John Coteau (5:00)

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John Coteau (5:14)

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Ann Berry (5:20)

Two recent bankruptcies in the auto sector, First Brands and Trickolor, are raising big questions about how private credit operates. Now, these companies are not household names. I hadn't heard of one of them, and the other I hadn't thought about in many years. But their downfalls could mean the loss of billions of dollars and expose a complex web of debt structures and intermingling and put a spotlight on the private credit funds, propping them up. So let's start with First Brands. And I'm going to say the reason we're bringing this story up, it may seem obscure right now, but stick with us because there are reasons we think that we're going to keep covering this one over the next couple of weeks.

John Coteau (5:58)

Absolutely. So let's start with First Brands. It's a global conglomerate that manufactures auto parts. And I'm not familiar with these. I take the train. But it's brands like Autolyte spark plugs, Ank wiper blades. All right, so the company was founded in 2013, and it grew rapidly, using loans to acquire 15 competitors. And so we'll come back to that. And as of last year, the company said it employed 26,000 people, had sales of around $5 billion. And the company filed for bankruptcy last month. It had $10 billion in debt. Yesterday, its founder, Patrick James, stepped down. And new directors within the company are investigating accounting regularities tied to the company's complex financial arrangements and saying that debt collateral may have been quote commingled.

Ann Berry (6:41)

So many syllables and so many mentions of the word debt. So as I'm listening to this, John and I spent some time reading about this over the weekend. So, First Brands, multiple layers of financing, multiple layers of debt. And what's emerging in the reporting and the coverage of this is that lenders didn't really have a full picture of what exactly their borrower was doing as it was going out and raising all of this debt. And so the one word that I honed in on there is commingled. And I also look at the word layers of financing, Right? And those two things, frankly, create a pit in my stomach. Basically, what it seems as though First Brands was doing in one area of its capital structure was they were going out to lenders and saying, hey, lender, guess what? I've got this great customer, and the customer owes me X amount of dollars in revenue. Just Lend me the money, that amount of money until they actually pay up. Me. Pay me the cash. Right. And one of the problems that's unfolding here is investors are worried that First Brands gave that shtick to a bunch of different lenders, didn't disclose that they were going out to lots of different parties to basically get the same kind of debt on the same assets. And now the real concern, the alarm bells are ringing because it seems that maybe $2.3 billion of debt was raised this way, generating $2.3 billion of cash into the company, which maybe has now, quote, vanished.

Danielle DiMartino Booth (8:01)

Right.

John Coteau (8:01)

I keep hearing that it's vanished. And that sounds criminal.

Ann Berry (8:05)

Well, actually, it is. That's not just a turn of phrase because there are now reports that the Justice Department are investigating to find out what exactly has happened. And the word that kept coming up over and over and over again was debt. Right. So there's a specific kind of debt, which is when companies borrow against their accounts receivable. That's the promise that your customer is going to pay up. But there's other kinds of debt in first brands, too. $6 billion in high yield, affectionately known as junk debt, which actually sits on its balance sheet. That's where you tend to have the most visibility. It's other stuff that you structure cleverly and you have sitting off on your balance sheet that's really causing some anxiety. And I will just say that, looking at this, lots of folks are saying they're getting deja vu, that there are precedents in history that do not sit well with them as they think about this set of facts. Right.

John Coteau (8:54)

Well, they're saying, is this an auto parts company or is it becoming a finance company? So people are thinking back to Enron, which was a utilities company.

Ann Berry (9:02)

Yeah.

John Coteau (9:02)

But really it came down to was it giving out loans in a finance company? And just yesterday, I'm going to throw to a clip, you spoke. You spoke with Danielle DiMartino. Booth.

Ann Berry (9:12)

Yeah.

John Coteau (9:13)

And she had this to say about the situation.

Ann Berry (9:16)

Yeah.

