PrefBlog

The Bridging Finance soap opera continues:

Bridging Finance Inc. owners Jenny and Rocky Coco are being sued by the private lender’s receiver and its senior creditor, BlackRock Inc., for their alleged roles in Bridging’s demise, marking the first instances in which either sibling has faced direct legal action in the two-year saga.

The two separate lawsuits, filed in Ontario court, allege negligence, fraudulent misrepresentation and breaches of fiduciary duty, among other things. The cases name multiple other Bridging officials as defendants, including David and Natasha Sharpe, the husband-and-wife duo who previously ran the lender, as well as Bridging’s former chief financial officer, general counsel and chief compliance officer.

The lawsuit by the receiver, PricewaterhouseCoopers Inc., alleges damages worth $1.7-billion, while BlackRock is seeking $75-million. Both parties have also asked a judge to approve an accounting or tracing order to track any funds that were wrongfully diverted into any type of property owned or registered by the defendants.
…
Ms. Coco is already a defendant in lawsuits connected to Bridging, because of allegations that she may have used investor money as part of her business relationship with Toronto real estate developer Sam Mizrahi, but the two new cases deal directly with her alleged role in the private lender’s demise. In addition to her ownership and board seat, Ms. Coco also sat on Bridging’s credit committee, which approved loans.

Before its downfall, Bridging was one of Canada’s best-known private lenders. Its business model was built on raising money from retail investors and then lending those funds to mid-sized companies that didn’t meet the credit standards of banks. At its peak, Bridging managed $2.09-billion on behalf of 26,000 investors.

Bridging’s receiver estimates that investors will lose $1.3-billion, and to recoup as much money as possible, PricewaterhouseCoopers is now suing multiple parties, including the lender’s former auditor, KPMG LLP, for $1.4-billion.

BIS has released a Bulletin by Benoit Mojon, Gabriela Nodari and Stefano Siviero titled Disinflation milestones:

Key takeaways

• • Insights into how the incomes of workers and firms absorb the disinflation burden in the euro area and the United States can be gained by decomposing changes in the GDP deflator into its underlying
  components.
• • Nominal wage increases of 4–5% in the euro area and 3–4% in the United States this year and next year are compatible with bringing inflation within reach of 2% by end-2024, provided that import price growth slows and profit margins stabilise or slightly shrink.
• • From a historical perspective, the 2023–24 disinflation path for prices and nominal wages is within the range of past disinflation episodes in both economies, although it remains uncertain how price and wage setters will react to the above-target inflation from 2021 onwards.

…
Importantly, in neither the euro area nor the United States does disinflation require subdued increases in nominal wages. Disinflation is expected to take place in the face of nominal wage increases hovering around 4–5% in the euro area and 3–4% in the United States (see also Graph 1). Inflation may thus come down even as nominal wage growth remains robust, provided that profit margins moderate somewhat. The markup is indeed projected to marginally weaken in both economies, although at different times. In the euro area, markup would decline in 2023 and remain stable in 2024, after having risen in 2022. In the United States, the markup, having declined in 2022, would remain basically flat in 2023, before partially recovering in the second half of 2024.

