THE preference shares of EquityLine Mortgage Investment Corporation (ELMIC) traded on the Jamaica Stock Exchange (JSE) has been delisted due to the company breaching several JSE rules this year.

The notice was sent to brokers on Monday and disseminated more broadly Tuesday morning. The JSE listed five reasons for delisting the Canadian mortgage company, the most breaches listed for any company being delisted for non-compliance with its rules.

EquityLine was in breach of JSE Rule 408 – after it submitted and then withdrew its audited financial statements, JSE Rule 409 – for failing to submit an annual report, JSE Rule 407 – for failure to submit quarterly financial statements, JSE Appendix 3, Listing Agreement, Section 11 for not furnishing certain information to the exchange and JSE Appendix 3, Listing Agreement, Section 12 which deals with timely disclosure of information.

Every company which has securities listed on the JSE, excluding the Private Market, must provide quarterly financials, audited financials and submit an annual report to the exchange as part of its ongoing reporting requirements. This information allows investors to act accordingly in how they trade the company’s securities.

Companies are also expected to maintain certain requirements under the JSE’s listing agreement with section 11 stating that a company should furnish information to the JSE as may reasonably called for while section 12 speaks to complying with requirements such as financial statements, other requirements and the policy statement on timely disclosure.

However, due to the company not being compliant with any of these requirements and the business to be wound up, the JSE decided to expedite the delisting process for EquityLine. If a company is suspended for more than 180 days, they’re automatically delisted.

EquityLine was initially suspended by the JSE on June 4 for its audited financials being more than 90 days late beyond the submission deadline. The company submitted its annual report which contained its 2023 audited financials in the subsequent weeks and was admitted back to trading on June 21.

However, due to certain developments being unveiled in the Canadian courts, Grant Thornton LLP, auditing firm in Canada requested EquityLine to withdraw its auditor’s report. Without the auditor’s report, the company had to withdraw its annual report which put it back in breach of JSE rules. The company’s preference shares were suspended for a second time on July 26 before they were ultimately delisted on Monday.

EquityLine’s previously submitted audited financials showed that it was insolvent as its liabilities of CA$53.24 million exceeded its assets of CA$47.26 million, translating to a shareholder deficit of CA$5.98 million. However, court filings in the Ontario Supreme Court of Justice show that the company’s financial position is way worse than expected with EquityLine SPV Limited Partnership, where it is a limited partner and consolidates its financials, had 80 per cent delinquency in its mortgage portfolio, a far different picture than what its audited financials revealed with no defaults and medium-low risk mortgage investments.

This means that Jamaican investors of the series A preference shares can effectively write off the investment since the potential recovery on the company’s assets is likely lower than expected. Sagicor Group Jamaica’s unit trust and pooled funds own 1,759,000 or two-thirds of the 2,683,400 series A redeemable preference shares while the remaining 100 plus preference shareholders are regular individuals. The preference shares were supposed to mature at US$2 per share but were instead delisted at US$1.265.

What was EquityLine?

EquityLine Mortgage Investment Corporation was a company formed in January 2018 as a mortgage investment corporation (MIC) under the laws of Canada. MIC’s were created as an alternative investment vehicle/financial instrument for investors to fund the growing Canadian real estate market in the 1970s. This provided a safe and regulated mechanism for investors to invest in mortgage loans with tenures between 6-36 months and allowed for qualified individuals and developers to access financing with less rigid terms. Those same borrowers sometimes refinanced with traditional financial institutions at better terms later on after closing the mortgaging with the MIC.

The company was a start-up being led by its founder Sergiy Shchavyelyev, a Russian/Ukrainian immigrant who migrated to Canada at a young age. The company had sought to raise US$10 million – US$20 million on the JSE and do subsequent capital raises on the Toronto Stock Exchange (TSX). Despite the offer getting extended once during the year Jamaica’s stock index was the best performing in the world, the offer failed to garner much local traction. The offer needed to issue a minimum of 2.5 million shares or raise US$5 million in order to be successful. Sagicor Investments Jamaica Limited was the lead broker.

Sagicor Group’s managed funds stepped in to save the offer which only garnered 924,400 series A redeemable preference shares being subscribed. EquityLine listed on February 6, 2019.

EquityLine went ahead and raised more funds through the issuance of series B and series F preference shares and establishing a limited partnership (EquityLine SPV) to access a CA$25 million revolving credit facility with Equitable Bank, Canada’s seventh largest bank. This allowed for it to grow its balance sheet very quickly, albeit at the expense of continued losses. It was planning to issue series B, F and I preference shares this year through securities dealer Research Capital Corporation to raise more capital.

