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David and Natasha Sharpe of Bridging Finance in the company's downtown Toronto offices on April 11, 2019.

Fred Lum/The Globe and Mail

As an alternative lender to borrowers who are too risky for the banks, Bridging Finance Inc. specializes in sticky situations. Yet earlier this year, that pedigree wasn’t enough to salvage one of its largest loans.

Founded in 1987, Allied Track Services Inc. started out as an Ontario family business focused on industrial railway construction. Over time, it morphed into a multinational company with divisions such as track signalling and timber bridge repair.

Bridging became Allied’s lead lender in recent years, extending roughly $100-million in debt, yet by the start of 2021, Allied’s track maintenance division was deep in the red. In January, an external review valued Allied’s assets around $40-million, less than half the size of Bridging’s loan.

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To fix things, Allied filed for creditor protection, with hopes of selling the business to someone who could right-size its balance sheet. But none of the 106 prospective purchasers who were approached submitted a formal bid, and in April, Bridging had to swap its debt for equity in Allied – which no one else seemed to want.

For many years, something like this would have barely registered with investors in the funds that Bridging manages, because it kept churning out solid returns. But two weeks ago, Bridging was put under the control of a receiver, and its top two executives – husband and wife David and Natasha Sharpe – have since been terminated from their posts.

The OSC is now investigating allegations of misappropriated funds and fraud, and whether certain officers made misleading or untrue statements to the regulator. The allegations have not been tested in court.

With fund redemptions by investors frozen and the receiver, PricewaterhouseCoopers LLP, asking for more time to go through Bridging’s complex loan book, the firm’s 25,900 unitholders are largely in the dark about their chances of getting all of their money back. The majority are retail buyers, but they also include some institutions, such as the University of Minnesota Foundation.

Many of these investors were attracted to Bridging, which now manages roughly $2-billion in assets, because it specializes in private debt that pays higher yields than conventional bonds. The money manager got its start providing alternative lending, known as bridge loans, to middle-market companies considered too risky for traditional bank financing.

Helping shed some light, The Globe and Mail has obtained documents that provide new insights into Bridging’s portfolio, and an analysis shows that several of its largest loans were struggling prior to the receivership. These debts comprise a substantial chunk of its portfolio.

Some of these insights can be gleaned from court filings tied to the receivership, but Bridging also allowed some potential institutional investors to review its loan book last fall. One of them, R.C. Morris & Co. (RCM), ranked the loans in Bridging’s two largest funds – the Bridging Income Fund and the Bridging Mid-Market Debt Fund – by grouping them in three tranches: A, B and C. RCM described a C loan as a “bad loan,” explaining that Bridging is “unlikely to collect” on its principal.

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The Income Fund had, as of the end of 2020, total assets of slightly more than $1-billion, and the Mid-Market Debt Fund had about $506-million.

By RCM’s measure, just 21 per cent of the loans were worth an A rating, while 44 per cent were given a C, including the loan to Allied. Most of the loans with a C rating also had deferred interest payments, which is known as a “payment-in-kind.” It was in RCM’s interest to get an accurate picture of the two funds because it led a syndicate that gave Bridging an emergency cash fusion of $126-million in 2020. The money was provided through a “participation note” that effectively gave the group a 10-per-cent interest in all of the loans, and entitled it to cash interest payments, regardless of whether the borrowers themselves paid in cash or were deferring their payments.

Private credit is a notoriously fickle business and alternative lenders charge high interest rates to help compensate for the risks they are taking on. In Bridging’s case, its average interest rate on its 62 loans is 12.1 per cent.

And in this business, even when a loan defaults, it doesn’t always mean lenders such as Bridging are left with nothing. They rank ahead of unsecured lenders and equity holders, so they are first in line to take control of the assets that were pledged as collateral for the loan to help make up any shortfall.

However, some of Bridging’s loans have so many tentacles that it can be tough to track what is really owed, and how much collateral exists.

Take Hygea Holdings Inc. In 2017, Hygea, which owned and operated doctors’ offices throughout Florida, was under financial duress. So, Bridging stepped in and ultimately increased Hygea’s credit 14 times over the next 2 1/2 years to about US$92-million – only to watch the company seek bankruptcy protection anyway in February, 2020.

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When a Hygea investor unsuccessfully sued Bridging during the bankruptcy proceedings, Bridging acknowledged in a court filing that its loans to Hygea were “woefully undersecured.”

That same investor, a holding company called Nevada 5, has also raised questions about a US$3-million personal loan Bridging provided to Hygea’s former chief executive officer, Manuel Iglesias.

In a court filing, Nevada 5 alleges that Mr. Iglesias’s loan documents were “drafted in such a way as appeared intended to conceal the lender’s identity – an extraordinarily unusual feature of any loan agreement, much less one for $3,000,000.” Nevada 5 alleges that Mr. Iglesias negotiated the loan directly with Bridging’s then chief investment officer, Ms. Sharpe.

The Sharpes, through a spokesperson, declined to comment for this story.

Hygea emerged from bankruptcy in July, 2020, with its debt restructured, and is now known as NeighborMD. But when RCM conducted its analysis several months later, it concluded that the health care company’s $130-million debt to Bridging was not good credit, and RCM gave the loan a C rating.

The Globe’s analysis also shows that some of Bridging’s other substantial loans appear to have debatable financial support.

