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Key Insights: The latest fallout from the collapse of auto parts company First Brands was unexpected, as Western Alliance had previously expressed confidence in its contract with Jefferies.
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Supporting Information: The Jefferies affiliate paid more than $211 million of its $337 million in debt when Western Union extended the loan last fall.
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Looking ahead: Western Union believes it will win its case against Jefferies and recover the full $126 million, but said the legal process will take time to resolve.
The high-profile bankruptcy of auto parts company First Brands Group has resurfaced.
Western Alliance Bank Corp. announced Friday that it is suing Jefferies Financial Group after Jefferies affiliates backed earlier guarantees that they could pay the balance of a large commercial loan. The loans were secured by accounts receivable from the now-defunct First Brands, which was accused of fraud.
Phoenix-based Western Alliance lost a total of $126.4 million in balances, reversing its previous commitment to its contract with Jefferies.
On Friday, Western Alliance CEO Kenneth Vecchione said Jefferies told his bank last week it would stop paying, which he called “surprising” and “highly unusual.”
“Frankly, in my entire banking career, I have never seen a breach of contract that intentionally jeopardizes the reputation and operational integrity of a counterparty, forcing future banks, customers and partners to seriously re-evaluate their reliance on that organization’s commitments,” Vecchione said Friday.
Western Alliance’s lawsuit, filed earlier in the day in New York state court, accuses Jefferies and several partners of breach of contract and fraud, claiming the defendants “knew they had no intention of repaying the loan in full.”
Jefferies said in a written statement that the bank reserves the right to conduct an audit of the deposits received from Western Union. Jefferies added that its affiliate “acts at all times in good faith and in good faith toward the bank.”
“Unfortunately, First Brands and its leadership committed massive and well-disguised fraud,” Jeffries said.
Jeffries also said he believes the Western suit is “without merit” and “will be vigorously defended.”
The Western Alliance suit marks another A blow to banks from the private credit industry. a series Concerns about credit losses began last fall Regarding the exposure of traditional financial institutions to non-bank lenders. While the banks’ personal credit-related assets appear to be largely underperforming, moves like West Union’s could lend credence to investors’ doubts.
First Brands first raised fears when it filed for bankruptcy in September amid allegations of fraud. Jefferies, through its affiliate Point Bonita Capital, the asset management arm of Leucadia, had invested in the company’s earnings.
Resulting from the collapse of the first brands Also a First Citizens Bank cost share At North Carolina and South State Bank in Florida, which reported related charges of $82 million and $32 million, respectively, in October.
In October, Western Union agreed to extend a loan it had made to a Point Bonita Capital fund that had ties to the auto parts company.
“Jefferies has publicly stated that they feel confident in Point Bonita’s ability to pay off all of its debt in the near term, due to various assets in addition to acquisitions related to the First brand,” Vecchione said during the company’s third-quarter earnings call in October. “Jeffries remains confident and so do we.”
Jefferies remained under contract as of last month, Vecchione said Friday, and has paid more than $211 million in debt.
Western Union also announced Friday that it is moving to close a $126 million credit hit. The bank said it is pursuing $50 million in collateral gains, as well as $50 million in “year-round spending initiatives that do not impair growth or operating capacity,” Vecchione said.
The remaining $26 million in cuts is still under review, Vecchione said, but he expects that amount “either through growth, pricing initiatives, future stock repurchases and other fee and expense programs.” He said the bank will have more details when it reports its first-quarter earnings call.
Mike Mayo, a Wells Fargo Securities analyst, called Western Alliance’s loss a “head-scratcher” in a Friday note, given the timing and the bank’s earlier favorable disclosures.
Phoenix Bank’s stock fell as much as 15% on Friday, though it regained some ground later in the day.
Trust Securities analyst David Smith wrote in a note that the $126 million loss was “large but manageable.”
“The loss is still a black eye for a bank that already is Dealing with significant value discounts To assume complexity and credit risk, he wrote. “The loss of $1.2 billion in market cap on a loss of $126 million clearly reflects fear that there is more to come.”
Vecchio said Friday that Western Union has an additional $330 million in asset-based lending exposure, excluding debt related to Prime Brands.
Still, the bank on Friday stuck to its previous guidance on credit quality for the year.
This event Not the first credit-related snafu in the Western bloc In recent months. In August, the bank sued entities affiliated with real estate firm Cantor Group to recover $100 million, alleging the borrowers fraudulently breached their loan agreements with the bank. Western Union took a $30 million reserve in the third quarter to manage potential loan losses.
Vecchione said Friday that there is a key difference between Prime Brands and Contour. Jefferies has clearly said it won’t pay the debt, and the collateral behind the first brand exposure is worthless, he said. Cantor’s case, by contrast, is tied to existing properties that are currently being reassessed.
Western Alliance believes it will win its case against Jefferies and recover the full $126 million, Vecchione said. But he noted that because of the legal process, “everything we get back will be on the street.”
