Equityline SPV Limited Partnership, a company that buys and holds short-term residential real estate mortgages in Canada, has been placed in receivership following revelations from a recent Canadian judgement that revealed it had 70-80 per cent delinquency in its mortgage portfolio. The company is listed on the Jamaica Stock Exchange (JSE) but was suspended recently after its auditors requested to withdraw its audit report.

Receivership is a legal process initiated by a lender or creditor to have a court-appointed receiver step in to take control of a business where the borrowing firm is in default of their lending obligations. This allows the receiver to determine the best route to recover a creditor’s funds and potentially avoid bankruptcy or liquidation of the firm.

In the case of Equityline SPV Limited Partnership, KSV Restructuring Inc was recently appointed as the receiver and manager of all the assets, undertakings and properties of the limited partnership. Thus, KSV Restructuring will dispose of the mortgages in Equityline SPV’s portfolio to satisfy CA$10 million in unpaid loans to Equitable Bank and cover KSV’s CA$700,000 receiver charge.

What led to the decision to place the firm in receivership?

Equityline SPV Limited Partnership accessed a CA$25-million revolving credit facility in August 2021 from Equitable Bank, Canada’s seventh-largest bank. That credit facility was secured by the short-term residential real estate mortgages that made up its portfolio of assets. There were certain terms contained in the general security agreement (GSA) and credit agreement that outlined what Equityline SPV and its affiliates should do to remain compliant with the bank’s terms. The legal title of the mortgages in Equitline SPV’s portfolio were held through Computershare Trust Company of Canada (CTCC). Equityline SPV retained the beneficial ownership of the titles to these mortgages.

According to the affidavit of Stephen Murphy, manager in the mortgage-backed securities operations division of CTCC, Equityline SPV and Equityline Mortgage Investment Corporation (ELMIC) retained and instructed a lawyer in March 2024 to commence enforcement proceedings in CTCC’s name for several mortgages. CTCC never authorised the commencement of those civil actions and never gave any authority to Equityline’s lawyers to commence any proceedings in CTCC’s name.

Sergiy Shchavyelyev, founder, president and CEO of the Equityline Group of Companies, noted in his response or compendium, “As Computershare was the legal title holder pursuant to the custodial arrangement, these proceedings were initiated in the name of Computershare although the beneficial owner of the mortgages is Equityline SPV. Enforcement counsel for Equityline SPV were Terry Walman and Glen Cohen.”

CTCC became aware of these enforcement proceedings when it received legal correspondence from Bethanie Pascutto, a lawyer with the Advocacy Centre for the Elderly, on behalf of Lyle Auten. CTCC requested Equityline discontinue the proceedings, which it then did. CTCC treated the situation as a one-off error. However, it later became aware of several other unauthorised proceedings done in its name. This pushed CTCC to resign as custodian since it was being put at risk from any legal proceedings taken in its name.

CTCC contacted Equitable Bank and informed it of the developments that were taking place. When Equitable Bank did subsequent checks, it discovered that Equityine Services or its affiliates were supplementing payments to Equityline SPV for it to remain current on its monthly interest payments. This was a breach of the reporting obligations as Equitable was not aware of the distressed state of its security, that being the mortgages.

Equityline’s CEO noted in his submission that the use of third-party financing was used because the default rates on the mortgages it held rose sharply between March 2022 to July 2023 as the Bank of Canada increased the country’s policy rate. This was because Equityline SPV didn’t have sufficient capital to redeem all its mortgages in default.

Following all of these developments, Equitable Bank delivered a notice of control on April 23 to CTCC and Equityline SPV, which directed the custodian to follow all its instructions with respect to the mortgage loans. It subsequently retained KSV to perform a review of Equityline SPV’s financial and operations.

“As a result of the defaults, Equitable Bank arranged for title searches to be performed on the properties where it held registered mortgages. The results of this search indicated to Equitable Bank that at least nine of the mortgages it believed were being held as security had in fact been discharged or postponed without the proceeds being paid to the loan and without the authorization or knowledge of either Equitable Bank or Computershare. This equates to CA$3,098,880 of outstanding debt owed to Equitable Bank that is no longer secured by a property charge. This has also reduced the total collateral value by approximately CA$8,229,019,” Equitable added in its submissions.

