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 are expected to lose at least $580-million, according to lender’s court-appointed receiver, marking the first official writeoff estimate for the private-loan portfolio.
The receiver, PricewaterhouseCoopers LLP, has been trying to value Bridging’s loans since it took control of the company in late April, but until now it had not given a formal indication of likely losses. The new projection of $580-million amounts to 36 per cent of the $1.6-billion Bridging had lent out as of Oct. 31.
PwC has also cautioned that investor losses could rise. The receiver is currently conducting a sale process for the private lender, and final bids will determine the extent of the losses. The receiver noted in a new report to Bridging unitholders that “the total overall loss may ultimately be greater than the [estimate].”
The Globe and Mail has previously reported that investors are expected to lose between $800-million and $1-billion, according to people familiar with the sale process.
How Bridging Finance fooled Bay Street – and hundreds of millions of dollars disappeared
Bridging Finance’s largest borrower used fabricated investment documents to secure loans
Bridging’s funds brought in assets from 26,000 unitholders, the vast majority of whom are retail investors.
PwC’s estimates stem from a valuation it conducted for Bridging’s tax purposes. When assessing the loans, the receiver was able to estimate what is known as a “doubtful debt reduction” for the 2021 taxation year. Such reductions are made when calculating a firm’s income, and a reserve for bad loans is allowable “where repayment is doubtful or the loan is impaired.” The income-tax loss can be deducted by unitholders.
PwC is still trying to salvage what it can from the troubled loan portfolio, but the process has been a challenge because the receiver has already discovered that Bridging’s largest loan is likely worth a fraction of its book value. A final loss figure for the full portfolio is expected early in the new year, the receiver wrote.
Bridging had assets under management worth $2-billion when the receiver was installed in late April. While the majority of these assets had been lent out, Bridging has a sizable cash balance, which gives investors a bit of a cushion. At the beginning of December, Bridging had cash account balances worth $282-million and US$115-million.
PwC also provided investors with an update on the process for selling Bridging and its loans, noting that 14 bidders were invited to the second round of bidding, and 11 went on to submit “final bids.” Of these, four were for “substantially all” of Bridging, and the rest were for individual loans.
Because there are different types of bids, the receiver must now reconcile the two groups. Those that were made for the whole business are likely at a discount to the sum of individual loans – akin to a bulk discount.
A final evaluation of the bids is expected by the end of January.
Although PwC has been evaluating Bridging’s entire loan portfolio, the receiver has spent much of its time assessing a single borrower, Sean McCoshen, who has ties to more than $500-million worth of Bridging’s loans – about one-quarter of its assets under management. Mr. McCoshen had personally guaranteed the largest loan in Bridging’s portfolio, to Alaska-Alberta Railway Development Corp., or A2A, which planned to build a railway from northern Alberta to ports in Alaska.
Earlier this month, The Globe reported that Mr. McCoshen used fabricated documents when posting collateral, falsely suggesting to the private lender he had nearly $180-million in investments. In 2017 he provided Bridging with an account statement showing he had investments with the Carlyle Group, the U.S. private-equity giant, worth $104-million, and the next year Mr. McCoshen valued the Carlyle units at $179.2-million in a personal-net-worth statement.
However, The Globe discovered that the two funds listed in the purported Carlyle statement do not exist and have never existed.
Over the summer, Mr. McCoshen filed for personal bankruptcy, and documents submitted as part of the process showed he had $20-million in assets and $222-million in liabilities – but the alleged Carlyle investments were not included. His bankruptcy trustee has since received a statutory declaration from Carlyle’s global general counsel stating Mr. McCoshen has never been an investor in Carlyle, he was never an employee of Carlyle and the investments he allegedly owned do not exist.
PwC said it has not been able to interview Mr. McCoshen because of his claim that he is “medically unfit for examination.” However, he responded to some questions in writing through his lawyer and addressed the Ontario Securities Commission’s allegation that a company he controlled transferred a total of $19.5-million to former Bridging CEO David Sharpe’s personal chequing account between 2016 and 2019 – often shortly after Bridging had advanced loans to Mr. McCoshen’s projects.
Mr. McCoshen, through his lawyer, alleged that the amount was requested by Mr. Sharpe, and that Mr. Sharpe told him that if he didn’t send the money, the former CEO “could take over [Mr. McCoshen’s] company [A2A] at any time.”
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