An Ontario court has authorized Bridging Finance Inc.’s receiver to reject the two final bids it received during an unsuccessful, five-month effort to sell the private lender.
Instead, the court-appointed receiver, PricewaterhouseCoopers LLP, will oversee Bridging’s remaining loans and wind down the lender’s operations, while simultaneously attempting to recover what it can for Bridging investors through litigation.
PwC sought this very outcome at a hearing in February, but was temporarily derailed by an anonymous Bridging investor. That anonymous investor’s lawyer, Domenico Magisano, urged Ontario Superior Court Chief Justice Geoffrey Morawetz to give them more time so they could prepare an argument against PwC’s plan.
Bridging Finance receiver faces opposition to wind-up plan from unknown investor group
Bridging Finance investors to lose $1.3-billion after sale process terminated because of unsatisfactory bids
But after a hearing on Friday, at which Mr. Magisano conceded he could provide no evidence of the sales process having prejudiced Bridging investors, Chief Justice Morawetz allowed PwC to reject the final bids on Tuesday. Under the approved wind-down, Bridging Finance’s investors will lose an estimated $1.3-billion, or roughly 62 per cent of their assets.
The decision opens a new chapter in the receivership, which was requested in April, 2021, by the Ontario Securities Commission after its investigators alleged Bridging had failed to disclose a number of conflicts of interest between its leadership team and its borrowers.
At the time, Bridging managed $2.09-billion on behalf of 26,000 investors, many of whom were retail buyers drawn to the company’s promise of higher yields than those on other investments in an era of ultralow interest rates. The scandal has implications for every major bank and independent brokerage in Canada, all of which sold Bridging’s private debt funds.
Bridging specialized in making short-term loans to high-risk borrowers and charged a steep average interest rate of 12 per cent to compensate for the uncertainty. This allowed Bridging to offer investors an annual return of about 8 per cent.
Bridging’s annual yield helped its funds explode in popularity. From the beginning of 2018 to the end of 2019, the total net asset value of Bridging’s funds grew threefold – from $660-million to $1.86-billion.
But PwC has alleged Bridging’s portfolio included many struggling loans backed by underperforming assets; that many borrowers were allowed to defer cash interest payments; and that Bridging executives had engaged in self-dealing. “It emerges that Bridging was very good at attracting capital, but highly ineffective at managing that capital,” John Finnigan, one of the lawyers for PwC, said at Friday’s hearing.
PwC initially hoped to sell either Bridging’s entire loan book or many of its individual loans to interested buyers, and the receiver launched a formal sale process in August, 2021. More than 200 potential bidders approached PwC before the receiver narrowed the field down to the two most promising bidders.
However, after an analysis by financial consultants, and after discussions with court-appointed lawyers who represent investors, PwC concluded it could deliver a better and more immediate return for investors if it simply wound down Bridging’s operations and canceled the sale.
The expected $1.3-billion loss does not include any recoveries from litigation the receiver has said it is contemplating bringing against Bridging’s former officers and directors, and against the former auditor of the funds, KPMG LLP.
Bridging Finance, which was run by the husband-and-wife duo of David Sharpe, the lender’s former chief executive officer, and Natasha Sharpe, the lender’s former chief investment officer, was a very profitable business for a while.
Over the four years from 2017 to 2020, Bridging was paid management and incentive fees totaling $148-million, plus an additional US$5-million. However, PwC has alleged that some of these fees were generated from inflating the net asset value of Bridging’s portfolio by not properly accounting for impaired loans.
Before Friday’s hearing, an anonymous group had attempted to rally investor support for an alternative to the plan put forward by PwC. Their campaign included a website, outreach by an Ottawa public-relations firm and the arguments of Mr. Magisano.
But the lawyer conceded in Friday’s hearing that he only represented one investor – who declined to be identified, and whose total investment amounted to about $134,000. Chief Justice Morawetz underscored that figure when dismissing Mr. Magisano’s arguments on Friday.
The investor group declined to respond to The Globe and Mail’s request for comment.
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