MFS IPO?
For months, we have been asking Paresh Raja’s representatives for comments on….just about everything.
Generally little has been forthcoming, and much of our reporting (there’s a comprehensive guide here) has been informed by the comments and filings from the administrators of the various Market Financial Solutions funding vehicles.
Now, however, founder Paresh Raja, via his lawyers at Mishcon de Reya, has filed an extensive defence to some of the claims.
There are dozens of MFS-linked court cases, but the particular case here is the OpCo, Market Financial Solutions Limited, vs Paresh Raja. This is the administrators of said OpCo seeking to obtain an allegedly missing £1.3bn from Raja personally, and is also the case from which Raja’s asset freezing order derives.
It’s going to set up a spicy hearing down the road! The defence effectively pokes holes in some of the claims from the administrators. In particular, there’s a lot of disputation over the £1.3bn figure for the missing collateral, which the defence describes as “unquantified”.
The defence also reiterates the claim — consistently made by Raja’s team over the past seven months — that the roughly £950m of Mayfair property held in PropCos created by the Magus accountants team is actually “held on trust for the MFS Group”.
Per the defence: “On that basis the money was not lost: it was turned into assets that have grown in value.”
Unexplained, however, is how that’s supposed to relate to the actual funding facilities, all of which have found significant amounts of missing collateral, independently of the claims of the OpCo administrators. Even if the Mayfair property in question (some of which has MFS-funding vehicle charges against it) can be added back somehow, shouldn’t the funding facilities have included only bridging loans?
During the collapse of crypto exchange FTX, customer money was transferred from the exchange to Alameda Research, Sam Bankman-Fried’s hedge fund. As it happened, when crypto prices bounced again off the 2022 lows which brought down the company, there was more than enough cash to pay creditors…and even more significantly, FTX had an 8% stake in Anthropic. This was liquidated for $1.3bn in 2024 to pay FTX creditors, and would be worth more than 100x that if Anthropic goes public at its intended $2trn price talk.
So, could have been a great VC investment, but exchanges are still not allowed to take customer money to yolo into startups! Doesn’t matter how good their boss is at VC, still not ok!
Mayfair property hasn’t had quite the run of Anthropic stock, and it is down in nominal and real terms.
But even if we accept that the shortfalls can be covered by liquidating the property portfolio (and there’s a lot to sell) who exactly should benefit? We looked at a few examples of these PropCos, which have multiple charges against them for different funding vehicles — something which shouldn’t happen with first charge bridging.
On top of that, if the PropCo assets are indeed held on trust for the benefit of the group, what on earth are the MFS vehicles doing lending against them?
All this and more will doubtless be revealed in the next round of filings and counterfilings.
I’ve somewhat more sympathy with the argument in Raja’s defence that significant expenditure was committed since 2012 to “relationship-building and entertainment of potential clients and brokers”.
Nobody goes into bridging finance for charitable purposes, and I can well believe that a certain amount of bling and walking the walk is useful to getting dealflow. It’s not my scene, and not all funders like it, but in certain circles having a swag watch or two is presumably admired.
The defence also revealed a detail I hadn’t come across before — apparently Raja, from “around 2022”, was actively preparing the business for a merger, or a sale or a flotation by 2027-2028. This preparation apparently involved the hiring of a head of governance and customer excellence, a new software system “which was due to go live in early 2026 and which would have provided fully transparent real-time loan information for all funding lines”.
There was also “the expansion from 2023 of the AML/MLR department by the recruitment of a group AML/MLR Officer and General Counsel” — shortly before the Saifuzzaman Chowdhury affair broke — plus various other activities, such as hiring KPMG and BDO to work on pre-IPO governance, and a search for external NEDs.
If anyone got a teaser for an MFS merger, you know where to find me.
9fin news
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GoldenTree lines up CMBS funding for UK acquisitions
9fin’s new column — Hot Stacks — on data centre deals….with a big deal for Anthropic
West Coast Asset Manager brings back portfolio-buying pioneer
Origination MD leaves Barclays
USS alternatives unit hires ex-Atlas banker
SG steps in on Italian consumer warehouse
Barclays refis ABL for clothing chain
First European fund for asset manager targeting SRTs, cash ABS, trade receivables
Swedish performing consumer book still on market post-NPL exit
Lowell clears hurdle for Arini takeover
High five
It’s a week of great excitement in securitisation regulation! All three key European bodies (Council, Commission, and Parliament) have agreed that senior securitisation tranches can be risk-weighted at 5%, when they are both resilient and bear the STS label.
In the topsy-turvy world of European policymaking, this is not a floor, but a floor-of-a-floor (?), but let’s just roll with it for now. Parts of the industry had pushed for even more, but this is still a halving of minimum capital requirements, and it’s likely to be sufficient to ignite the market for mortgage SRTs.
The whole project has a few conceptual oddities — there’s been extensive debate on how to make these capital requirements “risk sensitive”, which is all premised on double-counting the risk sensitivity.
The size of any senior tranche is already risk sensitive. You get a 95% triple-A on German captive auto loans or Dutch prime mortgages vs 65% on non-prime credit cards because of risk sensitivity. While this risk sensitivity is driven by the rating agencies (bad, if you’re a regulator), it seems almost perverse to load another layer of risk-weight sensitivity over the top of that. You don’t need to protect banks from the consequences of buying credit card seniors vs mortgages, because the 30 percentage points difference in overcollateralization already does it.
