TriLinc Global Impact Fund (TGIF), a prominent emerging market trade lender, is currently navigating a severe liquidity crunch, which it attributes to the actions of its former auditor, RSM. This crisis has impeded TGIF’s ability to pay its investors and fund new loans, casting a shadow over its future operations.
TGIF specializes in providing trade finance and term loans to small and medium-sized enterprises (SMEs) in emerging markets. However, a significant portion of these investments has worsened, with approximately 60% of its portfolio suffering from “material performance weaknesses.” The fund’s investments span countries like Argentina, Ecuador, Nigeria, and Uganda, regions heavily impacted by a trade finance shortage from traditional banks.
In 2018, TGIF’s total assets peaked at $403 million, enabling the fund to distribute $17.5 million to its investors. However, by March this year, its unaudited quarterly report indicated a decline in total assets to $288.5 million, with loans totaling $224.8 million now valued at a fair value of $164.2 million. The fund expressed doubts about the repayment of 14 loans in its portfolio, worth around $100.2 million, when they mature.
The fund attributes its financial woes to the “devastating and long-lasting impacts” of the Covid-19 pandemic and resulting supply chain disruptions. These factors have made it increasingly challenging for borrowers to meet their financial obligations. Consequently, TGIF has not made regular monthly distributions to investors since mid-2023 and refrained from new investments last year. At the end of 2024, the fund held just under $100,000 in cash, having raised $1 million by selling part of its investment in TriLinc Peru.
The liquidity crisis, according to TGIF, was exacerbated when RSM resigned as auditor in early 2023, following a dispute over portfolio valuation. RSM’s departure led to a breach of covenants in loans from development finance lenders, necessitating the repayment of $18 million in outstanding borrowings. TGIF is now suing RSM, arguing that the auditor’s “abrupt” exit starved it of cash and hindered its ability to invest in performance-enhancing opportunities.
RSM, on the other hand, claims its resignation resulted from TGIF’s failure to provide necessary information about loan valuations and interest income. This lack of information prevented RSM from forming an audit opinion. TGIF’s lawsuit accuses RSM of lacking the resources and expertise to conduct the audit, using concerns about loan valuations as a “pretext.”
The disagreement between TGIF and RSM centers on the valuation of non-performing SME loans. TGIF argues that its loans are typically over-collateralized and in a senior secured position, allowing it more flexibility in handling troubled investments. This flexibility includes payment deferrals, loan term amendments, and potential debt restructuring. TGIF maintains that when it classifies a loan as non-performing, it reports the fair value of principal and interest if it believes the SME can continue payments through future cash flows or collateral liquidation.
However, in February 2023, RSM advised TGIF against counting accrued interest on non-performing loans and asserted that the fund was incorrectly calculating their fair value. TGIF counters that its previous auditor, BDO, and its current auditor, KPMG, have not raised concerns about its valuation methods.
The consequences of RSM’s resignation were far-reaching. TGIF’s inability to file audited accounts to impact investor BlueOrchard and German development bank DEG by a May 15 deadline constituted a breach of loan covenants, leading both lenders to terminate facilities and demand repayment of the $18 million balance. TGIF contends that these credit facilities were “irreplaceable and essential” to its stability and growth. The termination of these facilities had “catastrophic” consequences, making it challenging to secure new lines of credit and diminishing its appeal to investors.
As the legal battle unfolds, TGIF accuses RSM of making fraudulent representations about its auditing capabilities and intentionally interfering with TGIF’s growth prospects. RSM, in response, seeks dismissal of the fraud allegations, asserting that it acted independently and is being sued by a disgruntled client.
TGIF’s challenges extend beyond the auditor dispute. Previous SEC filings reveal issues with some borrowers before the pandemic, including “missing inventory” held as collateral for a Moroccan metals recycler and a Brazilian sugar processor affected by falling prices. TGIF’s investments in loans originated by International Investment Group (IIG), which ceased operations in 2018 amid a probe, have also negatively impacted the fund’s portfolio.
Note: This article is inspired by content from https://www.gtreview.com/news/americas/trade-finance-impact-fund-faces-liquidity-squeeze-blames-auditor/. It has been rephrased for originality. Images are credited to the original source.