Bridging Finance investors face more than $1 billion in losses

Investors in the funds offered by troubled fund manager Bridging Finance Inc. are facing at least $1 billion in losses, according to the firm’s receiver PricewaterhouseCoopers Inc. (PwC).

In its latest court filings, PwC indicated that it expects investors in the Bridging funds to realize between 34% and 42% of the funds’ net asset value.

The last time a NAV was provided for the funds was March 31, 2021, when it was reported as $2.09 billion. Since PwC took over as receiver last April, it has been unable to provide an accurate NAV.

The actual losses faced by investors “will not be known until all of the assets within the Bridging Funds are realized upon, repaid or are otherwise monetized,” PwC said.

In the meantime, the Ontario Superior Court of Justice will hold a hearing on Feb. 25 to consider the latest motion from PwC. The receiver is seeking the court’s approval to abandon efforts to sell the firm and its funds, and to continue winding down the troubled firm.

The proposal to halt the sale process and continue the liquidation follows a recommendation from the law firm appointed to represent investors’ interests. After soliciting feedback from investors on the final bids for Bridging, Bennett Jones LLP recommended that the sale process be terminated “and the continued realization plan be used to generate and distribute proceeds to unitholders.”

Those final bids for Bridging included a cash offer and a restructuring proposal. The law firm’s consultations with investors and advisors reportedly revealed that there was “negligible” support for the all-cash offer. While there was some support for the restructuring proposal, PwC’s “continued realization plan” was favoured by two-and-a-half times as many investors as those who supported the restructuring proposal, it said.

The firm indicated that feedback was received from an estimated 50% of affected investors.

The so-called “continued realization plan” would involve PwC managing the funds’ loan portfolios and returning assets to investors as they are recovered, a process that it estimated may take five years.

Over that period, it’s estimated that the liquidation will incur between $27 million and $36 million in fees (including legal and advisory costs) and another $6.5 million in operating costs. The estimate doesn’t include the costs of potential litigation to recover assets for investors.

As part of the liquidation process, PwC said that it would also “pursue and seek financial recompense from those who caused damage to Bridging and unitholders.”

The latest report from PwC indicates that the “significant losses” that it expects unitholders to suffer stem from how the firm operated before regulators asked the court to step in. PwC was appointed Bridging’s receiver at the request of the Ontario Securities Commission (OSC).

“There appear to have been significant deficiencies in Bridging’s management of the loan portfolio, including the valuation of the loan portfolio and the NAV,” PwC’s report said.

Among other things, it pointed to alleged risk management failures, problematic transaction structures, insufficient collateral, and conflicts of interest as factors that contributed to the expected investor losses.

“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,” it said.

In its report, PwC said that the magnitude of the losses are due partly to “an accumulation of impairments that should have been recognized over time, rather than at the current one point in time,” and it said that it will “continue to investigate whether the Bridging funds reported inflated NAVs to maximize management and incentive fees.”

The OSC has not formally alleged any wrongdoing at the firm, and nothing has been proven.

The proposed liquidation process — which is projected to recover between $701 million to $880 million of the original $2.09 billion in assets for investors, including the legal and advisory fees — doesn’t factor in any recovery from potential litigation, given the uncertainty about what could be achieved there.

An unidentified group of Bridging investors announced that they plan to oppose the recommendation that PwC be appointed to continue winding down the firm at the Feb. 25 court hearing. The group said they will call for an investor vote to be held to determine the course of action.