Bankrupt private credit giant MFS faces another "big risk"! Creditors warn that double pledging could lead to a $1.3 billion shortfall

The storm in the UK private credit market has not yet subsided; new crisis signals have emerged.

According to reports on Friday, the 27th (Eastern Time), some creditors of UK mortgage lender Market Financial Solutions (MFS) warn that this bridge loan company, which has entered bankruptcy administration, may have a collateral shortfall as high as £930 million (about $1.3 billion) due to double pledging behavior, accounting for more than 80% of the total relevant debt.

Previously, the two companies that forced MFS into bankruptcy—Zircon Bridging Ltd. and Amber Bridging Ltd.—accused MFS of repeatedly pledging the same asset to different lenders in exchange for multiple financings.

The news about MFS’s bankruptcy and the above-mentioned collateral shortfall has continued to shake the market in the past two days, with relevant institutions’ stock prices plummeting. During Friday's US stock session, Jefferies, which fell over 3% on Thursday, dropped over 10%; Spanish bank Santander's European stocks plunged 3.7%; Barclays, listed in London, once dropped over 5%, underperforming the UK's FTSE 100 index, which set a new record high for the third consecutive day.

Wallstreetcn mentioned in a Friday article that the MFS crisis has implicated institutions including Barclays, Santander, Wells Fargo, Jefferies, and Atlas SP Partners under Apollo Global Management, with a combined risk exposure exceeding £2 billion.

Double-Pledging Cloud: How the $1.3 Billion Shortfall Formed

According to court documents obtained by the media, Zircon Bridging and Amber Bridging, which forced MFS into bankruptcy administration, accused MFS of “double pledging”—using the same collateral to secure multiple financings simultaneously, without proper disclosure to all lending institutions.

This accusation means that multiple creditors believed they held priority security interests over the same pool of assets, but those assets had actually been repetitively pledged.

An official from AlixPartners, the bankruptcy administrator, wrote in relevant documents: “Double pledging means 'different financiers funded the same asset.' My understanding is, this means the same collateral, without full disclosure, was used to secure multiple financing arrangements, so that multiple creditors each believed they held security interests in the same asset.”

According to creditor claims, MFS’s actions may result in over 80% of its £1.2 billion debt having an “unexplained shortfall,” with the shortfall reaching about £930 million (equal to $1.3 billion).

Angela Gallo, a finance lecturer at London Bayes Business School, pointed out that the collateral in such MFS deals should normally amount to 105%-120% of the loan. She said: “Frankly, £230 million of collateral against £1.2 billion of debt is catastrophic. This looks absolutely like a mess.”

However, AlixPartners has only just been appointed as the bankruptcy administrator this week, and work is still at the initial stage. The eventual actual losses for creditors are not yet determined. MFS founder and CEO Paresh Raja did not respond to requests for comment via social media from the press.

Wall Street Institutions Involved: Risk Exposure Estimates

According to media reports this week, prior to bankruptcy, MFS secured financing from multiple Wall Street institutions, with a combined borrowing exceeding £2 billion (about $2.7 billion).

Among disclosed exposures, Barclays is the single largest risk holder. According to court hearings, Barclays has about £600 million of risk exposure in MFS, and also operates MFS's bank accounts, which it has frozen in recent weeks.

Atlas SP Partners, the structured credit division under Apollo Global Management, confirmed holding a nearly £400 million risk exposure, about 1% of its balance sheet, and stated it was “maximizing recovery through all legal means.”

Additionally, media learned Jefferies’ exposure is about £100 million (about $135 million). Santander and Wells Fargo are also lenders, but their specific exposures have not been publicly disclosed.

Analysts say there should be some reservation on Barclays’ actual loss scale. Citi analysts pointed out that “there is an essential difference between arranging loans and retaining risk on the balance sheet,” and it’s unclear “whether provisions have been made, and if so, to what extent.”

Spokespersons for Barclays, Santander, Wells Fargo, and Jefferies all refused to comment. Apollo did not immediately respond to comment requests.

How the Bridge Loan Platform Collapsed

MFS was founded in 2006, headquartered in London’s Mayfair, by Paresh Raja, who serves as CEO. The company claims to provide “complex, property-secured loans,” with its core product being short-term bridge loans, servicing various real estate investors.

The business model is based on borrowing from Wall Street institutions for operation: MFS arranges financing through multiple affiliated entities under the group and acts as the servicer for the entire loan pool, responsible for collecting repayments. Zircon and Amber are also part of Raja’s affiliated company network. They borrow funds from lenders, then use those funds to grant short-term bridge loans to property buyers, with MFS acting as servicer.

This model created an illusion of rapid growth in the short term. MFS’s loan book peaked at about £2.5 billion. In the 2024 earnings statement, Paresh Raja attributed growth to the “strength of institutional financing partnerships,” disclosed new institutional financing of £1.3 billion that year, and said existing credit lines had been “expanded and renegotiated,” reaching £1.1 billion.

However, behind this expansion was an extremely fragile capital structure. Public financial data shows MFS held net assets of just about £15.9 million, with 149 employees.

On Wednesday, Zircon and Amber, after concerns about abnormal accounts and financial violations, proactively applied to place MFS into bankruptcy administration. The two companies stated in court documents there were “real and serious concerns” over “gross mismanagement” at MFS and its affiliates.

Crisis Spreading: “Cockroaches” Frequently Seen in Private Credit Market

MFS is not an isolated incident; it is the latest link in a chain of consecutive blowups in the private credit market recently, and has caused widespread alarm on Wall Street.

Double pledging accusations have appeared successively in the bankruptcy cases of US auto parts supplier First Brands Group and subprime auto lender Tricolor Holdings last year. Both Santander and Jefferies were deeply involved in those cases and are now facing similar predicaments again.

JP Morgan CEO Jamie Dimon, in a speech to investors on Monday, referred to such events as frequent “cockroaches,” and explicitly warned the current market reminds him of the scenes before the 2008 financial crisis. Dimon said:

“Unfortunately, we really saw almost exactly the same scenarios in 2005, 2006, and 2007—rising tides, everyone making money. I’m seeing some people doing stupid things right now.”

Nicole Byrns, founder of asset-backed financing fund Dumar Capital Partners, questioned the industry’s risk prevention capability:

“For the past six months, the market’s been discussing how to prevent fraud, setting up working groups, and developing new anti-fraud products. The MFS case again suggests there may still be obvious gaps in fraud detection capabilities.”

Meanwhile, other risk signals are accumulating in the private credit market.

A week before MFS’s bankruptcy, Blue Owl had just announced the suspension of quarterly redemptions for a private credit fund aimed at retail investors, prompting a new round of liquidity concerns. An Apollo business development company (BDC) also cut quarterly distributions and marked down its investment portfolio.

Bruce Richards, chairman of Marathon Asset Management, compared software industry debt risk to a “train you can see coming from afar,” warning “the market is only just waking up.”

So far, no government agency has brought misconduct allegations against any individuals involved in the MFS case.

MFS’s statement last Saturday characterized the incident as “a procedural issue with major banking partners”; Raja insisted, “the current situation does not reflect a failure of underlying business or asset quality.” The bankruptcy administrator AlixPartners has only just started its work, and the final scope of losses is still to be assessed.

Risk Warning and DisclaimerThe market has risks; investment needs caution. This article does not constitute personal investment advice and has not taken into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular situation. Investing based on this is at your own risk.