A lot has been written (and continues to be—proof positive right here) about the First Brands bankruptcy and its various elements. The complex debt structure of First Brands, mixed with the allegations of fraud, has led to a range of issues for lenders to consider.  (EDITOR’s NOTE: SFNet’s Supply Chain Finance Convergence, which will be held in New York on March 3, will also cover recent prominent frauds as well as SFNet’s Fraud Task Force recommendations.)

A company may work with a factor, with advance or maturity factoring, with recourse or without recourse, with or without notification to customers, in addition to an asset-based facility or without one.  Or, a company might have a customer who has established a supply chain program.  The company will want to have an asset-based facility that permits it to sell its receivables due from that customer using the customer supply chain program, so the company gets paid earlier than it otherwise would under the extended terms offered by the customer.  Or, a company may itself establish its own supply chain program, so that its suppliers may sell the receivables owing by the company through the program and it can extend payment terms with its suppliers. Or, a company may have a line of business that uses a securitization facility.

Less common, perhaps a company has off-balance sheet inventory financing using multiple special-purpose vehicles.

First Brands used not one or two of these, but almost all of them: factoring, supply chain finance programs, structured inventory financing and, in addition, an asset-based facility.  And that doesn’t include the series of secured term loans that the company has (including first lien, second lien and “side car” loans).  It does seem to raise the question of just how far a complicated capital structure might go.

For our purposes here, the focus will be on the receivables purchase facilities and to review how asset-based lenders have typically addressed, or perhaps should address, the relationship between such receivables financings and the asset-based facility in the asset-based loan documentation.

While the terms of loan documents can never substitute for the careful monitoring and administration of credit facilities, particularly setting up clear cash management structures and tracking cash balances and invoices to receivables, the terms of the loan documents may provide a basis for the asset-based lender to analyze and understand how its borrower is using another form of receivables financing in addition to the asset-based lending facility and by requiring compliance with those terms may facilitate identifying when there is an issue.

Review of First Brand Receivables Financings

First Brands commenced its Chapter 11 case in the United Stated Bankruptcy Court for the Southern District of Texas in Houston on September 24, 2025 as to certain First Brands companies and September 28, 2025 as to others.  With the filing of the petitions, on September 29, 2025, the debtors filed the Declaration of Charles M. Moore in Support of Debtors’ Chapter 11 Petitions (the “Declaration”).  Charles Moore, a managing director at Alvarez & Marsal, is the chief restructuring officer of First Brands Group, LLC and its debtor affiliates.

The Declaration describes the complex capital structure of the First Brands debtors matched by an equally complex corporate structure.  In addition to the asset-based facilities, leveraged term loan facilities and structured inventory financing programs, the Declaration refers to the following categories of receivables financing facilities:

• Customer factoring
• Third party factoring
• Supply chain financing

“Customer Factoring”

Based on the description in the Declaration, “Customer Factoring” refers to a standard “buyer” side supply chain financing, sometimes referred to as “reverse factoring”, with the “buyer” in this case being the customer of First Brands. This means that certain customers of the First Brand companies (principally large retail customers) had established supply chain programs pursuant to which the suppliers to such customers, like First Brands, are able to sell the receivables due from the customer at a discount to the supply chain program financier, or through its platform to other purchasers, in order to obtain payments, not of the receivables, but the purchase price pursuant to the sale of the receivables, prior to the date that the customer is otherwise obligated to pay the receivable under the terms it imposes on its suppliers, like First Brands.

These programs enable the customer (the “buyer”) to agree to pay its suppliers on extended terms (as the Declaration notes, up to 365 days) without leaving its supplier unable to operate in the absence of the funds from getting paid earlier, by offering suppliers who participate in the program the ability to get funds from the sale of the receivables prior to the extended due date--albeit at a cost.  The customer with the supply chain program then pays the receivable to the supply chain program financier when it is due.  The supply chain financier takes the credit risk on the customer.  The sales of the receivables by the supplier are typically “non-recourse” to the supplier except if there is some issue with respect to the receivable unrelated to the credit of the customer (that is, unrelated to the customer’s financial inability to pay).  The purchases by the supply chain financier of the receivables is completely discretionary, so it may at any time elect not to purchase the receivables, which may be likely if the customer’s business deteriorates.

