Here We Go Again: Billions Vaporized In Spectacular Private Credit Collapse

What happens when you mix the Tricolor's (failed) nonbank-finance ambitions to fill a gap - intentionally, we can now conclude - left in place by major banks, with First Brands desire to criminally rehypotecate its collateral twice, three, or more times, leaving bank landers with a huge ROI crater and one giant bag of nothing when they ask for their money back?

Why, you get the latest credit blowup: Market Financial Solutions (MFS) a UK bridging lender with a £2.4 billion loan book and over £2 billion in institutional funding lines, which has just collapsed in London to very little fanfare as it just the latest cockroach to emerge in the private credit bandwagon. And to prove that nobody has learned anything from last year's mega implosions of Tricolor, which handed out car loans to illegal aliens, and First Brands, whose specialty was devising delightfully arcane SPVs to make collateral disappear under the innocent guise of a car parts rollup, some of the names in the developing scandal are exactly the same: Banco Santander and Jefferies - both of which sank in the First Brands swamp - are once again scrambling to recoup whatever they can from an embattled company, only this time, they’re joined the "sophisticated" likes of Apollo’s Atlas SP Partners, Barclays, Wells Fargo and Castlelake. 

While little has been said about this latest credit saga on the western side of the Atlantic, the UK's MFS - which over the weekend was placed in administration (a UK way of saying bankruptcy) - is now on its way to becoming the latest multibillion-dollar collapse to saddle major banks with writedowns amid allegations of widespread fraud. Rumors that its CEO has fled to Dubai aren't helping the generally dismal mood. 

As MFS unraveled into a UK form of insolvency Wednesday, Bloomberg reports that some entities within the firm claimed in court filings that they were seeing "serious irregularities" and a "significant shortfall" in their collateral. That contrasted with the company’s Saturday statement blaming an “impasse that has temporarily limited our access to everyday banking facilities.” 

“For the last six months the market has been constantly talking about how to prevent fraud,” said Nicole Byrns, founder of asset-based finance fund Dumar Capital Partners. “Task forces have been put together. New anti-fraud products have developed. And yet this shows how there may still be weaknesses in the ability to spot it.” 

Or maybe everyone can spot the weakness, but if there are a few easy dollars to be made first before the inevitable collapse (and of course, everyone on Wall Street is brilliant and will sell right before everyone else) then nobody really cares. 

While overall corporate defaults have remained stable despite economic and geopolitical concerns, private credit markets have been spooked by a spate of what Jamie Dimon last year called "cockroaches"." He followed that up with a warning this week that he’s starting to see parallels between today’s markets and the era before the 2008 financial crisis.

“Unfortunately, we did see this in ’05, ’06 and ’07, almost the same thing — the rising tide was lifting all boats, everyone was making a lot of money,” Dimon said on Monday. “I see a couple people doing some dumb things.”

MFS is the latest case in point. Founded in 2006 and led by CEO Paresh Raja, MFS offered what it called “complex, property-backed lending.” The company claimed to offer customers bridging loans: short-term debts that borrowers could tap for various kinds of real estate investments. 

In other words, generous private credit on agreeable terms... pretty much what most private credit companies had been doing in recent years.

And in a move that will make the circular schemes of the Mag 7 blush, MFS funded this business by borrowing from Wall Street firms. These deals could be arranged through different entities within MFS while it was the so-called servicer responsible for collecting repayments.

In the beginning, the sky was the limit, and business at MFS appeared to be thriving. Its loan book reached a peak of £2.4 billion ($3.24 billion) at one point, with its growth due in part to “the strength of our institutional funding partnerships,” Raja had said in a statement announcing its results for 2024. Like every other "thriving" business, MFS had to project the image that it was growing at all costs, and the firm said it obtained £1.3 billion in fresh “institutional funding” that year along with the “upsizing and re-negotiation of existing institutional funding lines” of £1.1 billion.

