Will Macadam

Diameter Capital Partners made the extraordinary move of publishing its own Q4 2025 letter on LinkedIn today (13 January), as the hedge fund publicly expressed its disappointment at a “cherry pick[ed]” article from Bloomberg about First Brand losses.

A Bloomberg report based on the letter, which was published yesterday, highlighted that Diameter’s Master Fund booked a 123 basis point loss (around $100m) due to investments in First Brand’s capital structure, which the hedge fund said did not include “most of the relevant context”.

Despite the loss, Diameter’s Master Fund booked a 30 basis point gain in Q4 2025 and was up 8% year-to-date, while Diameter’s long-only Dislocation Fund III — which also racked up a 96 basis point loss on First Brands investments — returned 5% for the quarter and 9% inception-to-date, according to the letter.

The 21 page letter, signed by Diameter’s managing partners, Scott Goodwin and Jonathan Lewinsohn, covers a range of topics, from the macroeconomic outlook, to views on investment opportunities, and candid admissions of the hedge fund’s misteps over the last quarter.

Diameter’s letter also outlines some of the investments the hedge fund made outside of the distressed world, such as the “large investment” it made in the debt of Beignet Investor, a joint venture between Meta and third parties to build an AI data center in Louisiana. That deal was attractive to the fund as it “offered a spread roughly 150 bps wide of its equivalent-duration bonds”, and Diameter was the “only hedge fund with a large allocation” owing to its relationships with various parties.

The two Diameter funds suffered from “unsatisfactory performance” this quarter owing to investments the firm made in First Brands and EyeCare Partners, the hedge fund said.

Its investment in First Brand’s debt “began as a major win and ended as the worst loss of our careers”, the hedge fund admitted in its letter.

The hedge fund launched an investigation into First Brands’ syndicated loans in 2024 and “didn’t like what [it] saw”: unrealistic margins when compared to peers, cash flow reconciliation to EBITDA “well short” of adjusted figures, and the “smell” of fraud around the factoring of recievables and pledging of inventory.

This assessment prompted the firm to short the group’s loans in mid-2024, something the managing partners note was a rarity for Diameter owing to the settlement mechanics of loan shorts and the requirement to trade loan shorts if the position was held long term.

When First Brand’s refinancing efforts faltered and inched closer to a bankruptcy process, Diameter moved to cover the last of its short positions when the term loans were trading in the high 40s.

The auto parts supplier needed more than $1bn in debtor-in-possession financing. By this point, Diameter had tracked down comprehensive information memos for all of First Brand’s acquisitions since 2018.

Those memos allowed Diameter to piece together an aggregate revenue number for all of those companies at around $4.7bn, which the hedge fund took as external confirmation that the company’s revenue had been “real”. Diameter then compared the profitability of First Brand’s businesses before and after acquisition, concluding that the group’s EBITDA margins were likely 13-15%, or “$600-800 million in “real” EBITDA”.

On the assumption that most of First Brand’s revenues were real, Diameter “liked [its] chances” of the group being valued close to $5bn and bought around $100m of the group’s senior secured bank loan in the low 30s — giving the group the right to buy more than $100m of the new DIP A.

Diameter operated on the assumption that First Brands would only need to be worth $2bn-2.5bn to cover the DIP A and just under $4bn to repay their pre-petition loan, which had been rolled up into the DIP B.

Things started to go pear-shaped when First Brands struggled to fulfill customer demand, with fill rates in North America sitting at 60% of orders when the figure should have been around 90%. This trend emerged as First Brand’s management team left the business and the restructuring consultants bought in to run the business opted to not pay many of the group’s pre-petition suppliers, a dynamic that Diameter says it “didn’t fully appreciate at the time”.

Diameter, concerned by the low fill rates, made the call to swap half of its position in the roll-up DIP B for a position in the “safer” DIP A “at what were then good prices”. But “in a skydiving accident, it’s the helmet wearing the person”, the letter noted.

The hedge fund, which now sits on the private steering committee, notes that one of two things is likely to happen with First Brands, either: the new numbers around the group are “real” and lead to a knowable new money need, or “as can happen in frauds, more and bigger shoes keep dropping”.