“Third Party Factoring”

As described in the Declaration, “third party factoring” is traditional factoring, where the First Brands company sells (or “factors”) receivables due from a customer to a traditional “third-party” factor, meaning, in this case, a factor that is not working through a customer’s supply chain program.  Factoring arrangements may be on a “notification” basis where the customer is notified of the assignment of the receivable and directed to pay the receivable directly to the factor or on a “non-notification” basis where the customer pays to a “lockbox” at a bank which is then swept daily into a payment account of the factor or some similar arrangement.  In the meantime, as with the “customer factoring” the supplier to the customer selling its receivables to the factor gets paid the purchase price for the sale of the receivable to it (at a discount and subject to the factor’s commission and fees) and the factor takes the credit risk on the customer.  Like the supply chain product, there is some level of discretion to the obligation of the factor to purchase a receivable.

The factoring used by First Brands does not seem to have been on a “notification” basis or to have required that customers’ payments on the factored receivables be paid directly to the factor.

First Brands “Supply Chain Financing” Facility

Besides having customers that had established a supply chain program, it appears that First Brands itself also set up its own supply chain program for its suppliers.  Now it is First Brands that accepts an invoice from a supplier pursuant to which it acknowledges the obligation and agrees to pay it when due—but on extended terms.  On that basis, the supplier offers the invoice for purchase to the supply chain program financier or through its platform to other purchasers, who buy the receivable of the supplier owing by First Brands, enabling the supplier to First Brands to get paid earlier than would otherwise be the case based on the terms of payment between First Brands as the customer and the supplier.

Unlike with what the Declaration refers to as “customer factoring” or third-party factoring, in the case of its own supply chain finance program, the obligation of First Brands in respect of the amounts and terms that it owes to the supplier does not change (which is a core feature of the product so that it does not become treated as “debt”)—the change is that instead of being obligated to pay the supplier, First Brands is now obligated to pay the purchaser of the receivable of the supplier. 

The effect on the company from the perspective of the asset-based lender in this scenario is different from “customer factoring” or “third-party factoring.” This arrangement effectively puts the supply chain financiers who have purchased the receivables in the traditional place held by trade creditors in a Chapter 11.  This may have a practical impact on how a bankruptcy will be managed given the concentration of the receivables with the supply chain financier as contrasted with a more diverse group of trade suppliers and given its exposure, and that it is not in the business of selling goods to the company, the supply chain financier may have a different approach to the company in a bankruptcy.

The First Brands’ Receivables Financing Problem

While there seem to be challenging issues around the structured inventory financing that First Brands used as reflected in the litigation in the Chapter 11, the magnitude of the issues around the receivables purchase facilities is striking.  The Declaration says: 

Following diligence performed by the Company’s Advisors, the Debtors believe that an unpaid prepetition balance of approximately $2.3 billion has accrued with respect to the Third-Party Factoring arrangements as of the Petition Date. The Debtors’ factoring practices are subject to the Special Committee’s ongoing Investigation including (i) whether receivables had been turned over to third party factors upon receipt, and (ii) whether receivables may have been factored more than once. Pending the results of the Investigation, the Debtors will segregate funds received on account of receivables that were factored prior to the Petition Date by the Company.

Here the Declaration refers to two “classic” frauds in receivables financing: 

• Diverting the payments on the receivables that were supposed to be paid to the factor as the purchaser of the receivable; and
• the “double pledge” of the same receivable.

The Threshold Question

In asset-based facilities, there may be at least three forms of receivables purchase facilities that a borrower may want to be permitted to have under the terms of the asset-based facility:

• Factoring
• Supply chain
• Securitization

Here, the reference to the supply chain program is to the program established by the customer of the asset-based borrower, not a supply chain program established by the borrower.  Having both its own supply chain program and having customers with supply chain programs, and layering in the structured inventory financing, clearly distinguishes First Brands from how most businesses are financed.

Allowing for the use of these other methods of financing is challenging for the asset-based lender at a number of levels given the potential overlap in the collateral between the receivables subject to the purchase facility and the receivables that the asset-based lender is looking to as the basis for its facility.