You could also argue that monkeying about with credit risk requirements on senior tranches is a strange way of going about protecting deposit-taking institutions. These requirements may have gone too high, and it’s good to bring them back again….but the key risks (as demonstrated in 2008) are extension risk and fire-sale risk.
The chance of getting the money back (credit) is unchanged, but market value (which can really give a bank treasury investor a kicking) depends very much on whether the bonds get called at FORD or trade to full extension. Market decline for a leveraged investor can mean forced selling at knock-down prices, with the obvious result. Still, there’s nothing whatsoever about call incentives in any of the European working docs, but tons of hand-wringing about risk-sensitivity, floors, caps of floors and floors of floors.
More recently, we’ve had a nice demonstration of fraud risk (of which more below) — but senior credit losses, where the collateral actually exists, are non-existent outside CMBS. Credit risk is just the wrong target.
Still, that’s the lever we’re using! And it could be a hugely important one, with the potential to reshape European financial markets. The numbers, with mortgages, are just spectacular — ECB figures put loans for house purchase at €5.7trn across the eurozone. If even a modest 5% of that ends up recycled into mortgage SRTs, that’s still a giant new market.
Or is it? The thing is, mortgage SRTs will be pretty levered. Some illustrative worked examples we discussed here (courtesy of Alantra) put senior attachment points for mortgage deals between 2% and 3%. So if 5% of the outstanding eurozone mortgage stock gets put into SRTs, and the investable tranche is 2%, then we’re only looking at €5.7bn in actual money down on the table.
The trouble with mortgages, even though there’s an awful lot of them, is that bank regulation is already quite generous on mortgage risk weights. The output floor could change that, if it happens, but then you’re kind of using one bit of regulation to fix flaws in another bit. That’s not a recipe for a particularly healthy market.
The other trouble is, it’s once again not really about credit risk. The bigger problem for mortgages is interest rate risk, and who owns it, borrower or bank? Transferring the relatively negligible credit risk of prime mortgages to the buyside is one way to get capital into a banking system, but is there actually an undersupply of home lending in Europe? Is there good reason to think this credit risk lives more happily in levered mortgage and SRT hedge funds than on bank balance sheets?
No securitisation, no problem
Listed lender S&U announced this week it was in the final stages of putting together its first private securitisation warehouses, one for car loans and one for bridging, for a cool £600m of debt capacity.
“Nice trade”, one might think. “Good for the two unnamed banks, good for the lender. I wonder if we’ll see more of them”. But you might not think any more than that.
It is so obvious and so standard that a non-bank in either sector would fund through securitisation — initially private, perhaps public down the road — that it seems almost perverse to do it any other way. For consumer lenders of all kinds, securitisation achieves the cheapest, most levered capital structure available, which grows with the business.
Per S&U’s results, it “will provide flexible and scalable funding in line with our credit appetite and methods of operation…it will also give certainty over the credit cycle and do so at a cost saving on S&U’s facilities. Over time, the deal should lead to an improved valuation of the Group’s loan book and its earnings”.
The interesting thing is how long it’s taken S&U to get there. Originally a general retailer, it switched to lending in the 70s. Advantage Finance, its motor business, launched in 1999, and Aspen Bridging launched in 2017.
Up until now though, no securitisation. The business isn’t allergic to debt, though it’s set at very modest levels by securitisation standards — existing facilities are a £280m revolver and a £50m term loan.
We’re talking about a business with roughly a £500m balance sheet, doing £100m of revenue and earning £32m profit before tax — so by comparison to specialist lenders used to raising funding at 20x and financing their risk retentions as well, not much debt!
One can almost hear the screams of the investment bankers.
Presumably by now there are entire generations of origination professionals who have tried and failed to pitch S&U on doing securitisations.
I can imagine it working as a hazing ritual of sorts, akin to sending a builders’ apprentice to go and fetch a “long stand” or a tin of stripey paint. A newly minted director, over from New York and keen to make a mark, pitching a client that’s been holding out on an auto warehouse for the last 30 years…though someone’s finally done it.
There’s certainly a very particular culture at the firm. Chairman Anthony Coombs was a former Conservative MP, for Wyre Forest, whose publication record includes “Bobby and Bubba’s Small Adventures” and “The Reform of Capital Gains Tax”, presumably the sequel.
He’s the heir of original founder Clifford Coombs, and certainly brings his own personality to the company, perhaps helped by a deputy chairman and COO also from the founding family.
Announcing the interim results, he quoted St Paul’s letter to the Galatians; the annual report is somewhat akin to getting buttonholed at the Conservative Party conference.
A sample: “Recent decades have sadly seen an erosion of belief in the free enterprise system, a system which has led to unparalleled levels of prosperity and well-being into the 21st century. This has led to continual state intervention raising the share of gross national product the government controls, the level of regulations it uses and the taxation it demands to pay for this. ‘Governance’ is shorthand for this process of intervention designed to reduce risk but instead simply reducing commercial returns.”
After a brief digression into S&U’s business activity, we get the Iron Lady — “Just over 50 years ago, the then Leader of the Opposition, Margaret Thatcher, assured the nation that ‘the way to recovery is through profits.’ In recent times, British Governments of all colours, obsessed as they are with income distribution over wealth creation, have forgotten this, at S&U, we have not.”
So it may have been quite a journey to get this one over the line. Founder-owned businesses always have peculiarities; S&U certainly has that, but now it has securitisation too.
