From "monthly positive returns" to sudden collapse: Jefferies-affiliated fund faces redemption wave due to First Brands bankruptcy

According to media reports, Point Bonita Capital, a fund under Jefferies Financial Group Inc., has recently come under the spotlight due to its heavy holdings in the suddenly bankrupt auto parts supplier First Brands Group.

This crisis has completely disrupted the previously calm operations of Point Bonita, and institutional investors who had held onto the fund for its stable returns are now choosing to withdraw their capital. Sources told the media that those submitting redemption requests include BlackRock Inc., the asset management division of Morgan Stanley, Texas Treasury Safekeeping Trust Co., and Singapore’s sovereign wealth fund, among others.

Previously, Point Bonita was known for its stable performance. In its April investor letter, the fund even highlighted “Percentage of Months with Positive Returns: 100%” as a key feature. Fund manager Ross Berger, a 15-year veteran of Wells Fargo & Co., has achieved annualized returns of 7.56% to 9.38% every year since founding Point Bonita in 2019. Even within financial circles, this fund has kept a relatively low profile—until the First Brands incident broke and forced it into the spotlight.

Now, concerns about the incident continue to fester in the market. JP Morgan CEO Jamie Dimon warned that the fall of First Brands may be just one of “many cockroaches” in the credit market, suggesting that similar risks might not be limited to this one case.

Jefferies stated that its hedge fund division Leucadia, which manages Point Bonita, will comply with investor redemption requests and make payments in installments while handling the problematic First Brands assets. Investors will receive redemption payments over four quarters, to be completed by October 2026.

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

“This arrangement means that Point Bonita will have more than a year (if necessary) to fully realize the value of its remaining portfolio assets.”

“We Were Duped”

According to media reports, Jefferies held an investor day in New York just last week to try to boost investor confidence, but internally, the bank is frustrated by heavy selling of its stock in response to the Point Bonita incident. Executives believe the market is overreacting, as Point Bonita is only one of 19 funds under Leucadia Asset Management.

Sources told the media that their view is—the worst-case scenario would simply be the forced liquidation of this $1.9 billion fund; if the First Brands restructuring is not as bad as feared, the fund might even survive. Regardless of the outcome, Jefferies carries on as usual.

Jefferies CEO Richard Handler said at Investor Day,

“Personally, we think we were duped,”

“I don’t think this incident is a canary in the coal mine.”

But Jefferies is now facing outside scrutiny over its oversight of Point Bonita’s investment strategy. Wall Street analysts estimate Jefferies may directly incur losses of up to $42.5 million from its own investment in the fund. Although the loss remains manageable, Jefferies’ top management emphasizes they are making every effort to recover every cent.

Handler said,

“We will work day and night to recover the money we believe rightfully belongs to us—funds that were paid for and are held on behalf of stakeholders from the purchase of high-quality receivables,”

“We take this matter extremely seriously.”

In addition, the First Brands incident has brought other troubles for Jefferies. The bank had helped First Brands promote its loans, and some investors complained they were not sufficiently informed about the company’s use of short-term financing before investing. Jefferies also owns a CLO manager called Apex Credit Partners that holds some First Brands loans—though the bank says its exposure here is “very limited.”

Many investors worry that this incident shows the risk of “free lending” debt deals built up over the past few years is now starting to erupt in a concentrated fashion, so they are unwilling to treat the Point Bonita case as an isolated event. Morgan Stanley analyst Ryan Kenny noted that after Investor Day, Jefferies still left several First Brands issues unaddressed, including whether they could have “reduced risk earlier.”

“Rapidly Unbalanced”

Some questions center on Berger himself—when he was at Wells Fargo, he managed a proprietary portfolio as large as $11 billion.

In investment presentations to Point Bonita clients, Berger’s Wells Fargo role was described as: investing in bonds, bank debt, leveraged loans, credit default swaps, and accounts receivable similar to his task at Point Bonita.

But sources familiar with the operations said the department’s actual trading of genuine accounts receivable was limited, with some business focused on investments that didn’t involve holding the receivables themselves.

About a quarter of Point Bonita’s portfolio, around $3 billion in assets, was linked to so-called “trade finance agreements” related to First Brands. In some of these deals, First Brands would receive funds upfront from investors such as Point Bonita, in exchange for investors getting the right to receive future payments from retailers like Walmart Inc. and AutoZone Inc.

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

Although First Brands’ customers (like Walmart) have investment-grade credit ratings, the auto parts supplier itself is rated only B, the fifth level of junk bonds. In their first public statement on the incident, Jefferies admitted that First Brands was the “servicer” passing payments on to investors like Point Bonita, but the company stopped transferring funds from September 15.

According to trade finance experts, such arrangements are extremely rare and highly risky. Lois Duhourcau, CEO of Novicap, a platform providing working capital solutions for SMEs, said,

“In the investment-grade market, allowing clients to act as payment servicers is common, but with lower ratings, this is almost unheard of,”

“If the servicer is also the subject of creditor claims, the interests of both parties quickly become imbalanced.”

First Brands Is Not the Only Hidden Risk

First Brands is not the only “black box” company Point Bonita bet on. Sources told the media that the fund also provided $500 million in trade finance to a little-known commodities trading company called Radiant World. Over the past ten years, this company has grown almost tenfold and is now one of the world’s largest iron ore (second only to oil) traders.

According to media reports earlier this month, Radiant World has become a key trading counterparty for Glencore and also does business with Cargill.

According to investor letters seen by the media, as of April, Point Bonita’s first and second largest risk exposures listed in its letter were Glencore and Cargill, respectively.

Bloomberg reported that the risks stemming from Radiant World had led Glencore to assemble a special team of traders and risk managers to closely monitor its exposure to the company.

A person close to Glencore told the media the company was unaware of any direct relationship with Point Bonita—however, in trade finance structures, the actual paying company often does not know who ultimately holds the invoices for their accounts receivable.

Trade Financing

Media reports say Jefferies’ top management has shown no remorse over this matter. CEO Richard Handler and President Brian Friedman are still focusing on strong earnings next quarter, rather than potential credit risk “cockroaches.”

But regardless of how First Brands’ bankruptcy ultimately turns out, or whether, as one creditor alleged, about $2.3 billion has “disappeared into thin air,” the incident is likely to cast a long shadow over the trade financing sector—much like the wounds left by the 2021 Greensill Capital blowup. Greensill was a large platform matching investors and companies seeking short-term funding.

Craig Bergstrom, Chief Investment Officer at Corbin Capital Partners, which specializes in hedge fund investments, said,

“The history of trade finance funds is not illustrious, with very poor outcomes on several occasions. In reality, these funds often end up lending to high-risk borrowers in pursuit of higher returns to cover their steep operating costs.”

In the view of some industry players, however, the issue is not with the “trade finance” asset class itself, but with low-quality borrowers taking advantage of investors’ eagerness for high yields. Duhourcau, CEO of Novicap, said,

“Trade finance is a centuries-old sector and has proven to be very robust over the long term,”

“For funds, this should have been a great opportunity for strong returns, but some bad actors exploited investors’ hunger for high yields.”

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