Massive investment in "First Brands Bankruptcy of US car parts company turns into a million-dollar grave for UBS investors

The bankruptcy of the US car parts supplier First Brands is also causing difficulties for UBS. A subsidiary has invested massively and is losing 350 to 500 million investment funds.

UBS is giving some of its investors a big write-down. This is due to the bankruptcy of the US car parts supplier First Brands. It has accumulated 11.6 billion dollars in debt to date, as Reuters quotes from court documents. However, further liabilities could emerge.

According to US media, UBS has invested 500 million dollars in First Brands via a subsidiary and its fund, 350 million are unsecured according to the NZZ and are therefore very likely to be lost.

First Brands was one of the major players in the US auto parts business. The company sold brakes, spark plugs, windshield wipers and much more that mechanics install in cars. First Brands financed its business partly through loans and partly through supply chain financing.

Non-transparent financing

Certain financial institutions packaged their loans to First Brands into funds and sold them on to investors. This makes it difficult to determine the full extent of the outstanding loans.

Supply chain financing is also considered non-transparent. In principle, the model consists of investors pre-financing deliveries - and collecting a premium for this. The company that raises money via supply chain financing does not have to list it in full as loans on its balance sheet, as the NZZ explains. This means that a company can be much deeper in the red than the open loans reveal.

The US judiciary is also investigating whether First Brands had certain deliveries financed several times, i.e. whether it had several investors pay for one service.

UBS subsidiary O'Connor has invested massively

UBS has invested in First Brands via the hedge fund company O'Connor. In the course of the investigations into the car parts company, the UBS subsidiary announced that one of its funds had invested over 30 percent in First Brands. 9.1 percent were direct investments, 21.9 percent indirect. The fund is therefore threatened with a massive loss.

This large risk contradicts the rule that UBS itself upholds that no more than 20 percent may be invested in a single position. UBS itself defends itself with the argument that the direct investments and the supply chain investments in First Brands are not the same position. However, both are affected by the insolvency of the car parts company.

Investments in loans to First Brands were apparently supported by enormous returns of up to 17 percent in 60 days, as reported by Finanz und Wirtschaft with reference to the New York Times. A profit of this magnitude - calculated over the course of a year, this would be an interest rate of over 100 percent - should be recognized as a warning signal, according to "Finanz und Wirtschaft". If the interest rate on a loan is that high, the risk of default must also be high.

Due to the financial mechanisms involved, the case is reminiscent of Greensill Capital - the collapse of this financial institution contributed significantly to the downfall of Credit Suisse. Greensill's core product was supply chain financing solutions, and one of its former managers subsequently founded another shadow bank through which the UBS subsidiary handled its investments in First Brands.

UBS faces no loss, but reputational damage

UBS has told various media outlets that it is currently clarifying which investors will lose money because of First Brands. It seems certain that UBS itself will not suffer any losses.

In any case, the reputational damage is more serious. Not only does UBS have to put up with the accusation that fund managers acting on its behalf disregarded security rules and have now caused UBS investors massive losses.

It is also in need of an explanation, as it is in the middle of selling its subsidiary O'Connor - which is responsible for the bad investments. The US company Cantor Fitzgerald, which is taking over O'Connor, now wants nothing more to do with the original purchase price. It is also piquant that the US Secretary of Commerce Howard Lutnick was CEO of Cantor Fitzgerald from 1991 until the beginning of 2025. In the worst-case scenario, the affair could therefore fall back on Switzerland.

"Finanz und Wirtschaft" has also raised the suspicion that UBS had known about the impending loss on First Brands loans for some time and therefore pushed ahead with the sale of O'Connor. Cantor Fitzgerald is now proposing to remove all First Brands positions from the deal.

In Switzerland, UBS has been negotiating higher capital requirements with the Federal Council for months. The investments in First Brands and related financial vehicles cast a poor light on UBS's risk management. This is grist to the mill of those who are calling for the bank to be more strongly secured with equity capital.