Subprime crisis replays? UK private credit giant MFS bankrupt, Barclays and several major banks involved in the turmoil

The UK mortgage finance company Market Financial Solutions (MFS) has suddenly collapsed under fraud allegations, with Wall Street institutions including Barclays, Jefferies, and Apollo's Atlas SP Partners collectively exposed to over £2 billion in risk, once again triggering the fragile nerves of the private credit market.

According to Bloomberg, MFS entered UK bankruptcy administration (equivalent to bankruptcy protection in the UK) this Wednesday, with the presiding judge citing fraud allegations and issues of dual pledging of assets. Two subsidiaries within the company disclosed in court documents "serious violations" and a "significant shortfall" in collateral, with the total shortfall of funds that should be accounted for potentially reaching £238 million; meanwhile, the company is suspected of misappropriating "most or even all" of its trading income since last December, with the whereabouts of the funds still unknown.

After the news broke, the stock prices of related institutions generally came under pressure. Jefferies' stock price fell by more than 8% at one point, now narrowed to 3.4%; Apollo Global Management dropped about 3.4%; Barclays American Depositary Receipts (ADR) fell about 1.1%, and Santander ADR dropped about 2.4%.

The MFS incident follows the bankruptcies of US auto parts supplier First Brands Group and subprime auto lender Tricolor Holdings last year. JP Morgan CEO Jamie Dimon warned this week that the current market reminds him of the scenes before the 2008 financial crisis, bluntly stating that some competitors are doing "stupid things."

Bridge Loan Model: From Rapid Expansion to Sudden Collapse

MFS was founded in 2006 and is headquartered in Mayfair, London, with over a hundred employees, and its founder and CEO is Paresh Raja. The company positions itself as a provider of "complex, property-backed loans," with its core product being short-term bridge loans aimed at various real estate investors.

Its financing model involves borrowing from Wall Street institutions: MFS arranges financing across multiple affiliated entities within the group, while acting as the service provider for the entire loan portfolio, responsible for collecting repayments. The loan book size once peaked at approximately £2.5 billion. In a 2024 performance statement, Paresh Raja attributed growth to the "strong strength of institutional financing partnerships," disclosing that £1.3 billion in new institutional financing was added that year, and existing financing limits were also "expanded and renegotiated," reaching £1.1 billion.

However, behind this rapid growth lies an extremely fragile capital structure. According to publicly available financial data, MFS's loan book of approximately £235 million is supported by only about £16 million in equity capital; on a consolidated basis, the related Zircon Group's loan book of about £1.25 billion has only about £27 million in equity capital, with the rest almost entirely relying on debt financing

Major Banks' Risk Exposures Fully Exposed

According to Bloomberg, Wall Street institutions have a total exposure of over £2 billion (approximately $2.7 billion) to MFS.

According to court hearings, Barclays has a risk exposure of about £600 million, the highest among various institutions; in addition, Barclays also operates bank accounts for MFS and has frozen the related accounts in recent weeks. Atlas SP Partners—Apollo Global Management's structured credit division—confirmed it holds a risk exposure of about £400 million, accounting for approximately 1% of its balance sheet, and stated it is "maximizing recovery through all legal avenues."

Media reports citing informed sources revealed that private credit institution Castlelake arranged a financing line of about £400 million for MFS, part of which is retained, while the remainder has been distributed to other lending institutions through a syndicate; Castlelake stated that the related holdings are "fully secured exposures backed by a mortgage portfolio," with no direct unsecured exposure to MFS. According to Bloomberg citing informed sources, Jefferies' risk exposure is about £100 million (approximately $135 million). Santander Bank and Wells Fargo are also among the lenders, but specific exposures have not been publicly disclosed.

Jefferies was previously a lender to First Brands, which declared bankruptcy last year, and its founder Patrick James was charged with fraud in January this year. Spokespersons for Barclays, Santander, Wells Fargo, and Jefferies declined to comment.

Core of Fraud Allegations: Double Pledging and Income Misappropriation

Two subsidiaries of MFS—Zircon Bridging Ltd. and Amber Bridging Ltd.—voluntarily applied for bankruptcy management this week and made several serious allegations in court documents. As of the end of 2024, the two companies had issued a total of approximately £1 billion in bridging loans.

According to court documents, the two companies allege that MFS failed to deposit mortgage loan collections into the correct bank accounts and engaged in "double pledging" of assets—that is, repeatedly pledging the same collateral to different lenders (rehypothecation) to obtain loans from multiple institutions using the same asset. The total shortfall of funds that should have been accounted for by the two companies could be as high as £238 million.

The starting point for the fund misappropriation is pointed to December last year. Court documents state that the company is suspected of transferring "most or even all" of the transaction income since that point, but "it is still unclear where the missing income is and why it was transferred."

In response, MFS characterized the incident in a statement last Saturday as a "procedural issue with major banking service providers," with Paresh Raja insisting that "the current situation does not reflect a failure of the underlying business or asset quality issues," and described the bankruptcy management as a proactive step aimed at "protecting employees, investors, and stakeholders."

Founder Missing, Related Investigations Draw Attention

Paresh Raja has not responded to the comment request sent through his LinkedIn account, and there are rumors that he has left for Dubai, but this claim has not yet been confirmed.

In fact, MFS has long been under investigation. According to a Bloomberg report in 2024, several companies associated with Paresh Raja—including MFS and Zircon—had provided loans for dozens of real estate transactions related to former Bangladeshi Minister of Land Saifuzzaman Chowdhury. Bloomberg reported at the time that Chowdhury had accumulated a real estate portfolio in the UK worth approximately £200 million, consisting of over 350 properties. A spokesperson for AlixPartners, responsible for leading the bankruptcy management process, declined to comment.

Private Credit Market Alarm Sounds Again

MFS is not an isolated case but rather the latest chapter in the recent frequent explosions in the private credit market. Nicole Byrns, founder of asset-backed financing fund Dumar Capital Partners, stated:

"For the past six months, the market has been discussing how to prevent fraud, establishing special task forces and developing new anti-fraud products. However, MFS again indicates that there may still be significant gaps in the ability to detect fraud."

The industry's vulnerabilities are also traceable: The number of lending institutions in the UK bridging loan market has nearly doubled in the past five years, with competition becoming increasingly fierce; many platforms rely heavily on leverage, with banks typically providing most of the debt funding; some venture capital and private equity firms are even willing to subsidize platform operating losses, betting on future scale growth.

A week before MFS's bankruptcy, Blue Owl had just suspended quarterly redemptions for one of its private credit funds aimed at retail investors, triggering a new round of concerns about liquidity in private credit, with related asset management company stock prices generally under pressure. Bruce Richards, chairman of Marathon Asset Management, likened the debt risks in the software industry to "a train that can be seen in the distance, approaching," warning that "the market has just begun to wake up."

JP Morgan CEO Jamie Dimon has been outspoken:

"Unfortunately, we did see almost the same situation in 2005, 2006, and 2007—tide rises, all boats rise, everyone is making money. I see some people doing foolish things now."