Bad debts piling up, Apollo private credit fund forced to cut valuation

The bad debt risk in the credit market continues to escalate, with a series of high-profile corporate defaults triggering heightened alert on Wall Street. Amid recent shocks from the collapse of non-bank financial institutions in the UK, private credit giants have also been affected, with Apollo Global Management’s funds being forced to cut valuations and reduce dividends.

According to a previous article by Wallstreetcn, UK lender Market Financial Solutions (MFS) recently collapsed and entered bankruptcy proceedings in the UK. Court documents show that internal entities within the firm accused it of “serious violations” and significant collateral shortfalls, leading several Wall Street giants providing financing to face substantial potential losses.

This event quickly triggered a chain reaction in the capital markets, with shares of related financial institutions falling sharply. Jefferies Financial Group’s stock plummeted nearly 9.8%, and Apollo’s shares declined by 4.7%. Additionally, the shares of Barclays and Santander also declined after the open, by 3.8% and 1.7%, respectively.

Widespread credit anxiety is spreading through the financial sector. In this context, a business development company (BDC) overseen by Apollo has cut its quarterly dividend and marked down its investment portfolio by about 3%. This move further heightened investor concerns about the overall health of the credit market.

Major Players Face Risk Exposure

Founded in 2006 and led by CEO Paresh Raja, MFS is a non-bank financial company that offers “complex, real estate-backed loans.” The firm mainly provides bridge loans to clients, with its funding highly dependent on Wall Street support. At the peak of its business, MFS’s loan book reached £2.4 billion.

With MFS’s collapse, the Wall Street giants that provided funding are deeply involved. Bloomberg reports that during a bankruptcy hearing, a judge stated that Barclays alone had about £600 million of funds linked to MFS. Atlas SP Partners, part of Apollo, indicated its risk exposure was approximately £400 million. Additionally, sources told media that Jefferies’ exposure was about £100 million. Wells Fargo & Co. and Castlelake LP are also implicated.

Allegations of Double Pledging and Fund Transfers

The core cause of MFS’s rapid collapse lies in potential fraud allegations. Internal entities pushing the company into bankruptcy noted in court documents that December of last year was a turning point, with MFS suspected of transferring “most or all” of the income from certain transactions, with unclear destinations for the funds. Furthermore, the documents accuse MFS of using the same assets to secure loans from different lenders, a practice known as “double pledging.”

In response to these allegations, MFS attributed the issues to “a temporary deadlock that restricted our use of daily banking facilities.” Paresh Raja stated that the current situation does not reflect a failure of the underlying business or asset quality. Authorities have not yet charged anyone with illegal conduct.

Nicole Byrns, founder of Dumar Capital Partners, pointed out that the market has been discussing how to prevent fraud over the past six months, but this incident shows that the ability to identify such behavior may still have weaknesses.

Precursor to Crisis Sparks Wall Street Vigilance

MFS’s collapse is not an isolated case; its pattern is similar to recent struggles faced by US auto loan firm Tricolor Holdings and auto parts supplier First Brands Group, putting major banks under heavy asset write-down pressures.

These series of events have already raised high alert among financial leaders. JPMorgan Chase CEO Jamie Dimon warned that he is beginning to see similarities between today’s market and the period before the 2008 financial crisis, and he pointed out that “some people are doing stupid things.”

In the broader private credit space, tension is also evident. Previously, Blue Owl Capital decided to suspend quarterly redemptions for one of its retail funds, triggering a sell-off in asset management stocks. Bruce Richards, chairman of Marathon Asset Management, compared the market danger to “a train coming straight at you, visible from afar,” and bluntly stated, “The market has just woken up.”

Risk Warning and Disclaimer

Market risks exist; investments should be cautious. This article does not constitute personal investment advice and does not consider individual users’ specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their particular circumstances. Invest at your own risk.