By contrast, the dynamics of real wages differ markedly on each side of the Atlantic. In the euro area, by the end of 2024, real wages will return to positive growth rates. But these will remain too low to fully recoup the fall incurred in 2022, following the surge in energy prices after the invasion of Ukraine. By contrast, the energy shock was much more muted in the United States; partly as a result, real wages had already stabilised by the end of 2022. They are expected to start rising again in both 2023 and 2024, albeit more slowly than productivity does. This would partially correct for the large increase in ULC recorded in 2022.
…
The above analysis suggests that inflation may fall to within reach of 2% by late 2024 in both the euro area and the United States, even if nominal wages rise about twice as much, provided that import price growth slows and profit margins at least stabilise. If developments in any of the inflation components put the disinflation process in jeopardy at some point over the course of the next 18 months, when should an alarm bell ring? The answer is: relatively soon. This is because a striking feature of inflation forecast errors is that they correlate strongly across time horizons. This point cannot be taken for granted, as consumer inflation may be highly volatile and one might surmise that short-term projection errors are largely unrelated to medium-term ones. Yet this is not generally the case. Instead, if actual inflation next year is above the forecast formulated now, inflation in the following year is also highly likely to overshoot the forecast. This pattern applies to all forecasters: as shown in Graph 3, the OECD, Consensus, ECB and the Fed forecast errors over an eight-quarter horizon are very highly correlated with the forecast errors over the four-quarter horizon. What is more, the slope of the line that relates medium- to short-term projection errors is not far from unity, implying that forecast errors are not only highly correlated but they tend to be similar in size. This implies that, if inflation in 2023 turns out higher than projected, the benign disinflation currently expected over the medium term would become less likely. Thus, actual inflation and its components in 2023 will provide an early indication of whether the monetary policy stance needs adjusting.

Sarah Breeden, Executive Director for Financial Stability Strategy and Risk of the Bank of England, gave a speech titled Investing in financial stability:

But corporate debt can come with spillovers – where actions after a shock can amplify its effect on others (externalities and market failures as an economist would say), with potential consequences for the stability of the financial system. The FPC has identified two main channels through which this could happen.

The first operates through lender resilience and brings the risk of a ‘credit crunch’. Over-indebted companies might face challenges servicing their debt. And if they default, lender losses can test lender resilience and hence provision of credit to the economy more broadly. The second operates through borrower resilience and brings the risk of ‘debt overhang ’. In a downturn, more highly indebted corporates can reduce investment and employment by more than those with less debt, as we saw during the global financial crisis (GFC). This behaviour can amplify macroeconomic downturns, further affecting corporate resilience, and potentially also increasing losses for lenders on other forms of lending.
…
Research shows that the credit crunch following the GFC caused direct damage to companies and the real economy over and above the effects of a normal downturn. Back then, banks with weaker capital ratios and those more exposed to the US mortgage market constrained lending activity by more than other lenders as they focused on rebuilding their own balance sheets.

This had wide-ranging consequences: as I’ve mentioned before, those directly affected by this credit crunch cut their investment more than unaffected companies. These same companies also experienced weaker productivity growth and were more likely to fail . And other companies exposed to these directly affected companies reduced their own employment, grew more slowly and achieved lower productivity.

There is evidence this had a sizable impact in aggregate. Studies show that the excessive tightening of corporate financing conditions during the GFC accounted for 33-50% of the increase in SME unemployment in the United States, while contributing to 12.5-30% of the reduction in productivity among Italian corporates.
…
Banks are not the only providers of finance to the real economy. UK corporates, particularly large ones, have become increasingly dependent on financial markets as a source of lending. Indeed, market-based finance as a share of aggregate corporate debt has increased from 40% in 2009 to over 50% in 2022, accounting for nearly all of the increase in net lending since 2007.

In theory, the availability of market-based finance helps mitigate credit supply disruptions, as the existence of a strong market channel avoids over-reliance on bank funding. In addition, some market-based investors have long-term investment horizons and may be well placed to look through short-term dynamics.[3]

But increased dependence on market-based finance leaves UK corporates exposed to new shocks, especially in riskier market segments, like high-yield bond, leveraged lending, or private credit markets. Globally, these markets have almost doubled in size over the past decade. A sudden or disproportionate reduction in investor appetite for these assets, in combination with forced sales and sharp falls in asset prices, could impact UK firms’ ability to access funding, potentially forcing some companies to delever or even default. And given the interconnected nature of these markets, this is not a purely domestic challenge: UK borrowers are exposed to any deterioration in global risk appetite.

One potential trigger for loss of investor appetite is so called ‘fallen angels’ – companies whose credit has been downgraded to sub-investment grade. This is a vulnerability the FPC keeps an eye on, as it could have amplifying effects – with forced selling and many investors scrambling to sell assets at the same time, either because investment mandates prevent them from holding such bonds, or to avoid higher capital requirements associated with riskier debt.
…
So to facilitate the type of investment we need, we need patient funding. That means pools of capital with the right long-term investment horizon, and well-designed investment structures to channel this capital into companies and projects that need it.

