MFS Creditors Warn of £930 Million Shortfall
(Bloomberg) — Some creditors of Market Financial Solutions Ltd., the failed U.K. mortgage company backed by Wall Street lenders, have warned that there could be a £930 million ($1.3 billion) shortfall in collateral backing their loans.
Zircon Bridging Ltd, which forced MFS into bankruptcy in the UK this week. and Amber Bridging Ltd. accused the London-based firm of using the same assets as collateral for multiple loans. This practice, known as double pledging, may have led to an “unaccounted shortfall” of more than 80% in debts worth £1.2bn, according to documents in the allegations obtained by Bloomberg.
Barclays Plc, Apollo Global Management Inc.’s Atlas SP Partners unit and Jefferies Financial Group Inc. The collapse of MFS, which was backed by firms such as, is the latest crisis to affect both banks and direct lenders and sheds light on asset-based financing. Charges of double underwriting also emerged in the collapses of US auto parts supplier First Brands Group and sub-prime auto lender Tricolor Holdings last year.
Paresh Raja, owner and chief executive officer of MFS, did not respond to requests for comment through his LinkedIn profile.
Lenders often provide mortgages for less than the value of the assets supporting them; This means that the collateral is worth more than the loan given. Angela Gallo, lecturer in finance at Bayes Business School in London, said collateral on MFS-arranged transactions tended to be between 105% and 120% of the loan.
“To put it bluntly, having only £230m against £1.2bn of debt is a disaster,” Gallo said. “This sure looks like a mess.”
It is too early to tell what the ultimate losses (if any) will be for MFS’s creditors. AlixPartners was appointed to oversee the insolvency this week and has just begun its work.
Zircon and Amber are part of a wider network of companies affiliated with Raja. They borrowed money from lenders and used the proceeds to make short-term bridge loans for property purchases. The claim indicates that MFS acted as a servicer on the loans, meaning it was responsible for collecting repayments. Its total loan book was around £2.5bn, according to the website.
The companies moved to put MFS into administration after they became concerned about allegations of financial irregularities. Allegedly, an official from AlixPartners was told about the alleged double commitment in a phone call with a counterpart at another company two days ago.
“‘Dual underwriting’ meant ‘different funders financing the same asset,’ which I understood to mean that the same collateral was underwritten to secure multiple financing opportunities at the same time without proper disclosure,” AlixPartners official wrote in the claim. “So multiple creditors each believe they have security over the same assets.”
(Corrected Apollo’s full company name in third paragraph.)
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