From "Monthly Positive Returns" to Explosion: Jefferies' Fund Faces Redemption Wave Due to First Brands Bankruptcy

Media reports indicate that Point Bonita Capital, a fund under Jefferies Financial Group Inc., has recently come under scrutiny due to its deep holdings in the suddenly collapsed auto parts supplier First Brands Group.

This crisis has completely disrupted Point Bonita's previously stable operations, leading institutional investors who had long held the fund for its stable returns to withdraw their investments. According to insiders, those who have submitted redemption requests include BlackRock Inc., the asset management division of Morgan Stanley, Texas Treasury Safekeeping Trust Co., and Singapore's sovereign wealth fund.

Prior to this, Point Bonita was known for its stable performance. In an investor letter from April this year, the fund even highlighted "percentage of positive return months: 100%" as its most prominent feature. Fund manager Ross Berger, a 15-year veteran at Wells Fargo & Co., has achieved annualized returns of 7.56% to 9.38% since founding Point Bonita in 2019. Even within the financial circle, this fund had remained relatively low-profile—until the First Brands incident forced it into the spotlight.

Currently, market concerns regarding this incident are still brewing. JPMorgan CEO Jamie Dimon warned that the collapse of First Brands may be just one of "many cockroaches" in the credit market, suggesting that similar risks may extend beyond just this one case.

Jefferies stated that its hedge fund division Leucadia, which manages Point Bonita, will comply with investors' redemption requests while dealing with the fallout from First Brands' assets, and will make payments in installments. Investors will receive redemption payments over four quarters, until October 2026.

In a statement released by Jefferies on the evening of October 12:

"This arrangement means Point Bonita will have over a year (if necessary) to fully realize the value of the remaining assets in its portfolio."

"We were deceived"

According to media reports, Jefferies had just held an investor day event in New York last week, attempting to boost investor confidence, but the firm is frustrated by the market's aggressive sell-off of its stock due to the Point Bonita incident. Executives believe the market reaction is excessive, as Point Bonita is just one of 19 funds under the Leucadia asset management division.

Insiders revealed to the media that their view is—at worst, this $1.9 billion fund may be forced to liquidate; if First Brands' restructuring is not as bad as imagined, the fund may still survive. Regardless of the outcome, Jefferies continues to operate as usual. **

Richard Handler, CEO of Jefferies, stated at the investor day,

"Personally, we feel we were deceived,"

"I don't think this incident is the canary in the coal mine."

However, Jefferies is now facing external scrutiny regarding its regulatory Point Bonita investment strategy. Wall Street analysts estimate that Jefferies may directly incur losses of up to $42.5 million due to its own investment in the fund. Although this loss remains within a manageable range, Jefferies executives emphasize that they are working tirelessly to recover every penny.

Handler stated,

"We will work day and night to recover the funds we believe are rightfully ours—these funds come from the high-quality receivables we purchased, for which we have paid and hold on behalf of stakeholders,"

"We take this matter very seriously."

In addition, the First Brands incident has brought a series of other troubles to Jefferies. The bank had assisted First Brands in marketing loans, and some investors complained that they were not adequately informed about the company's use of short-term financing before investing. Jefferies also owns a collateralized loan obligation (CLO) management company called Apex Credit Partners, which holds some of First Brands' loans—although the bank stated that its risk exposure in this part is "very limited."

Many investors are concerned that this incident indicates that the risks of "free lending" debt transactions that have accumulated over the past few years are beginning to manifest, making them reluctant to view the Point Bonita incident as an isolated case. Morgan Stanley analyst Ryan Kenny pointed out that after the investor day event, Jefferies still had several unanswered questions regarding First Brands, including whether they could have "reduced risk earlier."

"Rapidly Unbalanced"

Some questions focus on Berger himself—who managed a proprietary investment portfolio of $11 billion during his tenure at Wells Fargo.

In the investment presentation aimed at Point Bonita clients, Berger's previous position at Wells Fargo was described as: investing in bonds, bank debt, leveraged loans, credit default swaps, and "receivables" similar to his tasks at Point Bonita.

However, sources familiar with its business operations revealed to the media that the department's actual transactions in true receivables investments were very limited, with some business concentrated on investment operations that did not involve holding receivables themselves.

In the Point Bonita portfolio, about a quarter, or approximately $3 billion in assets, is linked to the so-called "trade financing agreements" related to First Brands. In some of these transactions, First Brands would receive funds in advance from investors like Point Bonita, in exchange for which the investors would receive future payments from retailers (such as Walmart Inc. and AutoZone Inc.) The right to collect payments.

Since First Brands filed for bankruptcy on September 28, a special committee has been investigating whether the company has pledged the same collateral to different creditors. This means that payments owed by Walmart and other First Brands customers may have also been sold to other funds.

While First Brands' customers (such as Walmart) have investment-grade credit ratings, the automotive parts supplier itself has a rating of only B, which falls into the junk bond category's fifth level. In the first public statement regarding the incident, Jefferies acknowledged that First Brands was the "service provider" transferring payments to investors (such as Point Bonita), but the company has stopped transferring funds since September 15.

According to trade finance experts, this arrangement is extremely rare and highly risky. Lois Duhourcau, CEO of Novicap, a platform providing end-to-end working capital solutions for small and medium-sized enterprises, said,

"In the investment-grade market, it is common for clients to act as payment service providers, but once the rating is lower, this practice is almost unheard of."

"If the service provider is also a target of creditor claims, the interests of both parties can quickly become unbalanced."

Risks Extend Beyond First Brands

First Brands is not the only "black box" company that Point Bonita has bet on. According to insiders, the fund has also provided a $500 million trade finance line to a low-profile commodity trading company named Radiant World. This company has nearly grown tenfold over the past decade and has become one of the largest commodity traders in the world for iron ore (second only to oil).

Earlier this month, media reported that Radiant World has become an important trading partner of commodity giant Glencore, and it also has business dealings with Cargill.

According to an investor letter seen by the media, as of April, Point Bonita listed Glencore and Cargill as its first and second largest risk exposure targets, respectively.

According to Bloomberg, the potential risks posed by Radiant World have led Glencore to form a dedicated team of traders and risk managers to closely monitor its trading risks with the company.

A person close to Glencore told the media that the company is not aware of any direct relationship with Point Bonita—however, in trade finance structures, the actual payment company often does not know who holds the ownership of these accounts receivable invoices.

Trade Finance

The media reported that Jefferies' executives have shown no remorse regarding the matter. CEO Richard Handler and President Brian Friedman continue to focus on the bright performance of the next quarter rather than the potential credit risk "cockroaches." However, regardless of the final outcome of the First Brands bankruptcy case, whether or not approximately $2.3 billion in funds "vanished into thin air" as alleged by a creditor, this incident is likely to leave a lasting shadow in the trade finance sector, much like the trauma left after the Greensill Capital collapse in 2021. Greensill was a large platform that connected investors with companies seeking short-term financing.

Craig Bergstrom, Chief Investment Officer of Corbin Capital Partners, which focuses on investing in hedge funds, stated,

"The history of trade finance funds is not glorious, and there have been many very bad outcomes. In practice, these funds often provide financing to high-risk borrowers in pursuit of higher returns to cover their own high operational costs."

On the other hand, some industry insiders believe that the issue lies not in the asset class of "trade finance" itself, but in low-quality borrowers taking advantage of investors chasing high yields. Duhourcau, CEO of Novicap, stated,

"Trade finance is a field with a history of hundreds of years, which has long proven to operate very robustly,"

"For funds, this was originally a good opportunity to achieve considerable returns, but some bad actors exploited investors' enthusiasm for high yields."