HSBC HOLDINGS (HSBC.US) suspends $40 billion private credit investment plan after suffering $400 million fraud loss from the collapse of MFS.

According to reports, HSBC HOLDINGS (HSBC.US) has suspended its plan to invest $4 billion in its own private credit fund, following a $400 million loss due to the collapse of the British mortgage lender Market Financial Solutions (MFS). HSBC HOLDINGS announced this investment plan in June last year. Prior to this, HSBC's Chairman, Brendan Nelson, told shareholders that the bank had "substantially completed" a review of its lending policies and business processes after suffering a $400 million loss. Reports cited two sources familiar with the decision-making process as saying that no funds had been transferred yet and there were no plans to make an investment at the moment. HSBC's first-quarter financial report showed that due to the collapse of MFS causing fraud losses and the impact of conflicts in the Middle East, the bank's pre-tax profit in the first quarter fell to $9.4 billion, slightly below the market's expected $9.6 billion. Expected credit losses sharply rose to $1.3 billion, an increase of $400 million compared to the same period last year. In addition to the $400 million fraud loss related to MFS, the bank also made an additional provision of $300 million due to the Middle East conflicts. Although HSBC did not directly lend to MFS, it disclosed approximately $400 million in "fraud-related" losses in its quarterly performance. The issue lies in the financing chain. HSBC provided back-end leverage financing to Atlas SP, a subsidiary of Apollo, which in turn lent to MFS through special purpose vehicles (SPVs). The report also mentioned that in the related SPVs, HSBC provided funds for 80% of the loan value, while the more common ratio in the industry is around 60% to 70%. On the surface, this is a case of a British lending company, but the real concern is the risk transmission pathway: borrower, private credit institution, SPV, bank financing, and recovery arrangements layer by layer, ultimately causing a bank that is not a direct lender to suffer losses. This is the most easily overlooked aspect of private credit being used as a "safe bond substitute". Risks may not be confined to one loan contract, nor borne only by the ultimate borrower and direct lender. It may spread out along the fund, SPV, repurchase financing, and back-end leverage. Investors see smooth net asset values and stable distributions, but underneath there may be a complex credit transmission chain. The halt in HSBC's $4 billion investment in its own private credit fund is the latest sign of increasing pressure in the global private credit market. In recent years, private credit institutions have created astonishingly high returns for investors. However, this boom in the market has now come to an end. The latest financial reports of the entire industry show that returns are entering a new stage of dullness. Apollo Global Management Inc. stated that the gross return rate of its direct lending funds, which include investment-grade corporate loans, was only 0.5%, far below the 2.6% in the same period last year. Previously, Blackstone Inc. and Blue Owl Capital also announced a decline in returns compared to the same period last year. Meanwhile, with multiple bankruptcy events and external skepticism about the transparency of the private credit industry, as well as concerns about the impact of "AI disruption" on the underlying assets of the industry - the software industry being the largest risk exposure for private credit, investor anxiety is increasing. In September last year, auto loan lender Tricolor and auto parts manufacturer First Brands both declared bankruptcy, and creditors subsequently discovered that both companies had committed fraud by pledging the same batch of accounts receivable to multiple lenders. In February this year, MFS was also involved in a fraud case, with nominal loans of 1.16 billion, but the actual value of the pledged assets was only about 230 million. Furthermore, the "AI taking over jobs" phenomenon has caused significant damage to the global software services sector, further exacerbating investor concerns about the quality of private assets. Redemption requests are flying to the desks of major private equity giants like snowflakes. Given that these types of assets lack liquidity, massive redemptions may force institutions to sell assets at a discount during times of market turbulence. Wealthy individual investors are rushing to redeem funds due to concerns about the overall health of the funds. Many funds open to individual investors limit quarterly redemption amounts to prevent a run on the funds, which further increases investor anxiety. Jamie Dimon, the "Wall Street King" and CEO of JPMorgan Chase, referred to the chaos in the private credit market as "credit cockroaches" last year, sparking global popularity of the term. He expressed concerns about the "bad actors" in the private credit field this year as well, stating that some companies are "doing dumb things". Howard Marks, co-founder of Oaktree Capital Management, also stated that due to the massive expansion of the market over the past decade, the professionalism of private credit has significantly decreased. Cracks have appeared in some areas, and some may have underestimated the severity of these cracks. However, some asset management institutions and analysts believe that the current concerns are exaggerated. Bruce Flatte, CEO of Bruker Corporation, previously stated, "We need to calm down and look at this objectively, it's not as serious as it seems. This is definitely not the 2008 financial crisis, it has nothing to do with the financial crisis." The executive editor of Financial Information Services Group, Inc.'s Debtwire also pointed out that the inherent secrecy of the private credit market often leads to information vacuums, and observers tend to fill these gaps with the worst-case scenarios. The editor stated that the current size of the private credit market is far smaller than the real estate market before 2008. However, the "irrational boom" in this field over the past five years, and the complex financial structures built around the industry, bear similarities to the real estate market before 2008.