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The collapse of UK mortgage bridge lender Market Financial Solutions has caused chaos across specialist lending. Mortgages are the heart of the securitised products business, and if you can’t trust mortgages, what can you rely on?
9fin broke the news of double pledging and shortfall in collateral found under its warehouse facilities. The fraud allegations are reminiscent of the recent cases of First Brands and Tricolor in the US that have shaken the private asset-based lending industry.
Lots of well-known firms have been caught on the wrong side of MFS — the likes of Barclays, Atlas SP and Castlelake — and it was a close shave for other lenders.
In this episode of Distressed Diaries, host and senior reporter Bianca Boorer sits down with 9fin asset-based finance editor Owen Sanderson and Kawai Chung, mortgage market veteran and CEO of UK lender Folk2Folk, to dig into the drama, assess the impact, and consider how the ‘safest’ form of lending might have ended up in double-pledging.
Most importantly, we look at what could be done differently in future — as borrowers scramble to prove their credentials and lenders look over their books, what’s the future of asset-based finance in Europe?
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Bianca Boorer:
Scratching your head over the latest complicated restructuring? Wondering whether Europe will continue to follow aggressive US tactics? Well, tune in to Distressed Diaries, a podcast where we dig into companies that have taken a turn for the worst. I'm Bianca Boorer, senior distressed debt reporter at 9fin. In this series, we will explore how companies have ended up becoming over-levered, and more importantly, how they plan to right-size their balance sheets.
Today I'm sitting down with Owen Sanderson, 9fin's asset-based finance editor and Kawai Chung, CEO of Folk2Folk, a UK peer-to-peer lending platform, to talk about Market Financial Solutions (MFS). Thank you for joining me today.
Kawai Chung:
Hi, thanks. Thanks for inviting me on. It's a pleasure to be here. Really looking forward to this conversation. I think it has important ramifications for the industry.
Owen Sanderson:
Likewise, very excited to be here, Bianca. This has been keeping me excited since last Saturday and lots more still to come.
Bianca Boorer:
So before we get into it, I thought I'd give us a rundown about what's happened so far. So MFS, the mortgage bridge lender, has been in the headlines since it filed for administration on the 22nd of February.
Three days later, a court hearing revealed the company had in fact withdrawn its application and its founder, Paresh Raja, has fled to Dubai after being accused of fraud.
Two asset-based finance funding vehicles of MFS, Amber Bridging Limited and Zircon Bridging Limited, brought the urgent application to the court due to "real and serious concerns about the mismanagement of the company."
The skeleton argument said that there is evidence of serious irregularities in the management of the key bank accounts into which collections in relation to the applicant's mortgage loan portfolio were supposed to be paid by the company. They also said there was a significant shortfall in the collateral in the mortgage loan portfolio.
So, Daniel Bayfield, KC barrister at South Square, who was representing the applicant, said one of the greatest concerns is information and assets will not be available the longer this goes on. Judge Briggs said in a statement that given the serious allegations, including evidence of double pledging, the administration application was to go through.
The fraud allegations, including double-pledging, is reminiscent of recent cases, such as First Brands and Tricolor in the US, which have shaken the private asset-backed lending industry.
9fin broke the story about the hearing, and since then, all eyes have been on who has exposure to MFS.
Owen, you wrote about the company's initial filing whilst at the Structured Finance conference in Vegas. Can you tell us what you were hearing at the conference?
Owen Sanderson:
Well, the Vegas conference is very large. There's about 10,000 people there, and maybe 100 or so of those are from the European market.
But every time I'd lock eyes with someone in the corridor, we'd be throwing up our hands, wide-eyed astonishment. What are you hearing? What are you hearing? I would say there was a lot of panic. Maybe panic is not right, but certainly concerns and the feeling that this was actually going to be pretty large and pretty impactful for the industry.
There was very little information at that time. This was before the court hearing. So we knew that MFS had filed and we knew that it was a very large capital structure with a lot of institutions exposed.
Everybody was trying to piece together who had what and try to get ahead of where it was going to land and how it was going to affect some of these businesses.
I think actually some folks that were intending to be in Vegas flew in and flew straight back out again to try and fix up what was going on.
I think some of the lawyers there that were supposed to be doing BD and maybe a little flutter at the tables were spending their weekends advising their clients on what to do about it.
It was a pretty tense, pretty interesting atmosphere.
Bianca Boorer:
You wrote about the initial filing. Can you tell us a bit about that story?
