The U.S. hedge fund O’Connor informed its clients that an investment vehicle with significant liabilities to the First Brands Group is being dissolved, according to the Financial Times (paywalled article). Clients of the UBS subsidiary were exposed to more than $500 million to First Brands through related financial instruments.

UBS told clients of its Chicago-based subsidiary O'Connor that it would liquidate several invoice financing funds, including one fund that was not exposed to First Brands, according to people familiar with the matter.

«We informed investors last month that O'Connor’s Working Capital Opportunistic Funds are being wound down and that the majority of fund assets will be monetized by the end of the year,» UBS told the newspaper.

«We are prioritizing measures to protect our clients’ interests and to maximize recovery of the remaining positions related to the First Brands Group within the complex insolvency proceedings.»

No balance sheet risk for UBS

Last week, UBS CFO Todd Tuckner emphasized during the quarterly results presentation that UBS itself has no balance sheet risk related to First Brands. Only «a small number of funds» are affected. «It is always regrettable when clients experience losses,» he said. The most affected funds were designed for experienced investors and included clear risk disclosures. «No investment guidelines were breached.»

According to the FT source, 70 percent of the O’Connor fund with exposure to First Brands is expected to be monetized by year-end. In addition, a «High Grade» invoice finance fund that had no exposure to First Brands will also be liquidated. The total assets of this fund, amounting to around $600 million, are to be liquidated by the end of the year.

Rising concerns over «bad debt»

In the financial industry, concerns about corporate financing, insolvencies, and bad debt have been increasing. Since many of these debts are securitized in various financial instruments, the effects can be far-reaching.

The First Brands collapse and the liquidation of the funds could also affect the sale of O'Connor to Cantor Fitzgerald. There have already been media reports suggesting that the buyer intends to renegotiate the terms of the deal.