Largest borrower in Cortland’s $1.2-billion debt fund sold after defaulting on loan

The largest borrower in Cortland Credit Group Inc.’s $1.2-billion private debt fund has been sold after defaulting on its loan and filing for creditor protection, yet the timeline for repayment remains unclear under its new owner – another example of the uncertainty that private debt fund investors face in the current economy.

Independent Energy Corp. owns a diesel fuel refinery in Saskatchewan and started borrowing money from Cortland in the summer of 2021 at a rate of 16.5 per cent annually. Because the refinery was built at the height of the COVID-19 pandemic, construction took one-and-a-half years longer than expected and cost roughly 45 per cent more than originally budgeted, according to court documents. IEC filed for creditor protection in June, 2023.

At the time, IEC owed and guaranteed a total of $202-million to Cortland and was the largest borrower in its flagship fund. Cortland has since worked with a court-appointed monitor to find a buyer for the company, but the sale process was complicated because the only two bids submitted were not sufficient to repay Cortland, according to court filings.

After weighing the options, late in February Cortland and the monitor submitted plans to sell IEC to a numbered company, 2580597 Alberta Ltd., run by energy executive Joel MacLeod. According to the formal agreement, Cortland’s debt, now totalling $229-million, will roll over to the new owner. Cortland markets the affected fund, Cortland Credit Strategies LP, as a “short-term private debt fund” that focuses on capital preservation and stable returns. However, its investors have little clarity on the timeline or likelihood of repayment by the new owner.

They also may not be aware of the borrower’s importance to the total portfolio. In Cortland’s latest quarterly fund update, the company provides a table with brief summaries of its top 10 investments. Three of the top 10 loans are all to IEC and are simply different types of credit, including short-term financing, to get IEC through creditor protection. In total, IEC comprises 23 per cent of the total portfolio.

Cortland chief executive officer Sean Rogister said in an e-mail to The Globe that the fund maintains a credit reserve that is updated monthly and added Cortland is “confident that our reserve is sufficient.”

The calculations for the credit reserves are based on regular site visits to its borrowers, weekly collateral reviews for shortterm loans and regular appraisals for fixed assets that are generally conducted by third-party professional appraisers, he wrote.

As for disclosure, Cortland said it has confidentiality terms in place with its borrowers and that it is “sensitive about protecting our competitive position in the market – which makes disclosure of our borrowing clients and investors to nonaffiliated third parties difficult from a business sense.”

Private debt funds grew in popularity over the last decade in Canada, particularly with retail investors, because they targeted hefty annual yields – around 8 to 10 per cent – at a time when benchmark interest rates were close to zero. But the sector has faced some major hurdles since the Bank of Canada started raising interest rates in March, 2022, and some investors have decided they would rather park their money elsewhere because the risk-return calculus no longer works.

Cortland’s fund launched in 2013 and has returned an average of 6.22 per cent annually after fees over the past five years. Recently, ultrasafe guaranteed investment certificates have paid around 5 per cent annually.

Some private debt funds have also had to cut their monthly distributions because cash flow has gotten tight. Similar to Cortland, private mortgage lender Romspen Investment Corp. had to take its largest borrower to court last year after multiple loan defaults totalling $333-million. Since 2022 Romspen has cut its monthly distribution by two-thirds.

Although investors are often told they can redeem their money quarterly, some private debt funds have had to halt redemptions over the past year because they can’t sell their illiquid loans fast enough to meet the demand. Within the sector, Cortland is unique because its fund offers monthly redemptions – something Cortland says it can do by focusing on shortterm loans (12 to 18 months) and targeting lines of credit that offer more repayment flexibility for two-thirds of its portfolio.