Romspen was permitted to buy Woodbine Mall after the property went through two auctions and failed to find a buyer, court filings show.Azad Amin/The Globe and Mail
Three years into Romspen Investment Corp.’s investor redemption crisis, the private mortgage lender resolved a long-standing debt problem by using an emerging bankruptcy strategy: buying a troubled asset and keeping the debt.
In Romspen’s case, that means it will now owe itself $410-million.
Late last month, an Ontario judge approved Romspen’s proposal to buy Woodbine Mall in northwest Toronto from its largest borrower. The mall owner defaulted on his debt years ago and his loan total had swelled to $499-million, or 20 per cent of Romspen’s $2.5-billion flagship fund.
Instead of swapping the mall’s debt for equity, which is a common practice in proceedings under the Companies’ Creditors Arrangement Act, Romspen bought the shopping centre out of CCAA and kept $410-million of the debt intact using a tool known as a reverse vesting order. In court filings, the amount kept on the books is referred to as “retained debt.”
By choosing this path, Romspen is tapping into a form of circular financing that may not get resolved for years. The lender has suggested in court filings that it has redevelopment plans for the troubled mall. However, these could take years to materialize because the Greater Toronto Area is experiencing a real estate development crisis.
Private lender Romspen buys troubled mall from largest borrower after $499-million debt default
Court filings show Romspen was permitted to buy Woodbine Mall after the property went through two auctions and failed to find a buyer. The mall’s court-appointed receiver, Ernst & Young Inc., said in its latest report that the auctions “demonstrated that any sale to a third-party potential purchaser would result in sale proceeds significantly less than the quantum of the Romspen indebtedness.”
How Romspen settled on paying $410-million in debt to cover most of the purchase price, despite lower bids, isn’t clear.
David Preger, a lawyer at Dickinson Wright LLP who is advising the lender, wrote in an e-mail that for the purposes of the Romspen fund’s net asset value, “a substantial loan loss provision has been recorded.”
“The contribution of Woodbine to the Romspen fund’s overall NAV is materially lower than the debt amount,” he added, “and is aligned with the most recent independent appraisal of the asset.”
Mr. Preger did not disclose exact figures because Romspen’s practice is not to communicate individual loan values, but he said that “the transaction structure reflects a number of commercial considerations, including the preservation of future economic optionality, rather than any attempt to manage or avoid negative NAV impacts.”
In a ruling approving the reverse vesting order, Justice J. Dietrich of the Ontario Superior Court said Romspen’s purchase preserved certain tax losses and also prevented a land transfer tax from being paid, among other things.
KPMG LLP, Romspen’s auditor, declined to comment for this story, citing its policy to not comment on client matters.
Romspen's office in Toronto in October, 2024. The mortgage lender resolved a long-standing debt problem by buying a troubled asset and keeping the debt.Yader Guzman/The Globe and Mail
Romspen raises money from predominantly retail investors, then loans it out, often to real estate developers. The lender typically allows its investors to cash out of its funds once a month; however, it has frozen investor redemptions since November, 2022, because it has struggled with loan defaults.
When Romspen first froze redemptions, private debt was one of the hottest sectors in asset management. Private lenders used to pay attractive yields to their investors, usually about 8 per cent annually. But rising interest rates have spurred a real estate development crisis and some private mortgage lenders have cut their distributions or halted them altogether, and have also frozen investor redemptions.
Because Romspen’s redemption woes have dragged on for so long, the lender recently formed an investor advisory committee. In December, this committee released a report to clients, informing them that Romspen has struggled to recover money lent to several “large, complex” projects – including Woodbine Mall.
All five developments were either in receivership or had restructured under creditor protection, according to a Globe and Mail analysis, and each one had borrowed more than $100-million from Romspen.
The broader private credit sector has also wobbled of late, with multiple high-profile fund managers in the United States facing their own redemption crises.
A key feature of private debt is privacy, which means investors in these funds often do not know whom the managers have lent money to. In the U.S., some funds have recently disclosed that software companies have been major borrowers, which has been troubling because artificial intelligence has hurt the sector’s outlook.