Waygar Capital: Another Master of Risk from Ninepoint?

Michael Wekerle and El Mocambo provide an overview of the Ninepoint Canadian Senior Debt Fund.

Waygar Capital: Another Master of Risk from Ninepoint

Unlike the private debt fund Ninepoint Third Eye Capital Private Credit Fund, the Canadian Senior Debt Fund employs the figure of a Loan Consultant (instead of a sub-advisor). The role of the consultant is to “originate and underwrite transactions” and to “procure, service, administer and monitor the portfolio”.

The consultant is also “responsible for loan portfolio collections and payments, as well as maintaining appropriate accounting records.” The loan consultant is paid a management fee as well as a performance fee. Ninepoint Partners makes investment decisions.

This is also not the same arrangement Ninepoint had with Bridging Finance, their former BFF. If something goes wrong with the fund’s investments, Ninepoint will be unable to use the I had no idea what these guys were doing excuse.

Waygar Capital is the loan consultant for the Ninepoint Canadian Senior Debt Fund. Wayne Ehgoetz is the company’s President and CEO. Waygar’s Managing Directors are Terrance Kruk and Aaron Ehgoetz.

One of the reasons for the Ninepoint/Bridging split was Waygar showing up at Ninepoint’s door. Bridging’s relationship with Ninepoint “would appear to have soured around the time Ninepoint opted to launch a competitive product to the Fund [Bridging Income Fund] last year (the “Waygar Fund”),” according to a communication sent by David Sharpe to James Fox in May 2018.

The Waygar Fund appears to be very competitive with the Bridging Income Fund. Both claim to use a strategy of overcollateralized asset-backed lending. So far, the Waygar Fund appears committed to breaking Bridging’s record of never having a negative month (outside of receivership, that is). Both funds’ monthly returns fall within a narrow range of 0.50% to 0.70%, with an occasional outlier.

Wayne Ehgoetz described his secret sauce (the same strategy claimed by many private lenders) to deal with risk in an interview from 2021:

“We just don’t see ourselves as high risk because, for starters, all of our loans are fundamentally 100% collateralized and over collateralized. So that if they fail, and we haven’t had any failures in our portfolio, we can liquidate and get our money back as well as the interest. As a result, the investment is not at risk.”

Ehgoetz also talked about the interest rates charged to borrowers “generally in the 11% to 12% range. There are also closing and monitoring fees to consider. So our gross IRR on our loans today is between 13.5 and 14.5%.”

On February 28, 2022, Ninepoint suspended redemptions from the Waygar fund for 90 days. Nonetheless, Ninepoint has stated that they expect “exceptional upside” from the gated funds’ investments.

We’re not going to take Ninepoint’s word for anything. So we went looking for the facts.

The Waygar Fund had $351 million in AUM as of March 31, 2022. Waygar Capital, like its peers Third Eye Capital and Highmore Group, manages a concentrated fund. Only two issuers owed the fund $100 million in total, accounting for 29% of AUM.

We were able to connect many dots. We discovered some surprises, so let’s take a look at who we think are those two borrowers.

Issuer 9: A Canadian Media and Entertainment Company, accounting for 11.3% of the portfolio.

Wayne Ehgoetz described Loan 9 in a communication to investors about March 2019 events.

Loan 9 is a $25.3 million senior secured credit facility to a cutting-edge Toronto-based media company that owns and operates a live music venue, recording studio, corporate events, and nightlife. To get premier artists, performances, and content at launch, the borrower has formed strategic alliances with media and event sponsors. We have an LTV of 29%, which includes senior positions on the proprietor’s personal real estate portfolio, investment portfolio, personal guarantee, and a second lien on the media venue itself. With interest and fees paid up front, the projected annual IRR on this loan is 14.4%.

Waygar Capital Inc signed a loan agreement with Elmorealty, Inc, El Mocambo Entertainment Inc, and El Mocambo Productions Inc on March 15, 2022. Waygar Capital registered a $25.3mm charge on the property at 462 Spadina Ave, home to Toronto’s landmark small concert venue, El Mocambo, four days after the agreement.

Michael Wekerle, Wekerloo Developments, Chieftain Holdings, and Downsouth Limited were the loan’s guarantors.

Wek is a legendary bad-boy trader. Aka Mick Jagger and Warren Buffett meet. The Wek made his money at GMP as a trader. Then he had a public vehicle called Difference Capital and enjoyed a high media profile for a while.

The Wek has a history of debt: in 2015, the Globe wondered if he was about to run out of money (based on rumours at the time). “If I was bankrupt, I wouldn’t have just flown to Europe in my own jet, which cost about $100,000,” he replied. The Wek also has some assets: he sold a Fort Lauderdale estate for $17 million last year.