The FPC has been active in both these areas. On pools of capital, we have worked with other UK authorities to set up the Productive Finance Working group, which brought together experts from across the financial services industry. The group has produced recommendations and guides to support defined contribution (DC) pension schemes safely investing in less liquid assets. This is in itself a great investment – DC scheme assets more than doubled over the last ten years, and are projected to be around £1.2 trillion by 2035. So the benefits to pension scheme members of long-term investment gains, and to businesses of accessing this pool of capital, will only grow over time.

We also need the right structures to facilitate long-term investment, which links back to our focus on financial stability. Like the CFOs looking to fund long-term projects with long-term investment, we worry when non-bank financial institutions pair illiquid assets – things you can’t sell or exit in a hurry – with short-term liabilities. If investors pull out, the financier needs either to sell assets at a discount, or stop withdrawals – as we saw with commercial property funds in Brexit and Covid.

And because once you suspect others of withdrawing it is rational to do so yourself, ‘run dynamics’ can escalate quickly.

That’s why the FPC has been supportive of work by the Productive Finance Working Group, the FCA and others on the long-term asset fund (LTAF) – a new type of UK fund structure specifically designed for investment in long-term, less liquid assets. From an FPC perspective it ticks the boxes for both our primary and secondary objectives. And just last month the FCA authorised the first LTAFs – hopefully the first of many.

It seems that an LTAF has two key attributes:

LTAFs offer long-term investors access to a wide range of assets, including private market investments, which have until now been available only to a minority of investors. The LTAF will offer new investment opportunities and choice to a bigger group. The wider economy will benefit as LTAFs should also bring fresh capital into important new projects such as infrastructure.
…
The LTAF will be an “open ended” fund, meaning it can grow to accommodate new investor demand by issuing new “shares”. It will also enable investors to withdraw their money, by cancelling shares, according to agreed rules. The shares in the fund will reflect the value of the fund’s holdings.

The fund’s liquidity – the ability to raise ready money in order to meet investors’ potential withdrawals – will be carefully managed. Investors will be able to buy into, or sell out of, the fund, at longer intervals than traditional open ended funds which deal daily. A portion of an LTAF’s assets may, for example, be in listed assets which can be sold more quickly and where a price is more readily available. The rest may be private assets which take longer to sell, or liquidate. The mix and nature of the assets will determine how often investors will be able to buy or sell the fund.

Mirroring this, there are rules to govern the frequency with which the fund’s investments, including private assets, are valued.

It has also been pointed out:

Open-ended funds that invest in illiquid underlying assets but permit daily dealing without notice, can create a liquidity mismatch, which is both hard for fund managers to deal with and potentially brings wider systemic risks. The FCA therefore decided that there must be consistency between the notice required from investors to redeem and how long it will take the LTAF realistically to sell its assets. The FCA rules require at least a 90-day notice period for redemptions (discussed further below).
…
The LTAF is an open-ended fund. However, with a minimum notice period of 90 days to redeem and dealing not allowed more frequently than monthly (plus other permitted liquidity tools), the LTAF looks quite different to other types of FCA authorised funds. Given the nature of the LTAF assets, the FCA has decided that the LTAF can redeem units no more often than monthly – daily dealing is not permitted. In addition, the rules require the LTAF to have a minimum notice period for redemptions of at least 90 days. In practice, the FCA expects that many LTAFs will have significantly longer notice periods.

The period between dealing days will depend on the reasonable expectations of the target investor base and the objectives and policy of the LTAF.

In addition, the rules allow managers to use a range of liquidity management tools appropriate to investment in illiquid assets, if they are disclosed clearly to investors.

Permitted liquidity management tools

LTAFs will be permitted to use various liquidity management tools that take account of the liquidity profile of the underlying assets, these include:

Notice periods on redemptions and subscriptions (including minimum redemption notice period of 90 days).