Owen Sanderson:
Sure. This is the filing that didn't happen. The company tried to put itself into administration and it sent a release around on Saturday morning saying, effectively, everything's fine, but we're in administration.
My understanding is that was intending to release their funds, which had been frozen by their account bank, Barclays, with the hope that the company could continue going.
That application was subsequently withdrawn, as you know, Bianca, and then it kind of passed off to you.
So question back to you. How was the court hearing on Wednesday when things really kicked into high gear?
Bianca Boorer:
It was interesting. It was very crowded, actually. We had to be moved to a bigger room, so I definitely thought this has a lot of interest. My ears pricked up when the barrister, Daniel Bayfield, said there were accusations of fraud.
I was thinking this is going to be the next First Brands. Maybe Jamie Dimon, CEO of JP Morgan, was right about there being more cockroaches to come.
There was a group of unsecured creditors that were opposing the application. They wanted to appoint a different administrator to the ones that the ABF vehicles wanted.
So, Amber and Zircon wanted AlixPartners, and the unsecured creditors wanted BTG Begbies Traynor and Coots & Boots, who were the ones that Raja had initially put forward.
The ABF vehicles wanted someone independent, given the accusations of fraud around Raja. In the end, Judge Briggs also sided with this view and went with AlixPartners.
Also, interestingly, there was a journalist from Al Jazeera. At the end of the hearing, they had requested the full bundle of court documents. They've been following Market Financial Solutions (MFS) since 2024 as part of their investigation into Saifuzzaman Chowdhury, the former land minister of Bangladesh, who has been accused of money laundering.
According to the Financial Times, there are 291 charges in favour of MFS vehicles by Chowdhury linked companies.
Bloomberg had also found that he has 342 properties in the UK worth around £200 million.
When we've done some coverage as well, you mentioned about who was exposed to MFS. Can you tell us what we've found so far?
Owen Sanderson:
Sure. That reporting from Bloomberg and Al Jazeera and at the Financial Times about Chowdhury was a watershed moment for some lenders, not all. Formerly exposed, but no longer, institutions include Morgan Stanley, Deutsche Bank and BNP.
They're now out, but there's still quite a cast of institutions that do have current exposure. Atlas SP Partners, which was the old securitised products business of Credit Suisse, I believe inherited the position from there, but they have about 20% of the total, a net exposure of £400 million across two warehouses.
Big banks, including Barclays, Santander, Wells Fargo, Jefferies.
There's funds such as Avenue Capital, TPG Angelo Gordon, Castlelake, which brought the claim. Per the FT's reporting, we have Elliott as well. Bloomberg, I think, mentioned yesterday, we've got Sumitomo Mitsui Banking Corporation (SMBC) and Macquarie.
My view is actually we'll probably end up with a few more names associated, whether they're directly involved or perhaps they provide fund level leverage to some of these funds or provide repo to other institutions.
I think there might be bits of MFS exposure that are not direct, that find their way out into the financial system. I think that's all we have so far, but watch this space.
Bianca Boorer:
Yeah, I think we're still trying to map it out, but I think basically there's around £2 billion of senior ABF debt, 80% of which is in the hands of those banks and 20% by Atlas SP, which is Apollo's asset-backed fund.
So Kawai, let's come to you. Tell us a bit about Folk2Folk and how has this news impacted you?
Kawai Chung:
It hasn't impacted us just yet, but Folk2Folk are in a similar sector to MFS in the smaller ticket real estate lending space. We don't cover exactly the same areas.
One of the key differences with Folk2Folk compared to MFS is, we don't lend to foreign nationals. It's all UK based businesses and UK borrowers.
I think that's critical because that sort of lending adds a lot of complexity and also a significant amount of other risks to the lending proposition.
One of the incredible things about reading about MFS — I'm not too familiar with a lot of the details, by the way — with MFS, I think the size of that book, if it is £2 billion, is incredible given the complexity of the lending that could be made on that platform.
I was involved in a mortgage platform many, many, many moons ago and we had probably about £2 billion or £3 billion of assets on our book and they were very vanilla products.
It was hellish to manage and onboard, and it took us a lot of time to get things right. Lending £2 billion into a sector like small-ticket real estate to foreign nationals, gnarlier assets, complex situations, non-standard borrowers — that's a tough ask to manage.
A lot more established and more institutional grade platforms out there have struggled to do something similar. I feel like those headline numbers probably tell you a lot about the business already, but this is looking from 1,000 feet up. Those are my initial thoughts.
Bianca Boorer:
Okay, so let's take a step back. What is a mortgage bridge lender and how would you structure a loan into a warehouse facility?
