom of a broader trend. The private credit market, now exceeding $1.7 trillion, has grown rapidly, often at the expense of transparency. According to a report by the Federal Reserve, this expansion has been fueled by liquidity from traditional banks, even when they are not the original lenders. This indirect exposure creates a "black box" effect: banks face liquidity strains if defaults spike, yet their balance sheets may not reflect the full extent of their involvement.

The Fed has sounded alarms about the concentration of risk in private credit. Top fund managers like Oaktree, Ares, and Blackstone hold a disproportionate share of the sector's assets, and a significant portion of dry powder is concentrated among the top five managers. If these funds face distress or if borrowers default en masse, correlated losses could amplify systemic risks. UBS and Jefferies, as major underwriters and lenders, are particularly vulnerable if their portfolios are overexposed to similar structures.

Lessons for Investors and Regulators

The First Brands collapse highlights three critical lessons. First, transparency is paramount. The opacity of off-balance-sheet financing and layered collateral arrangements obscured the true fragility of First Brands' operations, as reporting on the lender clash has made clear. Regulators must mandate clearer disclosure requirements for private credit instruments, particularly those involving supply chain financing.

Second, diversification is no longer a luxury but a necessity. The concentration of risk among a few large managers and sectors like automotive supply chains increases the likelihood of correlated defaults. Investors must scrutinize the geographic and industry diversification of private credit funds, avoiding overreliance on opaque collateral.

Third, liquidity management must evolve. Traditional banks and non-bank lenders alike need to stress-test their portfolios under scenarios of sudden payment halts, as seen with Jefferies' $715 million exposure. The Fed's warning that private credit could strain liquidity during a financial shock underscores the need for robust contingency planning.

Conclusion: A Call for Vigilance

The automotive supply chain crisis involving UBS and Jefferies is a wake-up call. It reveals how the pursuit of yield in private credit can lead to systemic vulnerabilities, particularly when layered with opaque financing structures. As the Fed and market participants grapple with the implications, the need for enhanced transparency, diversification, and liquidity safeguards has never been clearer. For investors, the message is unequivocal: underappreciated credit risks in sector-specific portfolios demand not just attention but action.