Danielle DiMartino Booth (9:17)

If First Brands, which is just some. Who cares about air filters. If First Brands is our Enron and we are finding out every single day that it is a massive financing company. Yes, there are auto parts involved. But last night before I fell asleep, you know, one of the financing arms of this company said that $2.3 billion had up and vanished. Vanished. And I'm like, oh, this is so, so, so, so Enron or Tyco or WorldCom.

Ann Berry (9:51)

Interesting. So Danielle's seen a lot, John. So the fact that she's looking back and saying I'm having deja vu here was just a really one of the highlights of that conversation was actually getting her perspective on this.

John Coteau (10:00)

And this has made markets nervous because some of the banks that are affiliated with the lending here, Jefferies, UBS, BlackRock, they've been affected. And Jefferies stock fell 18% after these losses came out, thinking, are they going to have large exposure to this?

Ann Berry (10:13)

Right. So there's something about this that really is just starting to rattle folks. It is again, that sense of deja vu, an 18% drop in your stock price after news like this comes out is incredibly meaningful. There's a real red flag. So much so that the CEO actually had to come out and reassure investors into Jefferies that he actually thinks this contained and everything will end up being manageable. Also, just to give another sense, this Enron analogy, it's an important one because it reminds us of all the machinations and the way that this kind of behavior happened. Enron, though, at the time that its troubles were surfacing, you know, its peak market cap was $70 billion. At the time, it was the seventh largest publicly traded company in the United States. So just in terms of scale, I don't want to sort of overstate, but it's the substance of this that really matters. And the other issue here is trickle or Tricolor? Tricolor, the other company that has gone bankrupt, is also starting to utter another word that's giving people the jitters.

John Coteau (11:08)

That's right, subprime auto loans. Jamie Dimon commenting. We were talking about him earlier today on First Brands and Tricolor. He said, I probably shouldn't say this, but when you see one cockroach, there are probably more. Everyone should be forewarned on this one. So maybe the size and scale isn't that big, but. But they're starting to see little cockroaches. There might be more.

Ann Berry (11:28)

And JP Morgan in this issue, in this piece of it does seem to have some exposure to tricker law. Doesn't though seem to have was not involved in lending to First Brands. But the complexity of all of this is there are ricochet effects, there are ripples. And so what happens to one bank does tend to get attention from all the others. And what this is shining a light on is if folks don't do their homework, if folks get sold, for example, the same asset over and over again, this is where you run into issues. So we're going to keep watching this one because there's actually more to it than meets the eye. This is also one where I do think that the themes that are hidden in there are the kinds that make the market sit up and pay attention. So I think there are a lot of people quietly watching how this bankruptcy unfolds. Let's take a quick break and when we come back, why Domino's and Albertson stocks are up today and what it might say about consumer sentiment. Brew Markets Daily is sponsored by Public, the platform for those who take investing seriously. John, if you were to create a portfolio from scratch right here and now, what would you want to know?

John Coteau (12:27)

I mean, okay, at the very least, stocks, options, bonds and crypto.

Ann Berry (12:31)

Well, it's a good thing. Public combines a wide range of asset classes with the tools you need to build and manage your wealth. All of that plus Public has Alpha, an AI powered research assistant that can help you find the answers you're looking for.

John Coteau (12:41)

In fact, AI is woven into the entire experience of Public, from portfolio insights to earnings call recaps. Public gives you smarter context at every touch point.

Ann Berry (12:49)

