David and Natasha Sharpe, who formerly ran Bridging Finance, in the company's downtown Toronto offices on April 11, 2019.Fred Lum/The Globe and Mail
Bridging Finance Inc.’s investors will lose an estimated $1.3-billion under a final proposal to scrap selling the private lender in favour of winding down its troubled loan portfolio.
The sale process was initiated by Bridging’s court-appointed receiver, PricewaterhouseCoopers LLP, in August, 2021. After engaging with more than 200 potential bidders and then narrowing the formal offers down to two, PwC determined the final bids were unsatisfactory.
Instead, the receiver will ask a judge to approve a liquidation of the loan portfolio that PwC estimates will ultimately return between 34 per cent and 42 per cent of Bridging’s net asset value to its investors.
Bridging managed $2.09-billion when it was put under PwC’s control last April, which means investors are expected to recover between $701-million and $880-million. At the midpoint of this range, their total loss would be $1.3-billion.
How Bridging Finance fooled Bay Street – and hundreds of millions of dollars disappeared
The scandal has implications for every major bank and independent brokerage in Canada, all of whom sold Bridging’s private debt funds. In total, the private lender has 26,000 investors – the vast majority of them retail buyers.
Bridging specialized in making short-term loans to high-risk borrowers and charged an average 12 per cent interest rate to compensate for the uncertainty. This allowed Bridging to offer investors an annual return of about 8 per cent, which enticed elderly retail investors in a world of stubbornly low interest rates.
The business was a very profitable one for Bridging’s owners. Over a four-year period from 2017 to 2020, the management and incentive fees they earned totalled $148-million, plus an additional US$5-million.
The receiver will ask a judge to formally terminate the sale process on Feb. 25. If approval is granted, PwC hopes to make an initial distribution by June 30, with additional distributions likely made on a semi-annual basis as Bridging’s loans mature. The receiver has also said it is considering litigation against some Bridging officers and owners, and any proceeds from that could boost investor recoveries in the future.
As recently as November, when final bids for Bridging’s loan portfolio were being put together, estimates of investors’ losses totalled $800-million to $1-billion, The Globe and Mail reported, based on expectations from people familiar with the sale process. Ultimately, though, Bridging’s numerous deficiencies deterred bidders.
“Bridging’s overall lack of appropriate corporate governance, including its failure to address conflicts of interest, its inconsistent and often ineffective loan management practices, and failure to appropriately recognize and account for loans that were unlikely to be fully repaid have contributed to the substantial losses the receiver anticipates unitholders will suffer on their investments in the Bridging funds,” PwC wrote in a new report detailing the expected losses.
Bridging is currently under investigation by the Ontario Securities Commission after the regulator discovered several problematic loans and alleged impropriety. In one instance, Bridging’s largest borrower allegedly transferred $19.5-million into the personal chequing account of its chief executive officer.
Regardless of what comes from that probe, the expected investor losses have shattered the pristine and prudent image once projected by Bridging. Run by husband and wife duo of CEO David Sharpe and Natasha Sharpe, the chief investment officer, the private lender once seemed unstoppable. Mr. Sharpe had a background in compliance, Ms. Sharpe’s roots were in credit and risk management, and Bridging told investors it never experienced even one loan loss.
In its latest report, PwC said Bridging had fairly solid practices for reviewing and underwriting loans, but trouble often arose after its loans were advanced. The way in which Bridging’s loans were recorded on its books “often did not reflect subsequent risks or changes in the borrower’s financial position,” PwC wrote.
The receiver did not name specific borrowers, citing confidentiality concerns, but it provided ample examples of inadequate practices it discovered. In one instance, the collateral pledged to Bridging consisted largely of the borrower’s inventory. Yet PwC discovered the borrower’s inventory was destroyed and had been written down on the borrower’s financial statements. Bridging, meanwhile, “did not report any associated writedown or impairment of this loan, even though it was significantly undersecured.”
Bridging also had a habit of allowing struggling borrowers to defer cash interest payments. PwC found 30 borrowers with loans totalling $1.05-billion were not paying cash interest. This amounted to 62 per cent of Bridging’s total loan portfolio, after accounting for cash on its balance sheet.
And PwC found, in multiple instances, Bridging made further loans to existing borrowers who were already struggling – yet wouldn’t account for the additional risk. “In many instances, new collateral was not available from the borrower in consideration of additional loan advances,” PwC wrote.
Although many loans struggled, PwC could find only one significant writedown by management between Jan. 1, 2017, and the time of the receivership. PwC has previously alleged this practice likely boosted management fees Bridging’s owners earned because the fees were calculated as a percentage of the loan portfolio’s net asset value.
As well, despite the Sharpes’ assurances they had protected Bridging’s loan portfolio by ensuring the lender would be repaid first if something went wrong – often by demanding personal guarantees from borrowers – PwC found multiple instances in which the guarantee and collateral pledged were quite weak.
“While a personal guarantee should add to the value of the overall security package, the receiver identified a number of instances where the personal guarantees were provided on an unsecured basis or were either not supported by a personal net worth statement or Bridging did not take adequate steps to validate or verify the statement provided,” PwC wrote.
Last December, The Globe reported Bridging Finance’s largest borrower used fabricated investment documents to secure his loans. Sean McCoshen, the founder of a Bridging-backed company that proposed to build a railway from Alberta to Alaska, provided the private lender with a 2017 account statement showing he had investments worth nearly $180-million with the Carlyle Group, the U.S. private equity giant. The two funds listed in the purported Carlyle statement, however, do not exist and have never existed.
PwC also flagged alleged conflicts of interest between Bridging’s officers and its borrowers, which is a focus of the OSC’s continuing probe. The receiver went into detail about loans made to Gary Ng, a Winnipeg-based businessman who bought a 50-per-cent stake in Bridging Finance for $50-million in 2019.
Six months later after his purchase, an investigation revealed Mr. Ng had forged collateral documents and he wasn’t worth anywhere near what he’d said he was. This spelled trouble for Bridging because it had lent Mr. Ng and his companies $132-million.
Bridging’s owners – Jenny Coco and Rock-Anthony Coco, who owned asphalt giant Coco Paving Inc., and Natasha Sharpe – bought back Mr. Ng’s stake for $5, which has already been documented by the OSC. However, in its latest report to the court, PwC said it is “not aware of any meaningful disclosure having been made to unitholders” regarding the conflict of interest and the issues with Mr. Ng’s allegedly false collateral.
PwC also discovered that an agreement between Bridging’s owners and Mr. Ng pertaining to buying back his stake may include a covenant that prevents Bridging from suing Mr. Ng and some of his related corporations.
Details of the final two bids from Bridging’s sale process have been kept confidential, but PwC disclosed one was a cash bid that was “lower than the low end of the range of estimated recoveries” under its preferred liquidation, and the other was an investment proposal that would keep Bridging running by restructuring the lender under new management.
Lawyers representing Bridging’s investors said unitholders and their advisers support liquidation roughly 2.5 times more than the investment proposal, PwC wrote, and there is “negligible support” for the cash bid.
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Tim Kiladze
Greg McArthur