Equitable sent a demand letter requesting payment on CA$13.62 million remaining to be repaid. Equityline SPV and its affiliates paid CA$3.54 million which reduced its indebtedness to CA$10.07 million. However, no additional funds were paid over to Equitable Bank which moved to use the Ontario Supreme Court of Justice to appoint a receiver and enforce its legal rights.

“As of the beginning of May 2024, Equitable Bank understood that approximately 27 of the 34 EquityLine Mortgages were defaulted mortgage loans, impacting approximately CA$11,164,000 of the CA$13,617,080 owing to Equitable Bank. Stated differently, approximately 80 per cent of the EquityLine Mortgages in number and value were in default. It is unclear how long these defaults have existed, and Equitable Bank no longer knows the true value of its security,” Equitable Bank explained.

Equityline’s CEO Shchavyelyev, in his submission, noted that appointing a receiver wasn’t necessary since the firm was already in the process of enforcing its mortgages on defaulted homeowners. This was also against the backdrop of the fact that all fees already spent by the firm to enforce its mortgages would be for naught since the receiver would start over the process and the limited partnership wouldn’t benefit from this arrangement. He even added that Equityline SPVS had 34 mortgages had a face value of CA$18.16 million.

However, Justice Jana Steele in her endorsement to appoint the receiver stated, further, Equitable Bank is opposed to SPV continuing the administration and enforcement. As noted at para 12 of the affidavit of Jackson Chau, associate director, Special Loans at Equitable Bank, given the history “the bank has no confidence in Equityline to administer the mortgage portfolio. Accordingly, while I understand that it may be more costly for a receiver to administer and enforce the EquityLine Mortgage portfolio, given the circumstances leading up to this application, it is just and convenient, and appropriate in the circumstances for a receiver to be put in place”.

Why does this matter concern the Jamaican investing public?

Equityline SPV Limited Partnership was formed in June 2021 by ELMIC to expand its mortgage portfolio of assets. This investment vehicle allowed ELMIC to contribute up to 20 per cent of a new mortgage as a limited partner while the SPV would originate the remaining 80 per cent of funds for that new mortgage. The credit facility allowed the SPV to jump start its activities.

ELMIC was the limited partner with 100 limited partnership units in the SPV while Equityline SPV GP Inc was the general partner. ELMIC as a limited partner would have its liability limited to its investment in the limited partnership while Equityline SPV GP Inc. would have full management control and run the business. However, ELMIC consolidated the SPV’s numbers in its financial statements.

ELMIC’s series A preferred shares are listed on the JSE and acted as a funding source for the company which is still a start-up business. Those preferred shares were set to mature in January 2024, but the maturity date was pushed back twice before the company was suspended again on July 26.

The company withdrew its recently filed 2023 audited financials less than a month after filing them in June. Those financials, which were audited by Grant Thornton LLP, were given a qualified audit opinion and had a material uncertainty on ELMIC’s ability to continue as a going concern. The financials noted CA$4.68 million of its CA$26.57 million mortgages were past due by 30 days and that no loans were in the default stage known as stage three.

The firm has since ceased to distribute new securities following a request by the Ontario Securities Commission and approved a plan to wind up its operations. The company has never made a profit since inception in January 2018 and had an accumulated deficit per its last set of financials. Thus, investors of the series A preferred shares with a maturity value of US$5.37 million don’t know when nor how much of their money they will recover.

Any firm which is suspended for more than 180 days by the JSE shall be automatically delisted. This means that if no new developments occur before January 22, 2025, the company’s preferred shares would be delisted.

The Jamaica Observer has not received any responses from Shchavyelyev nor any other Equityline personnel up to press time on all these developments.

All information contained in this article was retrieved from https://www.ksvadvisory.com/experience/case/equityline.