(Bloomberg) — Some creditors of Market Financial Solutions Ltd., the failed UK mortgage firm backed by Wall Street lenders, warned there may be a £930 million ($1.3 billion) shortfall in collateral backing their loans.
Zircon Bridging Ltd. and Amber Bridging Ltd., the companies that forced MFS into a UK form of insolvency this week, 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-for deficiency” of more than 80% on £1.2 billion of debts, according to documents from their claim obtained by Bloomberg.
The collapse of MFS, which attracted backing from firms including Barclays Plc, Apollo Global Management Inc.’s Atlas SP Partners unit and Jefferies Financial Group Inc., is the latest crisis to hit both banks and direct lenders, and puts a spotlight on asset-based financing. Accusations of double pledging also emerged in the collapses last year of US auto parts supplier First Brands Group and sub-prime auto lender Tricolor Holdings.
Paresh Raja, the owner and chief executive officer of MFS, didn’t respond to requests for comment through his LinkedIn profile.
Lenders typically provide mortgages for less than the value of the assets backing them, meaning the collateral is worth more than the debt issued. Angela Gallo, a lecturer in finance at Bayes Business School in London, said collateral in transactions such as those arranged by MFS tends to be worth between 105% and 120% of the loan.
“To put it bluntly, having only £230 million against £1.2 billion in debt is catastrophic,” said Gallo. “This definitely looks like a mess.”
It’s too early to tell what the eventual losses — if any — will be for creditors of MFS. AlixPartners was appointed to oversee the insolvency this week and has just begun its work.
Zircon and Amber are part of a broader network of companies linked to Raja. They borrowed funds from lenders and used the proceeds to issue short-term bridging loans for property purchases. MFS acted as servicer on the loans, meaning it was responsible for collecting repayments, the claim shows. It had a total loan book of about £2.5 billion, according to its website.
The companies moved to place MFS into administration after becoming concerned about alleged financial irregularities. An official from AlixPartners was told about the alleged double pledging two days earlier on a phone call with a counterpart at another company, according to the claim.
“‘Double pledging’ meant ‘different funders funded the same asset,’ which I understood to mean the same collateral being pledged to secure more than one financing facility at the same time, without proper disclosure,” the AlixPartners official wrote in the claim. “So that multiple creditors each believe they have security over the same assets.”
(Corrects Apollo’s full company name in third paragraph.)
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