Diameter sold all of its DIP B loan and two-thirds of its DIP A loan “at prices materially above current”, which resulted in the firm crystalizing loses on its portfolios. 9fin reported that Monarch and Diameter were among the largest lenders to First Brands to pare back their exposure in December.

The hedge fund’s post-mortem of the situation suggests that Diameter got carried away in the process of turning a “successful short into a profitable long”. While the firm had access to documents that lifted the hood on First Brand’s acquisitions, it speculated that when the group acquired a company it would offer “significant discounts” to customers in return for working capital allowances that went to feed the “merry-go-round of receivables fraud that it needed to make payroll each week”.

First Brands’ CEO would then “feed fake inflated sales numbers into the company’s ledgers”, which fooled the company’s auditors and Diameter’s advisors, who were confident in the group’s revenue figures at the time the DIP funding was agreed. But as a result, First Brand’s companies had “far less revenue” than when they were first acquired.

The hedge fund said that it made the “wrong choice” once it noticed the fill rate problems and that, despite calls with customers and suppliers, the hedge fund could not “fully explain” why First Brands was struggling to source materials.

“In a fraud, if something seems off, you should just get out,” the letter notes.

First Brands is set to run out of liquidity by the end of January and is considering shutting down some operations or selling some assets, as reported.

In the case of EyeCare Partners, Diameter led a liability management transaction in 2024 that injected new capital, elevated the firm’s debt, and tightened documentation. You can read 9fin’s reporting on the transaction here.

Diameter was betting that “positive industry trends” would lift EyeCare’s margins from below five percent toward the 10% earned by peers, a thesis that began to show some traction in Q4 2024. The optometry and ophthalmology care provider’s traded up from the 60s into the low 80s, but the hedge fund hoped to sell in the high 80s and held, which it called “a mistake”.

EyeCare’s management “underestimated” the impact of major drug manufacturers ceasing a program to help Medicare patients with large co-pays on branded retina drugs; the group’s revenue took a hit as patients swapped to less profitable generics.

As EyeCare’s debt traded back down into the 60s, Diameter added to its position on the hopes that a CFO replacement might steady the ship. Following lacklustre Q3 results, the hedge fund stopped adding to its position and noted that it expected the group would struggle to refinance in 2027, but won’t trade out as “the debt feels too cheap to sell”.

Diameter’s funds were still in the black for Q4 largely thanks to investments made in Credit Suisse’s AT1 Bonds, and equity and debt investments in satellite company EchoStar, according to the letter.

The Swiss government made a controversial call in 2023 to zero Credit Suisse’s AT1 bonds as part of the hastily arranged merger of the troubled Swiss bank with UBS, prompting a legal challenge by bondholders. Diameter snapped up AT1 bonds when they were trading between three and 10 cents and subsequently joined the legal action against the Swiss government.

A lower court in Switzerland ruled that the write-down of the AT1 bonds was unlawful in November last year, as reported. Following that ruling, Deutsche Bank told its clients that the decision could result in recoveries of up 185 cents on the dollar.

Credit Suisse’s AT1 bonds have traded up to the 30s on the back of the positive news. The case is currently pending before the Swiss Supreme Court, but Diameter highlighted the “significant additional potential” its AT1 investments could bear.

Meanwhile, Diameter’s investment in EchoStar was the firm’s “best performer for the second straight quarter”. The hedge fund identified EchoStar as having hoarded “vast amounts of the wireless spectrum”.

Market sentiment around the satellite company was negative because the buildout expenses to actually use that network were being treated as “an unfunded liability”. But the story changed when EchoStar, supported by the Trump administration, started licensing its wireless spectrum in deals with SpaceX and AT&T.

EchoStar took back $11bn of SpaceX stock priced at a $400bn valuation as part of it’s deal with the rocket maker. The market has since excited itself over the possibility of a blockbuster SpaceX IPO valuing that business at between $800bn and $1.5tn, pointing towards a healthy windfall for the satellite company.

“EchoStar remains a large position for us, trading well below the sum of its (mostly cash) parts,” Diameter added.

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