David and Natasha Sharpe, of Bridging Finance Inc., in the company's downtown Toronto offices on April 11, 2019.Fred Lum/The Globe and Mail
Bridging Finance Inc. received a $126-million emergency cash infusion last year that gave new institutional backers better rights and more seniority than existing retail investors – but decided not to ask existing investors if they approved, according to documents reviewed by The Globe and Mail.
Detailed terms of the emergency money also were not disclosed upfront to existing investors, despite the potential impact on their standing with other creditors should Bridging get into financial trouble. Some details were later outlined in Bridging’s audited year-end financial statements.
Last September, Bridging received $126-million from a group of investors led by R.C. Morris & Co. to help fund extensive redemption requests in the face of COVID-19 market uncertainty. The financial instrument, formally known as a participation note, yields roughly 13 per cent annually and pays its backers monthly interest payments.
Unlike a traditional loan, the participation note gives its backers what amounts to a roughly 10-per-cent stake in every loan in Bridging’s two most popular investment funds. Its monthly interest must also be paid in cash, even though Bridging does not receive cash interest payments from almost half of the loans in the two funds. Instead, the interest on these loans can be deferred, which is known as a “payment-in-kind.”
Despite the complexity, Bridging initially kept investors in the dark about the new infusion, and was given legal advice that the transaction did not require their consent.
With roughly $60-million of the infusion still to be repaid, Bridging’s retail investors – who contribute the vast majority of its fund money – face an extra layer of uncertainty. Because the note is the most senior ranking claim in both the Bridging Income Fund and the Bridging Mid-Market Debt Fund, its backers must be repaid before any money can flow to retail investors, which is a relevant concern after Bridging was placed in receivership on April 30.
Bridging is under the control of PricewaterhouseCoopers LLP following allegations that the money manager improperly used investor funds to benefit some of its founders and executives. The Ontario Securities Commission is now also investigating whether some Bridging officers and directors perpetrated a fraud on unitholders, and whether certain officers made misleading or untrue statements to the regulator, but has yet to announce formal allegations on these matters. PwC terminated former chief executive officer David Sharpe and former chief investment officer Natasha Sharpe last Friday.
Bridging’s emergency funding was briefly addressed in an April 29 interview between Mr. Sharpe and two officials from the OSC, but at the time mostly high-level details were provided, such as the main investor (R.C. Morris, which is also known as RCM Capital), and the amount outstanding.
Mr. Sharpe also told the OSC that Bridging had repaid around $60-million of the note, and that the remaining roughly $60-million was set to be repaid on June 1. According to the former CEO, the emergency money was necessary because redemption requests piled up early in the pandemic, totaling 11 per cent of the Income Fund’s total value.
The Globe has since learned of the financing’s details, which gave RCM and the other backers a stake in every single loan in Bridging’s two major funds, as well as the right to receive cash interest payments from the loans that do not pay their interest in cash.
Documents also show that Bridging took the position that it did not require the consent of its existing investors because the purchases were done at “book value with full cash consideration.” By contrast, however, Bridging asked its investors in December to vote on a proposal to change the terms for redemption requests. Investors ultimately approved, and as of Jan. 1, Bridging has much more control over its redemptions – including the right to outright turn them down in certain funds. Mr. Sharpe declined to comment for this story.
Asked to comment on the deal’s terms, including whether the seniority was necessary because Bridging was viewed as a risky borrower, RCM wrote in an e-mailed statement that it “purchased senior undivided participations in certain of Bridging’s funds at full value. We are co-operating fully with the receiver and all other aspects of this transaction are subject to confidentiality obligations.”
Bridging and RCM have an intricate history. In addition to the emergency funding, RCM lent money to a budding money manager named Gary Ng when he bought a 50-per-cent stake in Bridging Finance for $50-million in 2019. The Investment Industry Regulatory Organization of Canada has since alleged that Mr. Ng forged collateral documents for some loans, leading Bridging’s shareholders to buy back his $50-million stake for $5.
Beyond the equity ownership, Bridging also lent Mr. Ng money, which means RCM and Bridging are both trying to recoup funds they had extended to him. To this end, Bridging recently sold loans it had made to Mr. Ng to a special purpose vehicle set up by RCM, because it believes that doing so will help with their collection. Bridging funds are still short $43-million from loans made to Mr. Ng.
In its receivership application, the OSC originally alleged that Bridging misappropriated $35-million from an investment fund it manages to complete an acquisition for its own benefit; that Mr. Sharpe received $19.5-million into his personal chequing account from a client to whom Bridging had lent more than $100-million; and that Bridging lent $32-million to a borrower two weeks before the same borrower bought a 50-per-cent stake in Bridging.
The regulator is also investigating to see if Bridging failed to make complete or timely disclosure of these issues to investors.
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