Kawai Chung:
Yeah, I think there's a lot of different descriptions of the non-bank lending sector. If we're talking about MFS, I look at them and I think they are a specialty finance platform that focuses on smaller ticket real estate credit opportunities in the UK. That could be anything from commercial loans, term loans, bridging loans, development loans — all of them are backed by land or property assets in the UK.
Coming on to that point about pledging different assets, what's really interesting is, going back to 2014 when I was first involved in setting up a non-bank lending business, we thought about this problem quite long and hard. We had several banks approach us with a senior financing, but back then there were two things that we had to deal with. What was the structure and how do banks get comfortable with the security?
For the first couple of years, we literally re-underwrote every single loan that we put into the warehouse so that the banks got comfortable that we were following the right processes. Then they would come in regularly to verify the data. That was a normal process to get recognised by high profile institutions who want to do things in the right way.
The other thing about the structure was that over time we had many banks wanting to come in, but every single bank would do it on a pari passu basis. You would have two or three banks putting a senior line into the same structure, so the same asset pool would be secured within that structure.
Looking at what MFS are doing, they have multiple warehouse lines in there. If you think about how the pledging structure works, it's just an assignment agreement. It's a legal document between the warehouse provider and the lender.
If you have multiple one of these, to validate whether these are assigned over multiple funding lines, you would have to have access as an auditor or as a lender to be able to validate that this same asset hasn't been assigned across different funding lines.
Why this didn't happen at MFS, I'm not close enough to the detail. I suspect that either that wasn't being done, or because funders were only looking at their own pools, they wouldn't be able to see what was being assigned across the wider funding structure that was set up.
When you look at the specific loans that MFS are putting into the market, bridging loans create some challenges and also opportunities for some of these bad practices. Because bridging loans have such a short velocity, the legal charge might actually never be completed before the loan has been exited.
Because of the speed of how these loans churn, it also creates problems because when it repays, and if you've assigned it to multiple warehouse lines, that's when the problems will appear very quickly. You might, as a warehouse provider, see a bridge loan repay that month, but the proceeds haven't come to you because they've had to assign it somewhere else.
I feel like that’s where, for MFS, that's where the problem escalated very quickly, and that's when the warehouse providers were able to uncover these issues. But again, I'm not close enough to the issue.
Owen Sanderson:
Can I just ask, just to break it down for people who are less familiar with UK mortgages or how a warehouse works. Obviously, each mortgage is over a given property or properties, so how does the charging and title and transfer actually work at a granular level?
Kawai Chung:
The title and charge is registered with the Land Registry in the UK. Quite often when you have completed a property transaction, that registration process can take a few weeks or even months before it's complete. Then you can log into the Land Registry site and see that the charge has been perfected and assigned to a lender.
The lender then, once it's funded a loan with that security, would then assign the rights of that loan and security to a warehouse provider. But that is just a legal document directly between a lender and the warehouse provider, so it's not necessary to register that with the Land Registry.
When you go to the Land Registry, you wouldn't be able to see a title as a warehouse provider. You would not see that title registered to you. You would only see that in the legal documents between yourself and the lender of record.
Owen Sanderson:
Sure. If I understand rightly, most bridging products are PIK (payment-in-kind), so the interest is capitalised and repaid at the end. Does that make a fraud-type situation easier, because you don't have to account for interest flowing through a structure?
Kawai Chung:
Yeah, potentially. Most bridging loans probably last from anywhere between six to 18 months. Now, the question I keep asking myself for the MFS situation is, if you were to use bridging loans and pledge it over multiple warehouse providers, you have six to 18 months to solve for an issue or to perfect the master plan, whatever that might be.
If it was a fraud, 18 months is not actually a very long time thinking about it. You'd have to get a lot of things right. It may be the case that there's a lot of problems out there. It didn't matter that it was only an 18 month window for this behaviour to take place.
Again, I don't know all the details, but it feels curious that you would use bridging assets to conduct these type of frauds because the window is so short. But then you also saw in trade finance receivables where those are even shorter facilities. That industry had its own issues and multiple platforms doing the same things.
But I suspect what happened there is that, I've met over 300 lending platforms across the UK over the years, and a significant number of them are trying to scale and trying to make the financials work. Sometimes, having access to capital or working capital is the biggest challenge for these platforms. It may be driven by issues like that.