In view of these challenges, the threshold issue for the asset-based lender that has a borrower that is selling receivables, or wants the loan documents to give it the flexibility to sell receivables, through the use of factoring, supply chain programs or securitization, is whether the lender is satisfied that the borrower has the systems to provide reliable and verifiable reporting that will enable the lender to track receivables that are being sold and that those same receivables are not being included in the borrowing base that the asset-based lender is relying on.  This is the “double-pledge” problem that has surfaced in the First Brands bankruptcy.

Basic Requirements to Consider

As part of managing the relationship between the receivables purchases facility and the asset-based facility, there are at least three key conditions that the asset-based lender should consider that it may require.

• Reporting: Reporting by the borrower as to the receivables sold, which might include purchase dates, purchase amounts, purchase price, amounts paid to the borrower in respect of the purchase price and the collection account to which the purchase price has been paid;

   

• Separate customers: The receivables that may be sold to the factor, supply chain program financier or to the special purpose vehicle used for the securitization are receivables due from customers whose receivables are excluded from the borrowing base (i.e., “ineligible”);

   

• Separate collection accounts: The establishment of separate designated collection accounts exclusively used for receipts from the customers making payments on the sold receivables.

The exact nature of the reporting may depend on the type of receivables purchase facility involved, but in some manner the asset-based lender is going to want to understand how the company is being affected by the financing from the other sources and to use the information to verify that there is no duplication.

Having the same customers obligated on both receivables that have been purchased by the factor, the supply chain financier or the securitization special purpose entity and therefore are then owing to the receivables purchaser ---the “sold receivables”---and receivables from the same customers that have not been sold and therefore are owing to the borrower, the “unsold receivables”, is going to lead to issues, including, for example, dealing with collecting those receivables (when a customer doesn’t pay for whatever reason, for example), the allocation of payments as between the sold and unsold receivables (particularly when the customer does not specify as to how a payment should be applied), and allocating credits, discounts, and allowances as between sold receivables and unsold receivables, among others.  The best situation is when the originator of the receivables is a separate subsidiary or a clearly identifiable and managed line of business.

While “sold” receivables would automatically be excluded from the borrowing base since one of the basic requirements for an “eligible account” to be in the borrowing base is that the receivable be owned by the borrower, the eligibility criteria need to address receivables that have not yet been sold.  This means that the eligibility criteria should expressly make receivables owing from a customer whose receivables are subject to the applicable receivables facility, whether or not at any point in time the receivable has been sold, ineligible. 

Allowing payments on both sold receivables and unsold receivables to be paid to the same deposit accounts would require a level of detail in monitoring and tracking and reconciliation that will be challenging at best.  So, separate deposit accounts for payments on receivables is a necessity.  Even with amounts paid to separate deposit accounts, the asset-based lender will want to monitor payments received to correspond to “its” receivables collateral to be certain to maintain the integrity of the borrowing base.

Other Key Requirements to Consider

There are several other aspects of having a receivables financing facility together with an asset-based facility that the asset-based lender should consider.

Non-Recourse Sales

Factoring is a flexible product that may involve sales of receivables with the “buyer” (that is the factor) having “recourse” to the “seller” (that is the company or “factored client”) in the event that the customer does not pay the receivable. If the customer does not pay, then the company is required to make payments to the factor for the purchase price paid by the factor for the purchase of the receivable.  Or, the factoring may be done on a “non-recourse” basis.  In this case, if the customer does not pay the receivable, the factor does not have “recourse” (i.e. right to get paid by the company for what the factor paid the company for the purchase of the receivable) in the event that the customer does not pay the receivable—except if the customer does not pay the receivable as a result of its financial inability to do so. 

Sales of receivables by a company to a supply chain financier or other purchasers through a supply chain program of the company’s customer obligated on such receivables are intended to be done on a “non-recourse” basis.  Similarly, with a securitization facility, the sales of the receivables by the company (the “originator”) to the special purpose bankruptcy remote “securitization subsidiary” are intended to be on a non-recourse basis.