However, it was revealed that Computershare Trust Company of Canada (CTCC), which held the legal titles of EquityLine SPV’s mortgages, had been informed that both EquityLine companies had retained legal counsel to enforce mortgage claims in the name of CTCC when it never gave permission to do such action.

CTCC informed Equitable Bank of what was taking place and of its intention to no longer be custodian of EquityLine SPV’s mortgages. Equitable Bank contracted KSV Advisory to subsequent checks on the status of the mortgages with EquityLine SPV where numerous breaches and discrepancies were discovered.

Equitable Bank applied to the Ontario courts to have KSV Restructuring Inc appointed as receiver of EquityLine SPV as it sought to enforce its legal rights. KSV Restructuring Inc was appointed receiver of EquityLine SPV in August.

In its first court report dated October 2, KSV Restructuring noted that it has identified several issues surrounding EquityLine SPV such as, “all mortgages are in default of their payment schedules; at least eight of the debtor’s mortgagors have alleged fraud, raising serious questions regarding the validity of their mortgages; the debtor’s principal has disclosed the unauthorized diversion of $1.6 million in mortgage repayments from the debtor to the MIC prior to the date of the receivership order, which amount is subject to EQB’s security interest and three mortgages, with principal amounts totalling approximately $1 million, that were subject to EQB’s security interest, were postponed or transferred without the required consent of EQB.”

KSV also mentioned in its motion record that Shchavyelyev and the associated companies have ceased responding to the receiver and no further payments of diverted funds have been made. As a result, KSV Restructuring made seven recommendations, including a request/motion from the court to appoint KSV Restructuring as the receiver of EquityLine Services Corporation (the fund manager) and ELMIC. KSV also wants to be authorised to exercise investigative powers which includes examining under oath any person such as representatives of the EquityLine Group with knowledge of the company’s affairs. This motion will be heard on October 17 in the Ontario Superior Court of Justice.

What’s next for investors?

Investors in Jamaica currently have to simply observe the developments in Canada and hope that there is some amount that will be refunded to them after the receivership is completed. KSV noted that there will likely be significant impairments on ELMIC’s mortgage portfolio which will decrease the likelihood of recovery even further.

“I don’t have any comment on that at this time. We’re aware [of the allegations] and we’re internally discussing and doing what needs to be done, but I’m not in a position to share what we’re doing at this time,” said Tracy-Ann Spence, chief investment officer of Sagicor Group Jamaica at an August media briefing.

Jamaican and Canadian lawyers are currently drafting claims against EquityLine and Shchavyelyev for the revelations that have taken place this year. The EquityLine founder has not been responding to some of these lawyers but has been focused on a film for his supercar club called Flat 6ix Club.

This is the second Canadian company to be delisted from the JSE following Optima Medical Innovations Corporation (formerly Tree of Knowledge International Corporation or TOKI) which cross listed in April 2020 before delisting in February 2021 due to not meeting JSE reporting requirements.

The JSE and Cumax Wealth Management Limited are also dealing with the threat of legal action from US-based Music Licensing Inc over its stalled cross listing onto the Jamaican equity markets. The Jamaican Government through Ambassador Sheila Sealy Monteith is currently in negotiations with the firm which is considering arbitration through the Investor-State Arbitration at the International Centre for Settlement of Investment Disputes (ICSID) as per a recent letter.

This has raised questions about the push by the JSE’s push to get more North American companies onto the JSE with its latest move for direct market access (DMA) being done now with the Canadian stock market. The investing landscape is still being affected by the Stocks and Securities (SSL) scandal which has evoked fear and caused some level of distrust by investors locally and abroad.

When the Jamaica Observer reached out to a senior executive at a financial conglomerate who asked to remain anonymous, they said, “With respect to EquityLine, it is unfortunate but it’s the harsh reality of what can happen when we give our local investors exposure to foreign companies with which there is little familiarity or oversight. The JSE is not equipped to regulate a company such as EquityLine. The IPO always had its share of risk, which is up to the investor to decide to take on, but there were always question marks as to why Jamaica was the chosen place to raise capital for a business plan that had nothing to do with the Caribbean, the cost of capital is cheaper in Canada, why not raise the capital there, unless there was some thought that what was being done would not fly in that jurisdiction, but Jamaica is easier to access.”

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