One of Bridging Finance Inc.’s worst-performing loans was advanced to a business partner of Jenny Coco, the private lender’s majority owner, and the debt has languished on Bridging’s books for a decade, The Globe and Mail has learned.
The Globe has also learned that responsibility for the debt changed hands. Initially, the loan to Toronto real estate developer Sam Mizrahi was advanced by a small investment vehicle created by Bridging’s founders, Ms. Coco and Natasha Sharpe. However, it was later assigned to Bridging’s flagship retail investor fund, even though it was at odds with how the retail fund was marketed to investors. Because of the transfer, the fund’s investors are now saddled with the bad debt.
Mr. Mizrahi is currently the driving force behind The One, a long-delayed luxury skyscraper now under construction at the corner of Yonge and Bloor Streets in downtown Toronto. The One, which is backed financially by Ms. Coco, will be one of the tallest dwellings in Canada once it is erected.
How Bridging Finance fooled Bay Street – and hundreds of millions of dollars disappeared
The Globe’s discoveries about Mr. Mizrahi’s loan, which was not made in support of The One, but a prior condo development, mark the first reported instance in which Bridging provided funds to a borrower with significant commercial ties to Ms. Coco. They also raise more questions about whether Bridging made sufficient disclosures about the links between its ownership group, its officers and its borrowers. Not only was Ms. Coco Bridging’s majority owner, she also sat on the credit committee that approved its loans.
The loan in question was originally worth $16.3-million and was advanced in 2012 to a company controlled by Mr. Mizrahi. At the time, Bridging was a small private lender controlled by Ms. Coco, her brother Rocky Coco and Ms. Sharpe, who was Bridging’s chief executive officer and a minority owner. The Mizrahi loan was underwritten through an entity called Bridging Capital Inc.
Two years later, in 2014, part of the loan was assigned to the Sprott Bridging Income Fund, which was an investment vehicle Bridging co-created with Sprott Asset Management to appeal to retail investors. More of the loan was subsequently transferred to this retail fund.
Around the time the loan was first assigned, Ms. Coco entered into a real estate partnership with Mr. Mizrahi to develop The One. Since 2014, Ms. Coco has injected $30-million of equity into the project and also lent The One $90-million.
The One is now being built, but Bridging’s loan to Mr. Mizrahi has been in default since 2018, The Globe has learned. The total loan size has ballooned to $48-million because it does not pay cash interest. Instead, its accumulated interest has been added to its principal. This structure is sometimes used by troubled borrowers who are short on cash.
None of the parties directly responsible for the original loan, or for its transfer to the Sprott Bridging Income Fund, responded to multiple lists of detailed questions sent by The Globe.
However, Bridging Finance is currently under investigation by the Ontario Securities Commission and potential conflicts of interest have been a key focus of the probe. The regulator also placed Bridging under the control of a court-appointed receiver in April, 2021, after discovering several problematic loans and alleged impropriety. In one instance, Bridging’s largest borrower allegedly transferred $19.5-million into the personal chequing account of then Bridging CEO David Sharpe, Ms. Sharpe’s husband.
To date, the OSC’s allegations have centred on the couple. Mr. Sharpe took over the CEO role in 2016. Both were relieved of their roles in May, 2021, shortly after the Bridging was put under the control of the receiver, PricewaterhouseCoopers LLP.
The circumstances surrounding the Mizrahi loan may widen the scope of the investigation. The OSC and PwC declined to comment for this story, but The Globe has learned that PwC is actively reviewing Mr. Mizrahi’s debt.
The relationship between Ms. Coco and Mr. Mizrahi may also make her a target of investor recovery efforts. PwC is currently negotiating the sale of Bridging’s loan book and significant losses are expected. Multiple outcomes are on the table, sources close to the process have told The Globe, but one potential scenario is selling the entire portfolio at a price that amounts to a 65-per-cent loss for investors.
When Bridging first advanced its loan to Mr. Mizrahi in 2012, the lender had just opened its doors and was largely funded by Ms. Coco and her family. Ms. Coco and her brother, Rocky, are the principals behind asphalt giant Coco Paving Inc. and they partnered with Ms. Sharpe to create the lender.
Ms. Sharpe has a background in credit and risk management, and she met Ms. Coco around 2009 while serving as an adviser on a Coco Paving acquisition. (The paving company was recently sold to an affiliate of GFL Environmental Inc. for an undisclosed sum.)
Bridging’s $16.3-million loan to Mr. Mizrahi was one of the first loans it ever underwrote, and the debt was advanced in support of a condominium building Mr. Mizrahi was constructing at 181 Davenport Rd. in Toronto’s upscale Yorkville neighbourhood. Mr. Mizrahi sought financing because his business partner on the project had his family’s assets frozen and could no longer advance funds.
By 2014, Bridging had partnered with Sprott Asset Management, one of Bay Street’s best-known money managers, to create the Sprott Bridging Income Fund and attract retail investors. In December, 2014, at least $11.3-million of the Mizrahi loan was assigned to this fund, court documents show.