Initial lock-in periods and minimum holding periods.

Deferral of redemptions.

Limits or caps on the number of units that can be redeemed on one occasion or over a period of time.

Side pockets.

Any liquidity management tools must be clearly disclosed in the prospectus (including worked examples of what they mean for investors in practice).

The FCA is clear that an LTAF should not expect to use (nor rely on) suspension as a means of managing fund liquidity in the normal course of events. The FCA also expects the manager to be able to manage its liquidity so that it would not be forced to sell assets unexpectedly or over a time period when it could not achieve an appropriate value.

Ultimately, it will be for the manager to demonstrate to the FCA during the LTAF application for authorisation process, that its suggested liquidity management tools are appropriate for the investment strategy of the LTAF.
…
Under the new rules for RMMIs as regards retail investors:

• retail investors who receive advice, would be able to access the LTAF subject to the new risk warning and risk summary being provided and of course the suitability test must be met.
• In respect of direct offer financial promotions, retail investors (who are not otherwise certified, self-certified sophisticated or certified HNWIs), will be able to invest up to 10 per cent of their investable assets into an LTAF or other RMMI products (in total) (referred to as restricted investors). Firms will need to take reasonable steps to establish that a retail client is certified as a restricted investor. The new forms of certification, including for restricted investors, are contained in COBS 4 Annex 5R. In addition the appropriateness test must be met.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.0893 %	2,154.7
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.0893 %	4,132.6
Floater	10.46 %	10.66 %	50,782	8.96	2	0.0893 %	2,381.6
OpRet	0.00 %	0.00 %	0	0.00	0	-0.2746 %	3,350.9
SplitShare	5.02 %	7.61 %	42,145	2.54	7	-0.2746 %	4,001.7
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.2746 %	3,122.3
Perpetual-Premium	0.00 %	0.00 %	0	0.00	0	-0.0996 %	2,714.7
Perpetual-Discount	6.29 %	6.38 %	42,234	13.36	34	-0.0996 %	2,960.2
FixedReset Disc	5.98 %	8.15 %	83,849	11.50	63	-0.0161 %	2,081.1
Insurance Straight	6.16 %	6.36 %	57,653	13.34	19	-0.3593 %	2,919.4
FloatingReset	10.57 %	11.08 %	51,544	8.66	2	0.5519 %	2,366.0
FixedReset Prem	6.97 %	6.71 %	312,557	12.64	1	-0.2376 %	2,317.3
FixedReset Bank Non	0.00 %	0.00 %	0	0.00	0	-0.0161 %	2,127.3
FixedReset Ins Non	6.02 %	7.39 %	78,099	12.00	11	0.3913 %	2,315.7