Owen Sanderson:
It strikes me that it's a very big — even for a normal lending business — it's quite a big administrative burden to manage your funding facilities. How much more of an administrative burden would it be to run an entire shadow book behind what's really…
Kawai Chung:
Yeah, that's the incredible thing. If you look at some of the well established platforms out there — I don't want to name names — they've got very extensive securitisation programs and warehouse programs. They're managed by big teams of capital markets experts who have been in the industry for decades.
They understand securitisation programs, they understand how the funding mechanics all work, and they've built the operations to support all of those things.
But they're still hugely complex structures which require a lot of external parties as well as internal teams to manage. They can be horrible things to manage. Managing six structures in a case like MFS feels like quite a high hurdle to manage.
Then if you're layering in any additional activities that are being reported in the press on top of that, it's quite bewildering. I have no idea how a platform can get much done managing such complexity.
Owen Sanderson:
What do you think this does to availability of capital for specialty finance companies?
Kawai Chung:
I was at an event last week where there were probably about 20 or 30 specialty finance platforms there. I think everyone in the room had appreciated that this sector is quite granular. Someone quoted me that there's probably about 300 small-ticket real estate non-bank lend ing platforms in the UK, hugely fragmented.
At the very top there are a few established names who have a good track record, they follow the right processes and they do the right things. I think they will continue to succeed in this space and will attract the right type of investors.
I think in a way this sector has probably become a bit too competitive. For a few of the platforms I've spoken to, they feel like this type of thing is bad right now, but in a longer term it's probably good for the industry because it will bring more discipline on both the investor side and on the platform side.
It will also weed out bad actors and platforms that are probably less viable. It just means that we don't have adverse dynamics that have maybe started to creep into this industry. Aggressive terms, aggressive pricing and shortcuts to completing loans and shortcuts for the underwriting process.
I think if you're a platform doing all the right things and having a good relationship with your investors and being transparent, providing the right type of records data and having robust legal frameworks, I think you would be in a very good place right now.
Owen Sanderson:
Do you think underlying borrowers will see their loans repriced, particularly in the bridging sector?
Kawai Chung:
If you look at this sector, a lot of the capital has come from banks and banks have their own capital models. To a point, the main differentiator would be what those funding parties' cost of capital looks like.
I've read in this sector that a lot of the challenger banks, for instance, are heavily involved in this space, but challenger banks have a very particular capital model. They have a very particular funding model. And that's actually quite well understood if you follow that space. So pricing for a lot of these platforms, if they've taken that type of capital, is quite well defined. I don't think there's probably that much movement allowed in there.
Where I see more aggressive pricing coming about is if there is capital optimisation somewhere in the background for a platform's funding model. Now, that might not necessarily come as a result of the direct warehouse facility that they receive from a credit fund or an investment bank, for instance, but this world now in the background, there's a lot more financial engineering that can take place behind the scenes.
That has actually, in recent times, translated into more aggressive pricing in the sector. In my view, I think it's probably gone too far. Some of our competitors price at a level that we could never compete against, but it's probably driven by the fact that they've managed to source and find that kind of capital.
Now, the debate about whether they've done the right thing, that's by the by. But I think that same kind of capital that has been going into that space now is probably going to be a bit more circumspect, making sure that they follow the right processes. There'll be more costs involved to do all the audit work and the due diligence. So that will probably end up being that the price will equalise against other platforms in the market.
Bianca Boorer:
Can you break it down for us? What does good look like? If you're a lender that has nothing to hide and is trying to get the best institutional funding in this environment, what are you giving? What are you opening to your lenders?
Kawai Chung:
For me, when I used to look at these lending platforms, a couple of the key things initially sets the tone. The culture of the business — why are they doing this? What is the purpose? That is a very clear signal of what this business is achieving, and it gives you a degree of confidence whether you're working with the right type of business or not.
Then you look at the products and the segments and the borrowers that they're trying to serve, and it has to make sense. Again, that sets the tone and drives a lot of whether you get comfortable with a platform or not.
When you get into the details, it's quite often quite holistic. All the things have to fall into place. You might have a platform that has absolutely no losses at all historically with any of the underwriting. But the question is actually, is that sensible and does that make sense? Or is there something that is being hidden?
Investors who are looking into this space, if they have that right kind of curiosity and asking all of those questions, they'll find the answers that they need to get comfortable or not about a platform. But going back to the core principles again, if I was looking to attract institutional capital and wanting to scale a business beyond what maybe most rational people would aspire to, you would want to be as open and transparent as possible with your investors and making sure that you get all the right quality tick marks that gets them on board.
So, having the right audit frameworks and due diligence frameworks and reports that gets them comfortable and being willing and open to opening your information and your books to people to validate that goes a long way.
