TriLinc Global Impact Fund (TGIF), an emerging market trade lender, claims its auditor is to blame for a liquidity crunch that has rendered it unable to pay investors or fund new loans.
TGIF provides and invests in trade finance and term loans to SMEs in emerging markets, but a large portion of these have turned sour, with around 60% of its investments by value deemed to have “material performance weaknesses”.
The fund carries out its own lending activities and invests in assets originated by other non-bank providers. The markets it operates in, such as Argentina, Ecuador, Nigeria and Uganda, are some of the most affected by the shortage of trade finance from banks.
TGIF’s total assets peaked at US$403mn in 2018, when it paid US$17.5mn in distributions to investors.
TGIF’s unaudited quarterly report, published in May, shows that at the end of March this year, the fund had total assets of US$288.5mn. Among those are loans with a combined principal balance of US$224.8mn, but which have now been given a combined fair value of US$164.2mn.
The fund has “reasonable doubt” that interest or principal payments on 14 loans in its portfolio, worth around US$100.2mn, will be paid when they come due.
TGIF blames the “devastating and long-lasting impacts” of the Covid-19 pandemic and associated supply chain ructions for the performance downturn.
“Together, these factors have made it more difficult for borrowers to repay their obligations to the [fund] in a timely manner or at all,” TGIF says in the May filing.
TGIF has not paid regular monthly distributions to investors since mid-2023 and did not make any new investments last year.
The fund had just under US$100,000 in cash at the end of 2024, and in February this year sold a portion of its investment in a company called TriLinc Peru to an affiliated fund, raising US$1mn in cash, according to the quarterly report.
TGIF claims that the liquidity crunch was triggered when its auditor, RSM, resigned in early 2023 during a dispute over the valuation of the fund’s portfolio.
The auditor’s resignation caused the fund to breach covenants in loans from two development finance lenders and it had to repay around US$18mn in outstanding borrowings, the filings show.
TGIF is now suing RSM, arguing the firm’s “abrupt” departure left it starved of cash, unable to make new investments to boost the fund’s performance.
RSM claims it resigned mainly because TGIF did not hand over information about its valuation of loans and interest income that it needed to form an audit opinion.
Launched in 2013, TGIF is one of four impact funds advised by subsidiaries of TriLinc Global, a Los Angeles-headquartered investment manager. TGIF is a public fund while the three others are private.
TGIF says its objectives are to make positive economic, social and environmental impact while earning competitive returns for investors. In a court document, it says most of its investors are retirees.
TGIF paid US$5.5mn in asset management fees last year to its advisor, a subsidiary of TriLinc Global, its 2024 annual report shows.
The fund is “pursuing multiple strategies in order to address its temporary liquidity needs”, it says in the quarterly report, including selling down investments, obtaining new credit facilities and “the pursuit of additional financing transactions as needed to supplement cash flows”.
Valuing SME loans
In a lawsuit filed last year in Los Angeles, TGIF accused RSM of quitting as auditor because it did not have the resources and expertise to carry out the audit. The fund claims RSM used concerns about loan valuations as a “pretext”.
Documents filed in the case show several TriLinc entities hired RSM as their auditor in July 2022, following the departure of personnel from BDO, which previously audited the fund.
According to both sides’ court submissions, late that year and into early 2023, as RSM prepared to audit the fund’s financial statements, a disagreement arose over how TGIF was valuing the non-performing loans on its books.
TGIF says in a court document that because its loans to SMEs are typically over-collateralised and in a senior secured position, it does not have to classify them as non-performing as soon as a borrower is more than 90 days overdue.
Instead, it says it has “greater latitude to work with the management of an SME when an investment becomes troubled and to consider for example, payment deferrals, loan term amendments, and potential debt restructuring”.
TGIF says when it classifies a loan as non-performing, it reports the fair value of principal and interest on its books if it “has a reasonable belief that the SME has the ability to continue to pay interest either out of future cash flows or through the liquidation of excess collateral”.
It uses its own method for calculating the fair value of interest and principal that is due.
But in February 2023, RSM told TGIF that it should not be counting accrued interest on non-performing loans and that the fund was incorrectly calculating the fair value of the non-performing assets, according to a court filing by the fund.
TGIF says BDO and its current auditor KPMG have not taken issue with the fund’s method of calculating the value of non-performing loans.
RSM quit as auditor of all TriLinc entities at the end of February 2023, during an “all hands” call with TriLinc management.
In a resignation letter later submitted to court, RSM told TriLinc it was resigning chiefly because it was “unable to obtain sufficient appropriate audit evidence that would allow us to evaluate management’s accounting positions, specifically regarding the recognition of interest income, despite repeated requests for such information”.
‘Catastrophic’ consequences
TGIF says RSM’s resignation had a severe impact on the fund by hampering its ability to secure new credit lines in order to make new investments.
Without an auditor, the fund was unable to file audited accounts to two lenders – impact investor BlueOrchard and German development bank DEG – by a May 15 deadline, which constituted a breach of loan covenants. Both lenders terminated the facilities and called in the US$18mn balance of the loans, TGIF says.
These credit facilities “were irreplaceable and essential to TGIF’s stability, profitability, and growth”, the company says in the lawsuit. The termination of the facilities had “catastrophic” consequences, TGIF claims, because it made the fund less attractive to new investors due to diminished ability to pay distributions and made it more difficult to secure new lines of credit.
The loss of its auditor so close to the US Securities and Exchange Commission’s (SEC) March 31 deadline to file audited financial statements “irretrievably damaged the reputation of TriLinc in the financial markets”, the fund claims in court documents.
TGIF also accuses RSM of making fraudulent representations about its capacity to audit the firm, alleging the auditor “intentionally chose to inflict harm on TGIF” by interfering with its growth prospects and relationships with investors and lenders.
It has accused the firm of an “intentional and malicious” fraud, as well as tortious interference with its business relationships.
RSM says in a legal filing responding to the claims that the court should throw out the allegations of fraud and tortious interference because they have no legal basis and TGIF has failed to provide sufficient evidence to back them up.
It denies intending to harm TGIF and contends it “acted as an independent auditor should and is being sued by the disgruntled client as a result”.
As the case progresses, RSM says, it will establish that it withdrew from the audit “because it was unable to obtain ‘sufficient appropriate audit evidence’ that it needed for the TriLinc Funds’ valuation of the loans and other receivables”.
RSM declined to comment further on the case, which is ongoing. A spokesperson for TriLinc Global says it does not comment on ongoing litigation.
TGIF experienced problems with some borrowers before the pandemic, previous SEC filings show, including “missing inventory” held as collateral on a participation in a loan to a Moroccan metals recycler, and a Brazilian sugar processor hit by falling prices.
It also invested in loans originated by International Investment Group (IIG), which ceased operations in 2018 amid a probe by US authorities and whose founders were later jailed.
TGIF says in corporate filings that IIG’s “acts and omissions have negatively affected and are likely to continue to negatively affect the value of certain of the company’s investments” and that it is engaged in legal action to obtain more information about the investments.
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