Under the first Sprott Bridging loan agreement, the Mizrahi debt was set to mature in June, 2015, but Mr. Mizrahi had the right to extend it for one six-month period. Beyond that, many details of the assignment remain murky.
Because of the secrecy, it is not known if the loan was sold to Sprott Bridging Income Fund, which would mean money was exchanged, or it was simply assigned at no cost.
But court documents clearly show that Ms. Coco partnered with Mr. Mizrahi on his ambitious plans for The One the same year the loan was assigned. Ms. Coco’s family company is a 50-per-cent equity investor in The One, and Ms. Coco became an officer and director of the company that owns The One on the same day – Dec. 17, 2014 – the loan agreement between Mr. Mizrahi and the Sprott Bridging Income Fund is dated.
There is no evidence to suggest the Bridging loan was used in support of The One. In court filings Ms. Coco has stated that Bridging has “no financial interest” in that development.
However, it is unclear why Bridging’s loan to Mr. Mizrahi still has not been repaid even as The One progresses.
In 2015, Mr. Mizrahi stated in an affidavit that the 181 Davenport project had faced delays due to weather and environmental issues, but the project was set to be completed in the fall of 2016, according to court filings. For reasons that aren’t known, the project’s last unit was sold four years later, in July, 2020, according to court filings.
Mr. Mizrahi did not respond to detailed questions about how the cash was used and why the loan is in default.
As for Bridging, Ms. Coco and the Sharpes have not explained why they thought this was an appropriate loan for its flagship retail investor fund in the first place.
The lender charged a high interest rate to account for the risk. The original loan charged 20 per cent annually and the transferred loan charged 12.4 per cent annually. But Bridging marketed the Income Fund by stressing a focus on a type of lending known as factoring – loans backed by receivables. Bridging also emphasized lending against hard collateral.
Bridging loans also did not usually have long time horizons. The company’s marketing materials described how Bridging loans were designed for “short-term needs,” such as restructuring existing debt or helping to fund acquisitions by providing a temporary loan before the borrower transitioned to a traditional lender, such as a bank.
As well, Bridging was known to sue borrowers who defaulted on their loans, and the company often had the ability to pursue the assets of officers and directors of its borrowers, who were sometimes required to sign personal guarantees as a condition of borrowing.
According to Mr. Mizrahi’s 2014 loan agreement with the Sprott Bridging Income Fund, two of his companies guaranteed Bridging’s loan. There is no litigation in Ontario showing that Bridging sued Mr. Mizrahi or those companies over the debt.
Court and land title records show that Bridging also has some security in the form of property that could be seized or sold in the event of default, with a claim on a retail store space at 181 Davenport that was owned by one of Mr. Mizrahi’s companies. Rents collected from that space were supposed to be assigned to Bridging, public records show. The space is currently being used as a sales centre for The One.
There is no public record detailing how much rent, if any, The One has paid to Bridging.
Neither David Sharpe nor Natasha Sharpe responded to specific questions about what steps Bridging took to recover the debt. They also did not respond to questions about what safeguards were put in place to protect Bridging’s investors from any potential conflicts of interest arising from the Mizrahi loan.
In an e-mailed statement to The Globe, John Wilson, who previously worked at Sprott, the Income Fund’s co-manager, said no one informed Sprott about the possible conflict of interest pertaining to Mr. Mizrahi and Ms. Coco.
Mr. Wilson now works at Ninepoint Partners LP, which is the new name for Sprott’s alternative investing arm following a management buyout.
“Bridging Finance was obligated, both contractually and as an OSC registrant, to disclose any conflicts of interest to Ninepoint and to unitholders,” Mr. Wilson said. “At no point did Bridging disclose any such conflict, nor did Ninepoint have any knowledge of a conflict.”
The Income Fund ultimately grew to $1-billion in assets, amounting to half of Bridging’s $2-billion in assets under management at the time of its receivership, but the co-management agreement between Bridging and Ninepoint ended in 2017.
A number of the loans in the Income Fund have defaulted, including the Mizrahi debt, which has complicated the current process of selling off Bridging’s loan book.
In September, 2020, a team from Agentis Capital pored over Bridging’s financials to grade the quality of its loans, because the lender was trying to secure emergency funding after COVID-19-fuelled investor redemption requests.
With respect to the Mizrahi loan, the consultant’s report obtained by The Globe suggested there is very little collateral backing the loan. Agentis gave the Mizrahi loan its worst rating – calling it a “C loan,” on which Bridging was “unlikely to collect on their principal.” Over all, 44 per cent of the Income Fund was given that grade by Agentis.
The report stated that “downside collateral” Bridging could seize in a worst-case scenario amounted to $2.6-million. At that time, the Mizrahi loan accounted for 4.7 per cent of Bridging’s Income Fund.
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