Barclays alone had about £600 million tied up in MFS, the judge said at the hearing on the administration. Atlas said it had about £400 million of exposure. Jefferies’ exposure was about £100 million, a Bloomberg source noted. 

Yet the whirlwind collapse of the firm has many scratching their heads what exactly happened. While many questions about what went wrong at MFS remain unanswered, Zircon Bridging Ltd. and Amber Bridging Ltd. -  the entities within the firm that moved to place it into administration this week - saw December as a potential turning point. That’s when the firm allegedly began to divert “most, if not all” of the income from some of its deals. Where the money went is currently unknown, the companies said in the court filings.

“It is still unclear where the missing income is and why it was diverted away,” the entities alleged. MFS had also been using the same assets to win loans from different lenders, a process known as “double pledging,” according to the filings, or as it is better known, rehypothecation, which is when you take the same collateral and pledge it over and over with different lenders. 

While it is still too early to comment on what may have gone wrong, Johan Groothaert offers a few general observations:

• The UK bridging market has become oversaturated, with the number of lenders having nearly doubled over the last five years.
• Venture capital and private equity firms have set up their own UK specialist property lenders, and some are willing to fund operational losses in these nascent platforms, banking on major growth in direct lending.
• Many bridging and buy-to-let lenders have become massively leveraged, with banks typically providing a significant portion of that leverage.

To be sure, soaring leverage across private credit platforms is increasingly looking like a stress point, with the latest developments around BlackRock TCP Capital and Blue Owl highlighting this.  

Well, based on the most recent publicly filed figures, MFS appears to have a loan book of £235m financed by ~£16m of equity, with the remainder funded by debt. On a consolidated basis, the related Zircon Group appears to show a loan book of ~£1.25bn, financed by ~£27m of equity, with the remainder funded by debt. Needless to say, the equity is long gone, and the question now is just how much of the debt is impaired. 

For its part, MFS faced “a procedural matter with its primary banking provider,” the firm said in Saturday’s statement, while CEO Raja added that "the current situation does not reflect a failure of the underlying business or the quality of our assets." 

MFS describes the administration as a step that has been taken to “protect employees, investors and stakeholders while the business works through an unexpected banking-related issue”. Because the company really cares about employees, investors and stakeholders.

Its lenders would surely disagree with that assessment: shares of Jefferies slumped 3.4% Thursday while Apollo’s stock slid 2.4%. ADRs of Barclays, which had already said it was conducting a full review of its loan portfolio after it booked losses on its Tricolor loans, fell 1.3%, while Santander’s ADRs dropped 2%.

That fact that this comes just a week after Blue Owl gates retail investors in its private credit fund will not help lift the prevailing dour mood. 

Titans of finance have waged a war of words this week over the health of corporates more broadly, especially in the world of private credit where Blue Owl’s decision to halt quarterly withdrawals from one of its retail funds rattled investors and sparked a selloff in the shares of asset managers. Some of the biggest players in private credit, though, have argued that many of the high profile blowups of late involved lending by banks rather than private markets firms. 

Others, however, see reasons for the market jitters: Marathon Asset Management Chairman Bruce Richards likened the dangers facing software firms - which have binged on tens of billions of dollars in debt in recent years even as artificial intelligence threatened to eat away large swaths of their business - to “a train coming down the tracks that you could see from some distance.”

“It wasn’t a matter of if, it was just a matter of when,” he said. “The markets have just woken up.”

They are taking their time through: like a few other recent private credit events, this one is only slowly hitting the mainstream press, as the screenshot from the Express below shows.

Expect similar explanations tomorrow stateside, especially since this is not just about private credit; as UBS warned earlier this week, these situations can spill over into the real economy, sparking "cascading defaults" and widespread contagion, and impacting entrepreneurs and investors. While there is hope that this period of growing stress can be worked through without too much collateral damage, allowing the industry to consolidate and be left with better capitalized lenders demonstrating strong risk discipline, who are we kidding: it's just a matter of time before the big one hits and the Fed is dragged out to bail out the Western financial system. Again.