Over $30-million in Homburg loans pose 'significant risk' to P.E.I. government: auditor general

Teresa Wright twright@theguardian.pe.ca
Published on March 16, 2016

A Charlottetown taxi driver drops off a fare at the Holman Grand on Grafton Street Wednesday. The auditor general's report that was released says more than $30 million in loans issued to the company that built the Holman Grand Hotel in Charlottetown pose a significant financial risk to the province.

©Guardian photo by Brian McInnis

Over $30 million in loans issued to the company that built the Holman Grand hotel in Charlottetown pose a significant financial risk to the province, according to the 2016 Auditor General Report.

A total of $35.5 million remains outstanding as of March 31, 2015 on a loan first issued to Dyne Holdings in 2008. The loan was refinanced and increased twice, topping out at $38.6 million in 2014.

But Auditor General Jane MacAdam says the province has since written down the amount it expects to be repaid on this loan by $10.6 million, based on what is believed to be recoverable.

MacAdam conducted an audit of the developmental lending portfolios within Finance P.E.I. and Island Investment Development Inc. (IIDI).

The value of loans issued under these portfolios has increased substantially over the last 10 years, growing from $70 million in 2005 to $191 million in 2015 - a 172 per cent increase.

Overall, MacAdam found approvals and management of most loans issued by Finance P.E.I. and IIDI for developmental loans were adequate, based on her sample audit of 21 loan files.

But she flagged over $30 million forwarded to Dyne Holdings in loans as a “significant risk to the province” and raised concern about the due diligence on the approvals of these loans.

Dyne Holdings first applied to IIDI for a $30 million loan in October 2008 for two large construction projects and a retrofit. One of those projects was the Holman Grand Hotel.

IIDI immediately raised red flags about the request, including the fact Dyne Holdings already owed $7.9 million in a separate, unrelated government loan.

Concerns were also raised about possible cost overruns for the project and about whether the company had adequate cash flow to cover debt repayments.

The entire ability to repay the loan hinged on a guarantee by Dyne Holdings’ parent company at the time, Homburg Invest. Inc.

Cabinet approved the loan despite the fact these concerns were forwarded to executive council. There was no documentation to show IIDI supported the approval of this loan and the loan application was not forwarded to the board of directors of IIDI until after cabinet had already approved the loan.

Then in May 2009, cabinet authorized a $2.84 million increase to this loan package to help finance increased costs of the original construction plan.

MacAdam notes this increase was approved without any work done to assess whether Homburg Invest was in a financial position to guarantee this loan and no detailed budgets were presented to support the estimated project costs.

Homburg Invest later went through a restructuring and then filed for creditor protection in 2011, leading to Dyne Holdings defaulting on the loan for the hotel.

Eventually a refinancing package was developed, but once again, MacAdam notes IIDI highlighted concerns, including the fact it would mean additional money made available to the borrower and “significant concessions” on terms of the loan, including delayed payments and a lower than recommended interest rate.

Again in spite of these concerns, cabinet approved $38.6 million in restructured loans in July 2014.

MacAdam says the loans to Dyne Holdings for these projects were problematic from the very beginning.

She also found neither Finance P.E.I. nor IIDI measures and reports on the economic benefits of any loans it issues to Island companies.

“There’s a lot of importance attached to economic development in these loans and it’s used as a rationale for approving a lot of these loans,” she told reporters Wednesday.

“It’s important there’s a framework that’s established to measure and report on the benefits realized.”

MacAdam also found directors of both Crown corporations and Treasury Board do not receive enough information to ensure oversight on developmental loans. As well, she found no mechanism to identify and deal with problem loans.

twright@theguardian.pe.ca

Twitter.com/GuardianTeresa