However, his Difference Capital, which was once his largest holding, was a flop. Difference, by the way, frequently invested in the same startups as another great Bay Street iconoclast, Maverick John Ruffolo.

Difference failed and was eventually merged with a fintech called Mogo. The Wek owned approximately 5 million shares worth approximately $8 million at the current trading price as of mid-2021. He is now the Chairman of the Waterloo Innovation Network (a collection of commercial buildings in Waterloo) and the CEO of El Mocambo Entertainment Inc.

According to The Star, Wekerle paid $3,780,000 for El Mocambo in 2015. “It’s going to take a few million dollars to turn this back into what it should be,” Wekerle said at the time.

Toronto Life reported in March 2022 that the few millions were an order of magnitude higher. Wekerle spent more than $30 million digging a new basement, adding a lift, and otherwise bringing the place up to code while preserving its legendary mojo,” according to the article.

Just as Ehgoetz described Loan 9, El Mocambo now has state-of-the-art facilities as per Toronto Life. “There are tour-grade sound systems and a full recording suite that enables artists to both live stream and record album-quality tracks. Soundproofing allows for a high-energy EDM concert upstairs while something unplugged and intimate is taking place downstairs.”

Ninepoint Partners appears to be drawn to the nightlife industry. They had also invested in Buca, Jacobs, and other “beloved set of restaurant brands” through their Third Eye Capital fund. We all know how that story ended.

A year after Waygar registered its charge on El Mocambo, the pandemic hit. El New Mocambo was supposed to open in March 2020, but Covid pushed the date back.

However, Waygar claimed that the pandemic had no negative impact on the fund’s portfolio. Wayne Ehgoetz told investors in early 2021 that “when Covid-19 restrictions were imposed in March of 2020, over 96% of our portfolio was comprised of essential service companies. Our portfolios fare extremely well during the pandemic. And, for the time being, all borrowers are meeting their debt service obligations.”

During the pandemic, only two borrowers were not deemed essential services companies, according to Ehgoetz. One of the companies was described as “a clothing manufacturer that has recently restructured into the production of medical masks and gowns.” The “other non-essential they just leaned a little bit more on their internet sales.” The “state-of-the-art Toronto-based media company that owns and operates an entertainment venue for live music, recording studio, corporate events, and nightlife” escaped the pandemic unscathed.

Assuming the low range of Waygar’s usual interest rates, Issuer 9 must incur $4.3 million in interest expenses each year.

At the very least, the Waygar team and The Wek have had a good time at El Mo.

Issuer 10: A US defence company, accounting for 18% of the portfolio.

The Waygar fund has stated its willingness to finance the Defense and Security industry since its inception. Ramesh Kashyap of Ninepoint told Bloomberg in September 2017 that the Waygar fund “will focus one-third of its business on lending to the defence sector.”

Wayne Ehgoetz wrote in an email to investors about events in April 2019:

Loan 10 is a $13MM credit facility that has the ability to increase by an additional $10mm, to a Virginia based company specialising in a broad range of defence products and risk management services. For 12 countries, the company is the sole provider of military distribution.

Over the next few years, the company has secured major US government contracts to supply defence products, training, and risk consulting services. Our loan is secured by take or pay purchase orders with international orders, which are backed up by a letter of credit that guarantees 100% coverage of our principal as well as accrued fees. The total LTV of existing accounts receivable, including boot collateral, is 62%. This loan’s projected annual IRR is 13.2%.

Boot collateral refers to secondary assets such as trademarks and patents that are used as additional loan security.

Waygar, as agent, placed a lien on Pacem Defense LLC and its parent company, Pacem Solution International LLC, according to Virginia State’s Uniform Commercial Code (UCC) database in April 2019.

In addition, Waygar Capital was appointed as Agent for Ninepoint Canadian Senior Debt Master Fund in April 2019 by Amtec Less Lethal Systems, Inc, a company previously acquired by Pacem.

Cory Mills is the Executive Chairman and co-founder of Pacem. His wife, who is also a cofounder, is Executive Vice Chairman. Mills, a combat veteran, says he “returned home and started a company making riot control munitions for law enforcement.”

Cory Mills, a wealthy candidate running for Congress in this year’s midterm elections, according to a Politico article titled “GOP hopeful sold tear gas used on Black Lives Matter protesters,” is a wealthy candidate running for Congress in this year’s midterm elections. He allegedly made his fortune by “selling tear gas used against Black Lives Matter protesters and purchasing a company that sold rubber bullets to Hong Kong to crack down on protesters.”

