BREAKINGVIEWS-UK mortgage cockroach emerges from credit cracks

By Liam Proud

LONDON, March 2 (Reuters Breakingviews) - For many months now, the titans of banking and private credit have traded barbs over which sector has the diciest exposures. To borrow the terminology of JPMorgan JPM.N chief Jamie Dimon, are the cockroaches scurrying around traditional lenders' books, or are they mostly located in the portfolios of disruptors like Apollo Global Management APO.N? One possible answer, given extra credibility by the blowup of a UK mortgage company, is that the two worlds increasingly overlap.

London-based Market Financial Solutions (MFS), which specialised in complex real-estate lending, collapsed last week alongside accusations from creditors that it had improperly pledged the same assets as collateral more than once. The group funded itself through private short-term loans secured on its mortgages from an array of banks and private-capital managers. Founder Paresh Raja did not respond to an emailed request for comment on Monday, but has previously said that MFS's entry into administration "does not reflect a failure of the underlying business or the quality of our assets".

The possible involvement of phantom or dicey loan collateral nonetheless has worrisome echoes of the recent failures of U.S. auto parts supplier First Brands and car dealership Tricolor. That recurring theme may explain why shareholders in some of the exposed names seem so jittery: Barclays BARC.L, Jefferies Financial JEF.N and Apollo Global Management lost about $10 billion of collective market value on Friday, which seems overly harsh given their combined exposure of less than $1.5 billion, based on media reports. Even that relatively small exposure may exaggerate the possible losses, people familiar with the situation told Breakingviews, given the presence of at least some underlying collateral.

Still, it's easy to see why investors are jumpy. So-called asset-based finance, where loans are backed by collateral like physical assets or intellectual property, is a red-hot market for both private credit and banks. Oliver Wyman in a report last year pegged the market size at $5.5 trillion in the United States — covering areas including equipment leases and royalty agreements like music rights. The recent blowups will feed into fears that lenders have let standards slip amid the rush. At the very least, the possible losses undermine the notion that asset-backed lending is always a low-risk endeavour.

Finally, MFS shines a light on the complex web of interactions between traditional banks and so-called alternative lenders — a category that includes private credit, hedge funds, insurers, specialty lenders, and beyond. Many of these entities grew to fill the gaps left by banks after the 2008 financial crisis, as Wall Street retreated from some relatively risky parts of the system, including the bespoke, large-ticket UK mortgages originated by MFS. It's increasingly clear, however, that banks are indirectly financing many of these upstarts' activities, and lending alongside or competing with them. Exposures to non-bank financial institutions now make up 14% of U.S. banks' total loans, Wells Fargo analysts reckon, compared with 5% a decade ago.

The upshot is that the cockroaches seem to be breeding in both banks and non-banks, as the two have raced to grow their lending. Friday’s stock moves suggest that both sectors may now have to put the brakes on somewhat, leading to a more sober future.

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CONTEXT NEWS

Creditors of collapsed property lender Market Financial Solutions (MFS) warned of a possible 930 million pound ($1.3 billion) shortfall in collateral backing about 1.2 billion pounds of loans, Reuters reported on February 27 citing court documents.

MFS may have been "double pledging" assets, administrators working on behalf of creditors warned in the documents submitted to London's High Court.

The Financial Times reported on March 2 that Barclays had months ago blocked some transactions linked to MFS. The UK bank, and some other lenders recognised "financial irregularities" as far back as November 2025, according to the FT report.

MFS founder Paresh Raja did not respond to an emailed request for comment on Monday. According to a February 23 report in mortgage industry publication Financial Reporter, Raja said that entering into administration "does not reflect a failure of the underlying business or the quality of our assets, but rather a technical and procedural impasse that has temporarily limited our access to everyday banking facilities."

Barclays, Jefferies Financial and Apollo Global Management's Atlas SP Partners had extended financing to MFS through various secured loans. Their combined total exposure was about 1.1 billion pounds ($1.5 billion), according to numerous media reports. Shares in Barclays, Jefferies and Apollo fell 4.2%, 9.3% and 8.6% respectively on February 27, according to LSEG Workspace data.

($1 = 0.7458 pounds)