Western Alliance, opens new tab announced on Friday that it had sued investment bank Jefferies Financial, opens new tab for not finalizing payment of $126.4 million it owed to the regional lender for loans tied to bankrupt auto parts supplier First Brands Group.
Western Alliance shares dropped nearly 14 percent in early trade, the lowest since October. Jefferies slipped about 10 percent.
Western Alliance stated that it filed a complaint in the New York Supreme Court against Jefferies and others for “breach of contract and fraud” for “conduct related to a commercial loan collateralized by accounts receivable purchased from First Brands Group”.
Western Alliance CEO Kenneth Vecchione said on an analysts’ call, “I can’t tell you what’s behind Jefferies’ motive.”
In response, Jefferies said in a statement, “We regret that the Bank, as well as a range of lenders to and around First Brands, will suffer losses as a result of this fraud. We believe that the lawsuit is without merit and it will be defended vigorously.”
However, Jefferies has come under sharp scrutiny over its lending standards and risk appetite following the collapses of British lender Market Financial Solutions and First Brands.
Investors are suing Jefferies, claiming the firm fooled them into investing in a fund associated with First Brands, which owed the Jefferies’ Leucadia Asset Management arm about $715 million of receivables.
Brian Finneran, Truist Securities Managing Director, said, “The narrative on First Brands is just getting so much worse, and now the question is shifting to whether everyone will have another round of losses.”
Western Alliance reported that under an October agreement, Jefferies had agreed to fully prepay the loan principal by March 31.
Therefore, after the most recent payment of $42.1 million on January 15, Jefferies told Western Alliance it would not receive the final two principal payments due in the first quarter of 2026.
Western Alliance CEO Vecchione told analysts, “In my entire banking career, I have never witnessed a breach of contract that so deliberately places the reputation and operating integrity of a counterparty at risk, forcing future banks, clients, and counterparties to seriously reevaluate the dependability of that organization’s commitment.”
The forbearance agreement that the companies entered into is a short-lived order in which the lender agrees to defer or make loan payments over a specified period rather than put the loan into default.
Western Alliance indicated that it will record a charge-off of the full remaining balance of the loan, which is $126.4 million, and take measures to recover the loss.
J.P. Morgan analyst Anthony Elian added that it would be important that the growth profile, along with the earnings profile past the first quarter, be virtually insensitive to the charge-off.
Vecchione reported, “The realization of securities sale gains, supported by planned operating expense reductions, should provide an aggregate offset of $100 million. We are evaluating other pathways to close the remaining $26 million gap.”
Sean Dunlop, Banking Analyst at Morningstar, said, “The market is skittish about private credit risks, so the knee-jerk reaction (in Jefferies’ shares) isn’t altogether surprising, but looks overstated for a risk that should be, at this point, fairly well understood.”
Dunlop stated, “It seems unlikely that Jefferies would suspend those payments if it didn’t expect its net exposure after litigation to be lower than the $126.4 million owed—particularly since the firm looks well capitalized and has what we view as a manageable debt load.”
Jefferies recorded a fourth-quarter pre-tax loss of $30 million in January on its investment in the fund, Point Bonita, which has exposure to First Brands.
Its indirect investments in the Point Bonita fund were 5.9 percent or $43 million of the fund’s accounts receivable acquired by First Brands and a $2 million interest in bank loans of the auto-parts supplier on the Apex platform of Jefferies Finance.
That analysts added that it brings the likelihood of further writedowns as Jefferies reports its first-quarter earnings later this month. First Brands filed for bankruptcy protection in September after lenders probed irregularities in its financial reporting. According to the court filings, the company registered liabilities worth $11.6 billion.
