Western Alliance sues Jefferies over $126 million payment tied to First Brands loans

By Ateev Bhandari, Pritam Biswas and Arasu Kannagi Basil

March 6 (Reuters) - Western Alliance WAL.N said on Friday it had sued investment bank Jefferies Financial JEF.N for not completing payment of $126.4 million it owed to the regional lender for loans tied to bankrupt auto parts supplier First Brands Group.

Shares of Western Alliance plunged about 14% in early trading, hitting their lowest since October. Jefferies slipped nearly 10%.

Western Alliance said 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".

"I can't tell you what's behind Jefferies' motive," Western Alliance CEO Kenneth Vecchione said on an analysts' call.

"We are deeply disappointed by Jefferies' conduct."

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."

JEFFERIES UNDER SCRUTINY

Jefferies has come under sharp scrutiny over its lending standards and risk appetite after the collapses of British lender Market Financial Solutions and First Brands.

Investors are suing Jefferies, alleging the firm defrauded them into investing in a fund linked to First Brands, which owed Jefferies' Leucadia Asset Management arm about $715 million ​of receivables.

"The narrative on First Brands just getting so much worse and now the question is shifting to whether everyone will have another round of losses," said Brian Finneran, Truist Securities managing director.

AGREEMENT BREACHED

Under an October agreement, Jefferies had agreed to complete prepayment of the loan principal by March 31, Western Alliance said. However, 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.

"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," Western Alliance CEO Vecchione told analysts.

The forbearance agreement the companies signed is a temporary arrangement where the lender agrees to delay or reduce loan payments for a set period, instead of forcing the loan into default.

Western Alliance said it will record a charge-off for the entire remaining $126.4 million loan balance, along with actions to make up for the loss.

J.P. Morgan analyst Anthony Elian said it would be key that the growth profile, as well as the earnings trajectory beyond the first quarter, has very minimal impact from the charge-off.

"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," Vecchione said.

MARKET REACTION

"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," said Sean Dunlop, banking analyst at Morningstar.

"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 in January posted a fourth-quarter pre-tax loss of $30 million related to its investment in Point Bonita, the fund that has exposure to First Brands.

Its indirect investments in the Point Bonita fund were $43 million, or 5.9%, of the fund's accounts receivables purchased from First Brands, and $2 million interest in the auto-parts supplier's bank loans through Jefferies Finance's Apex platform.

That raises the prospect of additional writedowns when Jefferies announces its first-quarter earnings later this month, the analysts said.

First Brands filed for bankruptcy protection in September after lenders probed irregularities in its financial reporting. The company listed $11.6 billion in liabilities, according to court filings.