In general, the factor, supply chain financier and the securitization subsidiary purchase the receivables on a non-recourse basis because it provides the basis for making the argument that the receivables are purchased pursuant to a “true sale”, so that the receivable would not be included in the estate of the company if it were to be subject to an insolvency proceeding, and so that the transaction should not be recharacterized as a secured loan by the “purchaser” to the company secured by the receivable.

From the asset-based lender perspective, having the sale of the receivables on a non-recourse basis is desirable because it limits the contingent obligations of the borrower to the purchaser of the receivables.  For this purpose it is important to understand that “non-recourse” does not mean “no recourse”—it just means that the purchaser cannot look for payments from the borrower if the customer obligated on the receivable does not pay as a result of its financial inability to pay—that is, it goes to which party as between the “seller” (the company) and the “buyer” (the factor, supply chain financier or securitization subsidiary) takes the credit risk on the customer.  For example, if the customer does not pay because it received defective or non-conforming goods or there is otherwise a dispute about the goods or amounts payable, the receivables purchaser will have “recourse” to the borrower (even if the documents refer to the sale as being on a “non-recourse” basis).

So, the asset-based lender will want to understand that the purchase price that its borrower may receive for the sale of the receivables may have to be repaid or the amounts payable by the purchaser for the purchase price of subsequent purchases of receivable reduced by the amount of the receivables previously sold that did not get paid for reasons other than the financial inability of the customer to pay—for a factor, a “charge back” or in a supply chain or securitization it might be referred to as a “credit note” or similar term.

This “recourse” to the borrower may take the form of the obligation of the borrower to repurchase the receivable if any of the representations (effectively like eligibility criteria) are not satisfied or an indemnification obligation by the borrower to the receivables purchaser for the losses suffered by the receivables purchaser as a result of the failure of the receivable to satisfy the criteria. In a credit agreement that allows a securitization facility, the basis for the borrower’s liability to the purchaser to repurchase the receivables or indemnify the receivables purchaser will be defined as the “Standard Securitization Undertakings.”

Still, the asset-based lender will want to have the sales on a non-recourse basis, but will need to permit the contingent liability of its borrower in connection with the sale of the receivables.

Rights of Asset-Based Lender to Purchase Price; Timing of Release of Asset-Based Lender Lien, Etc.

Pursuant to the sale of the receivables to the factor, supply chain financier or special purpose securitization subsidiary, the borrower will be entitled to the payment of the purchase price for such receivable.  This right to payment, just like the receivable that is sold, is an asset of the borrower that should be subject to the security interest of the asset-based lender. 

The principal difference between the original receivable and the purchase price payment is that the party obligated to make the payment has shifted from the customer that purchased the goods or services from the borrower to the factor, supply chain financier or the bankruptcy remote special purpose securitization subsidiary.  That, and the terms under which the payment to the borrower is to be made, is now governed by a different set of terms and agreements.  The right to payment of the borrower after the sale is subject to the terms of the factoring agreement or receivables purchase agreement (including, for example, the recourse to the borrower and reduction in the purchase price if the receivable is not paid as described above).

The asset-based lender will want the documentation to be clear that:

• its consent to a sale of the receivables does not mean that it is releasing its rights to all amounts at any time payable by the purchaser to the borrower, but the security interests of the asset-based lender continue in the proceeds from the sale of the receivables;
• the asset-based lender has a security interest in all of the rights of the borrower under the factoring agreement or receivables purchase agreement or related documents and is authorized by the borrower to exercise any of such rights;
• the release of the lien of the asset-based lender on receivables that are sold only occurs upon the receipt of the payment of the purchase price for such receivables, and so long as such payment is made to the deposit account specifically designated for the purpose of receiving such payments; and
• if the borrower is required to repurchase receivables that did not satisfy the requirements for purchase under the terms of the applicable receivables purchase agreement or other terms and conditions of the purchase, the security interest of the lender in such receivable automatically attaches to the receivable when it is repurchased or if the borrower otherwise acquires rights to a receivable that was previously sold.