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Its largest loan, worth $180-million, was provided to a company called Alaska Alberta Railway Development Corp., which hopes to build an Alaska-to-Alberta railway (A2A) that will connect Fort McMurray with the port of Valdez. The A2A proposal has been in the works since 2015 and it recently received a lift by obtaining a presidential permit from then president Donald Trump – something a rival and nearly identical project known as G7G does not yet have.

A2A’s backers have been talking for years about bringing First Nations communities on as equity investors, but the funding has yet to materialize. In an interview with the OSC last month, Mr. Sharpe acknowledged it was time to stop lending A2A more money – its latest amount was $20-million in February – and bring in equity backers instead.

Bridging obtained a personal guarantee on its A2A loan from a businessman named Sean McCoshen, who is the main principal behind the proposed railway. Mr. McCoshen, a financier, markets himself as a bridge between Indigenous communities and financial capital, and he formed a business relationship with former Bridging chief executive David Sharpe over the past five years.

But in his interview with the OSC, Mr. Sharpe was pressed about Mr. McCoshen’s ability to backstop the loan. A cursory review of Mr. McCoshen’s financial statements suggests he has more than enough assets to cover the liability, yet the OSC found the vast majority of these assets came from a $4-billion valuation that A2A says was ascribed to the project by consulting company McKinsey & Co.

Because large infrastructure projects of this sort are highly conditional – major failures in Canada in recent years include multiple liquefied natural gas plants in British Columbia and the Northern Gateway pipeline – and because much of McKinsey’s alleged valuation assumes various governments will step up with more than $10-billion in funding, the OSC wondered whether Mr. McCoshen’s guarantee meant much if Bridging stripped out the A2A project. Doing so left around $100-million in assets in Mr. McCoshen’s name, and many of these have large liabilities against them, such as mortgages.

In fact, when that $4-billion valuation is removed from Mr. McCoshen’s assets, his net worth becomes negative $96-million, the OSC said in court filings.

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The OSC’s probe has also revealed that Mr. McCoshen is tied to some of Bridging’s other underperforming loans.

Bondfield Construction Company Ltd. was one of Ontario’s largest builders of public infrastructure until its 2019 collapse, and it had borrowed $80-million from Bridging two years before it entered bankruptcy proceedings. The company, now under the control of a court-appointed monitor, still owes $46-million to Bridging – yet this debt has been assigned to Mr. McCoshen at no cost. This peculiar arrangement has raised many questions for the OSC’s investigators.

The hope for Mr. McCoshen, it appears, is that there is extra money from Bondfield’s assets after he pays back the Bridging loan. In his April examination with the OSC, Mr. Sharpe said Mr. McCoshen took an interest in the potential return that might flow to Bondfield from a continuing lawsuit against the Toronto Transit Commission. He said Mr. McCoshen was also interested in a property Bondfield owns in the Toronto suburb of Brampton, as well as the potential for Bondfield’s equipment to assist with the A2A railway project.

In an interview with The Globe last week, Mr. Sharpe described assigning the loan to Mr. McCoshen as a “risk manoeuvre.” When it comes to the $46-million still owed, “he’s on the hook,” Mr. Sharpe said, “but above that, he gets the upside.”

For its part, RCM gave the Bondfield loan a B rating, meaning its analysis shows there will be “some recovery” for Bridging.

Mr. McCoshen’s ties to Bridging do not end there. He also helped negotiate a Bridging loan to the Peguis First Nation that is valued around $120-million and charges close to 13-per-cent interest, and he guaranteed another Bridging loan advanced to a Winnipeg-based cannabis company named Growforce Holdings Inc.

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Growforce is a subsidiary of one of Bridging’s largest borrowers, MJardin Holdings Inc. As of September, 2020, MJardin owed Bridging $144-million, and RCM gave the loan a C rating. In 2020, MJardin reported a net loss of $34.8-million and said there are significant doubts about its ability to continue as a going concern.

Mr. McCoshen did not return a request for comment.

Because the receiver’s work is continuing, it’s too early to calculate Bridging investors’ chances of being fully repaid. And while the firm has some large troubled loans, its portfolio also includes debts that look to be in much better shape.

For one, Bridging is a major lender to an American cannabis producer called Harvest Health & Recreation Inc. Last year, Harvest seemed to struggle, but lately cannabis stocks have rebounded dramatically, and higher share prices offered Harvest opportunity to raise equity for debt repayment. Harvest also agreed to a merger with Trulieve Cannabis Corp. this week, and the combined company may have more balance sheet strength to repay debt.

In a similar vein, cannabis producer Tilray Inc. repaid a $64-million loan to Bridging this week, after receiving shareholder approval to merge with rival Aphria Inc. in late April.

Repayments like this help to explain why Bridging now has $301-million in Canadian cash sitting on its balance sheet, as well as US$20-million, according to PwC. The Canadian cash total has climbed by $72-million since the receivership was first requested to weeks ago.

Still, sorting through the complex loan book will take time. After that is done, the receiver will need to settle on the best course of action – which could involve everything from selling Bridging’s portfolios to a different money manager, or unwinding the loans one by one and dissolving the firm altogether.

At a court hearing Friday afternoon, John Finnigan, the lawyer for PwC, called for patience as the receiver sorts out Bridging’s affairs. “No one knows at this point what the right path forward is,” he said.

In the meantime, investors are stuck. This week, the OSC ruled that trading in Bridging’s funds will be frozen until August, which means no one can buy new units or redeem existing ones until then.

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