According to Politico, Mills is funding his campaign “primarily with money he earned through the company.” Mills’ personal loans provide $641,500 in campaign funding as of 2021.

According to the article, US Congressmen launched an investigation to learn more about the safety of Pacem’s tear gas products. Pacem disclosed a list of all entities in the United States to which they sold tear gas products as part of the process. They sold $1.28 million in tear gas products to law enforcement agencies, distributors, and correctional facilities between 2018 and 2021.

Mills was displeased with the Politico piece. After the article was published, he ran an ad in which he threatened to tear-gas the liberal media.

The borrower had “prime US government contracts to supply defence products, training, and risk consulting services over the next few years,” according to Waygar. Government contracts in the United States are generally open to the public. We discovered several contracts awarded to Pacem and its subsidiaries, but none of them were in the seven figure range. Contracts with the DOJ, Federal Bureau of Prisons, and the Department of Homeland Security totaled more than US$680k in 2020, and US$360k in 2021, according to Politico.

Waygar also informed investors that the borrower was “the sole provider of military distribution for 12 countries.” According to Politico, Pacem Solutions is registered to work in Pakistan, the United Arab Emirates, Iraq, Kenya, Malaysia, and Kuwait, and it has provided “support and advisory” services in Ukraine, the Democratic Republic of the Congo, and the Kurdish region.

On June 15, 2021, the IRS issued a Tax Lien against Pacem Solution International LLC for US$ 111,815.29 in unpaid taxes. The lien was paid off on September 21, 2021. The IRS then placed another lien for $592,278 on February 24, 2022. Let’s hope Pacem doesn’t manage the business the same way it manages its tax liabilities.

You won’t be surprised to learn that Cory Mills is a staunch Trump supporter, even believing in the election fraud conspiracy theory.

A loan that not even David Sharpe was willing to back.

Ninepoint and Waygar were chastised for their lending practises by none other than David Sharpe in 2018. Sharpe stated in a letter to Ninepoint’s Co-CEO James Fox in May 2018:

“It is our understanding that the Waygar Loan was extended to the Eastway Group, a borrower who lacks the cash flow required to service a loan of this size, without customary asset-based lending reporting requirements and industry standard covenants in place.”

Of course, Sharpe considered Waygar competition, so take this statement with a grain of salt.

A loan to a “leading plant-based technology company”

On June 7, 2021, The Very Good Food Company, a “leading plant-based technology company,” announced that it had entered into a loan agreement with Waygar as agent for Ninepoint Canadian Senior Debt Fund for a $70 million senior secured credit facility.

The Credit Facility has a 9.95% interest rate and a 2-year maturity with a one-year extension option. Waygar was given 225,000 common share purchase warrants for C$ 5.62. In addition to the regular fees, The Very Good Food Company paid a $2 million finder’s fee.

Plant meat companies have failed to meet their growth targets. The Globe and Mail recently reported on some of these companies’ difficulties.

Beyond Meat, the poster child of the plant-based movement, can serve as an example. Despite reporting revenue of $464 million in 2021, the stock price has dropped by more than 75% in the last year. A convertible senior bond with a maturity date of 2027 was recently trading at 37 cents on the dollar. Reality check: the term “senior” on a debt instrument does not imply that it is risk-free or immune to volatility.

The Very Good Food Company has had its own set of difficulties. The company reported $2 million in revenue for the first quarter of 2022, a 24% decrease from the same period in 2021. The company spent $15.5 million in cash in the first quarter of 2022. The stock price has dropped 92% in the last year, and it now trades at $0.23 per share.

Mitchell Scott, CEO and cofounder, was fired on April 4, 2022. On the same day, co-founder James Davison and Chief Research and Development Officer resigned. Was this the type of “good management team” that Waygar prefers to work with?

The credit facility of $70 million has not been fully utilised by the Very Good Food Company. The company owed approximately $7 million under the credit facility as of March 31, 2022, including payable fees.

Ninepoint Partners has repeatedly demonstrated a high appetite for risk. What Ninepoint considers “conservative lending” appears to be quite risky to us. So the question is whether Ninepoint will be able to manage the risk. The only way to know is to wait and see.

We will not pass judgement on the creditworthiness of the borrowers described here. We hope that the observations made above on some very important relationships provide a different perspective on the underlying assets of the Ninepoint Senior Debt Fund.

Wayne Ehgoetz asserts that he is “happy at any time to answer any questions that anybody might have about our fund, about what we are doing, or any other question they might have.” You can put that claim to the test. We made an attempt. However, as far as we know, you must first be screened and approved by Ninepoint.

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