Amount of the Purchase Price

When it comes to the amount that the borrower should be paid as the purchase price for the sale of any of its receivables, the interests of borrower and asset-based lender are clearly aligned.  More is better.  The less the discount from the face amount of the sold receivable, the greater the cash flow benefit to the borrower of being able to get paid in respect of the receivable earlier, rather than waiting until the extended due date that would otherwise be the time when the borrower received payment from the customer owing the receivable.

As a condition to allowing the sale of the receivables, the asset-based lender may want to require the receipt of a minimum amount as the purchase price based on a percentage of the amount of the receivable.  Usually, this will be consistent with the determination of the purchase price under the terms of the applicable receivables purchase facility.

The issue is that the amount of the purchase price payable by the receivables purchaser may be reduced by various amounts, and it may get particularly complicated in arrangements with a factor. The factor will have its “commission” and various fees as part of the standard pricing and other charges that may relate to the scope of the services it is providing to the borrower as part of the factoring arrangements. Still, if the factoring arrangements do not involve “advances” in respect of the purchase price or the extension of other financial accommodations, but is “maturity” factoring, as is usually the case with a borrower that has an asset-based facility, there may still be a minimum amount for the purchase price required by the asset-based lender.

In general, on the other side of the equation, the receivables purchaser will also want the purchase price that it pays to be a reasonable amount in order to avoid potential fraudulent transfer claims against it.  This will also relate to the characterization of the sale as a “true sale”, which is an important element of the structure of the receivables financing from the perspective of the receivables purchaser.

Limit on Amount of Receivables Sold

In order to manage the impact on the borrowing base or the pool of receivables that may be collateral to secure the asset-based facility generally, the asset-based lender may want to include a dollar limit on the aggregate amount of the receivables that have been sold and are outstanding at any one time.  This may be done in the basket for the receivables purchase facility under the negative covenant on asset dispositions. 

In the case of a securitization facility, there may also be a dollar limit on the amount of the debt that the special purpose subsidiary that is used to purchase the receivables may have outstanding at any one time, although since debt may only be one way for the subsidiary to finance the purchase of the receivables it is not as comprehensive an approach in managing the magnitude of the impact of the receivables purchase facility on the business as limiting the amount of outstanding receivables sold in the asset disposition covenant.

Agreement with Receivables Purchase Facility Provider

In the case of a factoring arrangement, it has been customary for the factor, the asset-based lender and the company to enter into a tri-party agreement consisting of an “assignment of factoring proceeds and acknowledgement”, effectively an intercreditor agreement between factor and asset-based lender. Both factor and asset-based lender share a common interest in clearly defining their respective rights to the assets of the common borrower, as well as for the asset-based lender being able to track the receivables that should be included in its borrowing base and those that should be excluded. This is a relatively standard document that includes a number of provisions that align with the requirements of the asset-based lender for the sale of receivables.

In the case of a customer supply chain program, there is also commonly a form of “lien release” agreement between the supply chain program provider and the asset-based lender as acknowledged by the company which also addresses many of the points of concern to the asset-based lender, as well as confirming for the supply chain financier that it is purchasing the receivables free and clear of any lien of the asset-based lender.  Some supply chain providers have more recently not been requiring such agreements, which seems to increase the likelihood of a dispute as to the priority of the claims to receivables between the parties.

The determination of the priority between a receivables purchaser and a secured lender is somewhat complex although Permanent Editorial Board Commentary No. 29, Sections 9-203(b)(2) and 9-318 (February 7, 2025) issued by the Permanent Editorial Board for the Uniform Commercial Code (the “PEB”) on the subject is very helpful in addressing the issues related to such determination.  The PEB is responsible for the comments to the Uniform Commercial Code and issuing clarifying commentary.  Still, there is the question about how the security interest of the lender would relate to the rights of the purchaser if the purchaser is determined to have acquired the receivables in a “true sale” so that the receivables are not included in its estate in the event of a bankruptcy of the company. Having a tri-party agreement would generally seem preferable to having to litigate the issue.

Interestingly, in the First Brands case, it seems that the factoring arrangements allowed payments by customers to be made to a deposit account of the company and the factor was making advance payments of the purchase price to First Brands.  There also does not appear to be any tri-party agreement among company, factor and asset-based lender. 

Editor's Note: Part 2 of this article will appear in TSL Express in our January 14 edition.