I've personally never been afraid to do that because I would price that into what we're trying to do, whether I'm on the investor side or whether I'm on the platform side. When you've priced that in, you can build a business with much more clarity there.
If you haven't priced that in, those additional costs and hurdles that need to be incurred to get the right type of capital into your business then causes you problems down the line because you won't be able to achieve the returns that you have promised yourself, your investors or your funders. Because you haven't factored in that you need to build in all of these controls and frameworks to give that right level of comfort that people need to make sure that your business is operating in the right way.
Culture is a big driver of that. I've seen in the non-bank lending sector that people want to chase scale and they want to do it incredibly quickly.
When I started as a young analyst on my banking desk, a senior guy used to jokingly come around and say, "You've got to be long term greedy." It sounds quite trite, but it's something that stuck with me all the time in this industry.
The guys who have built long-term businesses and did all the right things will continue to be the dominant players in this market. We're still quite young in this sector, but there are already names out there now that have, in my view, followed the right steps, followed the right processes and brought in a lot of institutional capital.
They've been transparent and open about what they do. They've shared information and they take an approach that they have nothing to hide. If you want to build a successful business in the long bank space, I think those are the steps you have to take.
Bianca Boorer:
What do you guys think the future is of asset backed lending? Do you think there are more approaches to come?
Kawai Chung:
I think if you look at the small-ticket real estate space, there’s 300 lenders or so. Someone quoted me the stats recently. Which is quite astonishing because it’s a quite fragmented market. The statistics tell you that within 300 lenders, there's got to be some bad actors in there somehow. What the industry probably needs to do is figure out what are the best practices for validating whether or not bad practices or bad actors exist.
Some of it is cultural or smell tests. You can't put your finger on it. Other things are quite straightforward. You bring in the right third party to help you validate that.
I think the legal structures that have been put in place by the sounds of it, with some of these platforms that have gone to the wall recently, some of the terms agreed may have been prohibitive for investors to validate portfolios. You probably see changes there where platforms have to be much more open to lenders if they have multiple warehouse lines so that everyone can validate.
For the industry, I think there will be a lot of bad news. Unfortunately for the asset backed space, we've started to be captured under the same breadth as private credit. That's a different industry, but it's just private capital assigned to different asset classes.
Some asset classes have really struggled. The lev loans or the private loans into corporates have had its issues.
If you look at the global financial crisis, if you look across CLOs, real estate and mortgages. With mortgages, there was a liquidity point. With real estate, there was a liquidity point which drove valuations. With corporate loans, you had lots of defaults.
But they didn't all have the same performance profiles from 2008 to 2015. They all performed very differently. They all performed very differently because those different segments of the market evolved very differently out of the GFC as well.
It's a similar situation here. There's been a massive wall of private capital into corporate loans and now we're starting to see those problems. But that sector is ginormous. It's quite easy to look at that and think that the problem is massive in the asset backed space.
The biggest asset backed product in the financial crisis was mortgages. If you looked at a lot of the mortgage portfolios, actually a lot of them recovered quite significantly and quite well post crisis. Now you can argue whether that's because of quantitative easing and everything else. But you didn't see the same recovery profiles in real estate or, to some extent, in corporate loans or sovereigns, for instance.
You have to look at each segment differently, I think, overall. But within the asset-backed finance space, there may be an evolution where back in 2015/16, you had lots of these independent platforms like the PCS where they would validate deals.
We had the securitisation regulations come in, which created a little bit more transparency. There may be further steps going ahead. There may be interesting technological developments as well, which helps to monitor this.
Someone mentioned to me that blockchain might be a good way of managing whether security is perfected for real estate assets and whether assets have been pledged in the right way. Only once across the industry.
I'm sure some smart start up or smart organisations will start creating tools which will help investors validate that for this sector. Actually, that will be a welcome introduction into the market.
But I think it will take a little bit of time for people to figure out what the best practice is and to reevaluate how they underwrite these type of businesses.
But I think the ones that have been following the right steps all the time have been open. It'll be much easier for them to continue to attract capital and those who have not taken those steps yet will struggle a lot more. And that's probably for the best.
Bianca Boorer:
Yeah. Thank you both for joining me today.
Owen Sanderson:
My pleasure.
Kawai Chung:
It's been a pleasure. Thank you.
Bianca Boorer:
And thank you to our listeners. If you have any feedback on this episode, please reach out to us at podcast@9fin.com and we'll see you next time.
Thank you.