Performance Highlights
Issue	Index	Change	Notes
POW.PR.A	Perpetual-Discount	-2.03 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 21.44 Evaluated at bid price : 21.70 Bid-YTW : 6.54 %
IFC.PR.F	Insurance Straight	-2.00 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 21.72 Evaluated at bid price : 22.00 Bid-YTW : 6.11 %
TRP.PR.D	FixedReset Disc	-1.97 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 14.90 Evaluated at bid price : 14.90 Bid-YTW : 9.40 %
IFC.PR.K	Perpetual-Discount	-1.94 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 6.29 %
IFC.PR.C	FixedReset Disc	-1.79 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 16.50 Evaluated at bid price : 16.50 Bid-YTW : 8.19 %
TRP.PR.G	FixedReset Disc	-1.54 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 15.37 Evaluated at bid price : 15.37 Bid-YTW : 9.17 %
GWO.PR.G	Insurance Straight	-1.43 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 20.75 Evaluated at bid price : 20.75 Bid-YTW : 6.38 %
TRP.PR.C	FixedReset Disc	-1.40 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 10.55 Evaluated at bid price : 10.55 Bid-YTW : 9.99 %
POW.PR.G	Perpetual-Discount	-1.36 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 21.54 Evaluated at bid price : 21.80 Bid-YTW : 6.51 %
TD.PF.B	FixedReset Disc	-1.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 16.30 Evaluated at bid price : 16.30 Bid-YTW : 8.29 %
RY.PR.S	FixedReset Disc	-1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 7.32 %
IFC.PR.E	Insurance Straight	-1.07 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 21.29 Evaluated at bid price : 21.29 Bid-YTW : 6.21 %
CU.PR.J	Perpetual-Discount	1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 19.05 Evaluated at bid price : 19.05 Bid-YTW : 6.27 %
BN.PR.K	Floater	1.09 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 11.12 Evaluated at bid price : 11.12 Bid-YTW : 10.84 %
TD.PF.E	FixedReset Disc	1.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 17.35 Evaluated at bid price : 17.35 Bid-YTW : 8.11 %
MFC.PR.Q	FixedReset Ins Non	1.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 20.54 Evaluated at bid price : 20.54 Bid-YTW : 7.22 %
BIP.PR.E	FixedReset Disc	1.48 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 7.67 %
TRP.PR.F	FloatingReset	1.50 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 14.90 Evaluated at bid price : 14.90 Bid-YTW : 11.08 %
ELF.PR.H	Perpetual-Discount	1.59 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 21.49 Evaluated at bid price : 21.75 Bid-YTW : 6.40 %
CU.PR.C	FixedReset Disc	1.65 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 18.50 Evaluated at bid price : 18.50 Bid-YTW : 7.51 %
GWO.PR.N	FixedReset Ins Non	2.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 12.01 Evaluated at bid price : 12.01 Bid-YTW : 8.46 %
FTS.PR.H	FixedReset Disc	2.77 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 11.86 Evaluated at bid price : 11.86 Bid-YTW : 9.04 %

Volume Highlights
Issue	Index	Shares Traded	Notes
PWF.PR.P	FixedReset Disc	20,000	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 12.18 Evaluated at bid price : 12.18 Bid-YTW : 8.76 %
BMO.PR.E	FixedReset Disc	13,884	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 20.01 Evaluated at bid price : 20.01 Bid-YTW : 7.43 %
TRP.PR.B	FixedReset Disc	12,700	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 10.05 Evaluated at bid price : 10.05 Bid-YTW : 10.19 %
SLF.PR.E	Insurance Straight	11,300	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 5.94 %
MFC.PR.Q	FixedReset Ins Non	10,600	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 20.54 Evaluated at bid price : 20.54 Bid-YTW : 7.22 %
There were 0 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BMO.PR.W	FixedReset Disc	Quote: 16.35 – 24.95 Spot Rate : 8.6000 Average : 4.8298 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 16.35 Evaluated at bid price : 16.35 Bid-YTW : 8.17 %
CM.PR.Q	FixedReset Disc	Quote: 17.10 – 18.95 Spot Rate : 1.8500 Average : 1.2996 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 17.10 Evaluated at bid price : 17.10 Bid-YTW : 8.18 %
CU.PR.J	Perpetual-Discount	Quote: 19.05 – 22.00 Spot Rate : 2.9500 Average : 2.5313 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 19.05 Evaluated at bid price : 19.05 Bid-YTW : 6.27 %
TD.PF.A	FixedReset Disc	Quote: 16.26 – 17.00 Spot Rate : 0.7400 Average : 0.5013 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 16.26 Evaluated at bid price : 16.26 Bid-YTW : 8.21 %
IFC.PR.K	Perpetual-Discount	Quote: 21.25 – 22.00 Spot Rate : 0.7500 Average : 0.5332 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 6.29 %
GWO.PR.Y	Insurance Straight	Quote: 18.25 – 19.00 Spot Rate : 0.7500 Average : 0.5593 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-05-19 Maturity Price : 18.25 Evaluated at bid price : 18.25 Bid-YTW : 6.27 %

This entry was posted on Friday, May 19th, 2023 at 7:10 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.