Wall Street hit by UK mortgage lender collapse, raising fears of more credit 'cockroaches'

By Lawrence White, Sam Tobin, Anirban Sen and Saeed Azhar

LONDON, Feb 27 (Reuters) - Wall Street lenders on Friday were rocked by the implosion of little-known UK mortgage provider Market Financial Solutions Ltd, fuelling concerns about wider losses among banks and reviving warnings of more "cockroaches" in the booming private credit industry.

The collapse of MFS hammered the shares of Barclays and Jefferies, and accelerated a broader selloff in financial firms and alternative asset managers on Friday, as the market grappled with the prospect of a widening credit contagion, amid concerns about lending standards in the industry.

Other players impacted included Atlas SP Partners, a structured credit affiliate of Apollo Global Management APO.N. It comes after twin bankruptcies of auto parts supplier First Brands and car dealership Tricolor last year and follows troubles at Blue Owl OWL.N, which emerged late last year when it moved to limit withdrawals from a fund.

"We're starting to continue to see these types of things pop up, which is definitely a problem," said Joe Saluzzi, co-head of Equity Trading at Themis Trading in Chatham, New Jersey, adding that he was concerned how deep problems went.

Shares in Jefferies fell nearly 10% in U.S. trading, adding to Thursday's 3.5% decline, as reports of the New York-based bank's exposure to MFS rattled investors. Barclays shares were down 4.2%, underperforming the broader FTSE 100 index, which rose 0.6%. Santander shares dropped nearly 5%. The sentiment hit banking shares more broadly with S&P 500 bank index .SPXBK down 4% on Friday.

London-based MFS specialised in complex property-backed loans. It had applied for administration, a form of UK insolvency protection, after it ran into difficulties, according to previous media reports and court documents seen by Reuters. Creditors who successfully applied to have the company put into administration on Wednesday cited financial irregularities and mismanagement in court documents.

The administrators said in court documents for Wednesday's hearing that they had support for putting MFS into administration from "major international financial institutions and/or their legal counsel". The institutions' names were redacted in court documents provided to Reuters.

MFS may have been "double pledging" assets and there could be a collateral shortfall of 930 million pounds ($1.25 billion), administrators working on behalf of creditors warned in documents submitted to London's High Court this week. The collapse raises further questions on the practice of asset-based financing, which involves loans that are backed by collateral such as hard assets, while also putting the spotlight on double-pledging that was at the heart of the twin bankruptcies of auto parts supplier First Brands and car dealership Tricolor.

For loans to MFS totalling 1.16 billion pounds, there was only 230 million pounds of "true value" available in the collateral accounts, they said.

ANOTHER BLOW FOR JEFFERIES

The collapse of MFS marks a double whammy for Jefferies, which was already in the spotlight due to its prominent role in the implosion of First Brands.

Apart from Jefferies, others including Barclays, Santander SAN.MC, Wells Fargo WFC.N, and Apollo-backed Atlas are among the lenders to MFS, which had borrowed more than 2 billion pounds ($2.69 billion), according to the court documents.

The banks declined to comment.

Atlas said it has roughly 400 million pounds of exposure to the mortgage provider, or about 1% of its balance sheet. Atlas is one of the senior creditors to MFS, alongside other bank lenders.

"Following a breach of contractual terms by Market Financial Solutions, Atlas proactively put two warehouses into default last week and is pursuing all legal avenues to maximize recoveries," a spokesperson for Atlas said in a statement to Reuters, referring to two so-called warehouse loans.

Shares of Apollo and other asset managers were down on Friday on broader investor concerns around stress in the private credit industry.

Investors are on the alert for any sign of deteriorating lending standards and cracks appearing in credit markets, with some of those fears centred on a boom in private credit, in which specialist funds lend directly to companies. The collapse last year of First Brands and Tricolor heightened those concerns, although traditional banks were among the most exposed.

Jefferies disclosed last year that its Leucadia Asset Management division, through its credit fund Point Bonita, held about $715 million in receivables linked to First Brands, although it later said its exposure was limited.

Some experts played down concerns over wider losses at Jefferies. The bank's total exposure to MFS has been estimated at roughly 100 million pounds, "but the entire balance is unlikely at risk," BMO Capital Markets said in a note on Friday.

LATEST 'COCKROACH'

The implosion of MFS comes months after JPMorgan CEO Jamie Dimon warned that more "cockroaches" could emerge from pockets of Wall Street's multitrillion-dollar credit machinery, following the bankruptcies of First Brands and Tricolor.

MFS, based in London's Mayfair, described itself as a specialist provider of buy-to-let mortgage lending and bridging finance, with net assets of 15.9 million pounds and 149 employees as of December 31, 2024, according to its most recently filed accounts.

The company, founded by CEO Paresh Raja, said it had a loan book of 2.4 billion pounds at the end of 2024, the accounts show.

MFS did not respond to a request for comment. The company is unaffiliated with the U.S.-based asset manager MFS Investment Management.

MFS creditors Amber Bridging Limited and Zircon Bridging Limited had separately filed for an administration order against MFS, court documents dated February 24 and reviewed by Reuters show, citing "real and serious concerns about the mismanagement of the company" and entities in its wider MFS Group.

Amber Bridging and Zircon Bridging, cited as creditors of MFS in the court documents, said there were irregularities in payments due to their accounts and applied for independent administrators to be appointed.

The Times reported Barclays has a 600 million pound ($809.70 million) exposure to MFS. Bloomberg said Barclays was among the banks that arranged the loans for MFS.

Analysts from Citi said that the figure may warrant some caution, given banks typically sell on some or all of their exposure when arranging such loans.

"Arranging a loan is very different to retaining that risk on B/S (balance sheet)," Citi said. "Also not clear if/how much could already be provisioned against (if anything)."

($1 = 0.7428 pounds)