Bankrupt private credit giant MFS still faces a "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, and new signs of crisis are emerging.

According to reports on Friday, the 27th, Eastern Time, some creditors of the UK mortgage lender Market Financial Solutions (MFS) warned that this bridge loan company, now in bankruptcy proceedings, may have a collateral shortfall of up to £930 million (about $1.3 billion), accounting for over 80% of its related debts due to double pledging.

Two companies that previously forced MFS into bankruptcy—Zircon Bridging Ltd. and Amber Bridging Ltd.—accused MFS of repeatedly pledging the same assets to different lenders to obtain multiple financings.

News of MFS’s bankruptcy and the collateral shortfall has continued to impact the market over the past two days, with related stock prices plummeting. During Friday’s trading, Jefferies, which had closed down over 3% on Thursday, fell more than 10%; Santander Bank of Spain dropped 3.7% during European trading; and Barclays listed in London once fell over 5%, underperforming the UK FTSE 100 index, which closed at a record high for the third consecutive day.

An article from Wall Street Journal on Friday mentioned that MFS’s crisis has involved several Wall Street institutions, including Barclays, Santander, Wells Fargo, Jefferies, and Atlas SP Partners under Apollo Global Management, with a total risk exposure exceeding £2 billion.

Double Pledging Suspicion: How Did the $1.3 Billion Shortfall Form?

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

This accusation implies that multiple creditors believed they had priority security interests in the same assets, but in reality, these assets had been pledged multiple times.

An official from bankruptcy administrator AlixPartners wrote in related documents: “Double pledging means that different lenders have provided funds for the same asset. I understand this to mean that the same collateral has been used to secure multiple financings without full disclosure, leading each creditor to believe they have a security interest in the same asset.”

According to creditor claims, MFS’s operations may have resulted in over 80% of its £1.2 billion debt—about £930 million (roughly $1.3 billion)—being unexplainable shortfalls.

Angela Gallo, a finance lecturer at London Bayes Business School, pointed out that the collateral value in such transactions typically should be 105% to 120% of the loan amount. She said, “Simply put, collateral of £230 million backing £1.2 billion in debt is disastrous. This looks like a complete mess.”

However, AlixPartners was only recently appointed as the bankruptcy administrator this week, and the work is still in the early stages. The final scale of actual losses for creditors remains uncertain. MFS founder and CEO Paresh Raja did not respond to media requests for comment via social media.

Wall Street Involvement: How Large Are the Risks?

According to media reports this week, MFS had borrowed over £2 billion (about $2.7 billion) from multiple Wall Street institutions before filing for bankruptcy.

Among the disclosed exposures, Barclays is the largest single risk. Court hearings revealed that Barclays’s risk exposure to MFS was about £600 million, and it also manages MFS’s operating bank accounts, which have been frozen in recent weeks.

Atlas SP Partners, under Apollo Global Management, confirmed holding about £400 million in risk exposure, roughly 1% of its balance sheet, and stated it is “maximizing recovery through all legal means.”

Additionally, media reports indicate Jefferies’s exposure is about £100 million (approximately $135 million). Santander and Wells Fargo are also among the lenders, but their specific exposures have not been disclosed.

Analysts suggest that the actual losses for Barclays should be viewed with some caution. Citigroup analysts noted, “There is a fundamental difference between arranging loans and retaining risk on the balance sheet,” and it remains unclear whether provisions have been made or the scale thereof.

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

How Bridge Loan Platforms Are Collapsing

Founded in 2006 and headquartered in London’s Mayfair, MFS was established by Paresh Raja, who also serves as CEO. The company claims to provide “complex property-backed loans,” primarily short-term bridge loans for various real estate investors.

MFS’s business model relies on borrowing from Wall Street institutions to sustain operations: it arranges financing through multiple related entities within its group, while itself acting as the service provider for the entire loan portfolio, responsible for collecting repayments. Zircon and Amber are part of Raja’s related company network, borrowing funds from lenders and then using those funds to issue short-term bridge loans to property buyers, with MFS serving as the service provider.

This model created an illusion of rapid growth in the short term. MFS’s loan book once peaked at around £2.5 billion. In its 2024 performance statement, Raja attributed growth to “the strength of institutional financing partnerships,” disclosing that new institutional financing in that year totaled £1.3 billion, with existing financing also “expanded and renegotiated,” reaching £1.1 billion.

However, behind this expansion was an extremely fragile capital structure. Public financial data shows MFS’s net assets are only about £15.9 million, with 149 employees.

On Wednesday, Zircon and Amber proactively applied to place MFS into bankruptcy after concerns over account irregularities and financial misconduct. Court documents mention “serious mismanagement” and “genuine and serious concerns” about MFS and its subsidiaries.

Crisis Spreads: Private Credit Market Shows “Cockroaches”

MFS is not an isolated incident but the latest link in a series of recent private credit market collapses, which have raised widespread alarm on Wall Street.

Double pledging allegations previously appeared in last year’s bankruptcies of US auto parts supplier First Brands Group and subprime auto lender Tricolor Holdings. Santander and Jefferies were also involved in those cases, and now face similar difficulties again.

JPMorgan Chase CEO Jamie Dimon referred to such incidents as “cockroaches” that frequently emerge during a speech to investors this Monday, warning that the current market reminds him of the pre-2008 financial crisis environment. Dimon said:

“Unfortunately, we saw almost the same situation in 2005, 2006, and 2007—everything was booming, everyone was making money. I now see some people doing stupid things.”

Nicole Byrns, founder of private asset-backed fund Dumar Capital Partners, questioned the industry’s ability to prevent fraud:

“Over the past six months, the market has been discussing how to prevent fraud, establishing special task forces, and developing new anti-fraud products. MFS again shows that the ability to detect fraud may still have obvious gaps.”

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

One week before MFS’s bankruptcy, Blue Owl announced suspending quarterly redemptions for a private credit fund targeting retail investors, sparking renewed liquidity concerns. Apollo’s business development company (BDC) also cut quarterly distributions and marked down its portfolio.

Bruce Richards, chairman of Marathon Asset Management, compared debt risks in the software industry to “a train visible from afar, coming straight at us,” warning that “the market has only just begun to wake up.”

Currently, no government agency has filed misconduct charges against any individuals involved in the MFS incident.

In a statement last Saturday, MFS characterized the event as “a procedural issue with major banking service providers,” with Raja asserting that “the current situation does not reflect a failure of core business or asset quality.” The work of bankruptcy administrator AlixPartners has just begun, and the final loss scale remains to be seen.

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