Earn an uncapped 1% match when you transfer your old investment portfolio over to Public. Get started at public.com brewmarkets that's public.com brewmarkets full disclosures on public.com brewmarkets well, growing up, my family couldn't dine out much, but when we did, stuffed crust pizza at Pizza Hut was the ultimate treat. So I got to have a little trip down memory lane today while unpacking Domino's earnings, it just reported a healthy 5.2% US same store sales growth. That's a golden metric for restaurants, and it was a pretty good outcome. Now this was driven in part by the success of the Stuffed Crust Delight since its launch at Domino's this spring. But this also caught our eye because its performance was so much better than the other quick service concepts we've covered recently, folks like Carver and Sweetgreen. Those have been seen in customers paring back on eating out and their growth declining. Now, as well as innovating, the Pizza King ran a strong promotion. It was called Best Deal Ever, which let consumers get pizza for under 10 bucks with lots of toppings. And it rolled out a partnership with Doordash, which Domino's expects to see contributing more later this year. Despite this, Domino's did flag some warning signs about consumer sentiment. The CFO said on the earnings call that restaurant sales have visibly slowed in recent weeks. Well, taking note of that comment, I switched over to take a quick look at Albertson's earnings, also out today. And one of the reasons I love the markets and I love earnings season is you can go and find sort of pieces of a jigsaw puzzle and start putting them together to figure out what's going on at a larger scale. So in this instance, I wanted to see two slides of what I think are the same coin. In prior cyc, weakening of consumer sentiment often came with people just eating out less. But as a result, they were purchasing more groceries. And then within groceries, shoppers tended to buy cheaper brands. So I wanted to see if Albertsons are seeing this phenomenon happening right now. And sure enough, there are signs of consumer uncertainty there too. CEO Susan Morris said Albertsons shoppers are using more coupons, they're spending more on private labels, so read value. And they're also not splurging outside their essential purchases as much, despite the fact that Albertsons is trying to lure more purchasing by absorbing cost increases and keeping prices down. So between these two companies, the signs are starting to read difficult for consumers. Going to Domino's and Albertsons now. Both companies are trying to offset this risk. The pizza chain doing so with cost cuts. The grocer with more pharmacy and digital sales. For today, Domino's stock up nearly 4%. Albertsons up nearly 14%. We're going to keep watching because all of these are little pieces of the information puzzle and how consumer is doing. Well, it's 4:00pm on the east coast. The markets have closed and we don't have a ticker tape. So let's throw it over to our human ticker. John, thanks.

John Coteau (15:40)

It was a rocky day for the major indices on Wall Street. The S&P 500 finished down nearly 2.10 of a percent. The NASDAQ finished down 7.10 of a percent and the Dow finished up 4.10 of a percent. Another day, another commercial partnership with OpenAI. Today Walmart announced that its customers will be able to shop and purchase items directly on the ChatGPT platform using instant checkout, similar to recent arrangements with Etsy and Shopify. Additionally, on Walmart and Sam's Club websites, customers will be able to interact with ChatGPT in the search bar. Shares of Walmart were up nearly 4% today on the news.

Ann Berry (16:16)

Well, final thought on this one. It is the big week for bank earnings. We just unpacked what's going on at JP Morgan. Goldman Sachs also had its earnings results out today. Again, pretty healthy set of results. We saw that some with some others also. But there was a different piece of Goldman Sachs news that we wanted to flag and that actually announced yesterday and that is that the mighty bank is spending just under a billion dollars over the next couple of years buying Industry Ventures, which is an investor in venture capital firms and early stage startups. Now Industry ventures manages about $7 billion, which for Goldman Sachs is really not a lot of money. So why are they doing this? Well, one person's view, they're trying to go after two different things. Goldman Sachs too does not want to be left on the sidelines when it comes to getting involved in these big tech deals. And so gaining more SC more in that tech space by doing something like buying a big investor in the venture community is one way of getting into the flow a little bit more. The second thing here too, and we touched on it in our last story, is about continued access to private capital and private assets for retail investors. Banks are going to want to make sure that they're on the cutting edge of getting access to private investing vehicles out to more and more people. This to me, just another move in that direction. That's it for today's Blue Markets Daily.

John Coteau (17:32)

And Brew Markets Daily is hosted by Anne Barry and produced by John Coteau, Tarka, Belle Teef and Emily Milian. Our technical director is Uchena Waoghu and the president of Morning Brew Inc. Is Devin Emery.

Ann Berry (17:41)

Wake up tomorrow with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew Daily. See you back here tomorrow, same time, same place.