Big banks backstopping troubled lender Equitable

RBC joins syndicate for emergency funds in bid to stem contagion from competitor

Alternative mortgage lender Equitable Group Inc. says the syndicate of lenders backing a $2-billion standby credit line to shore up its liquidity has been expanded to include all of Canada’s Big Six banks.

Equitable announced Monday it had obtained a letter of commitment for a two-year, $2-billion secured backstop in a bid to stem any contagion from its embattled rival Home Capital Group Inc., which has seen a partial run on its funding.

The loan facility’s backers initially included Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and National Bank. Then, Bank of Nova Scotia and Bank of Montreal were added to the syndicate later Monday. Equitable confirmed Wednesday that Royal Bank of Canada, the country’s largest bank by market capitalization, would also be backing the emergency funding.

“If all six of Canada’s largest banks have the confidence to support Equitable Bank, it is evident that our customers, whether they be savers and depositors or borrowers should have similar confidence,” said Andrew Moor, president and chief executive of Equitable Bank, in a statement on Wednesday.

Last week, Equitable saw an “elevated but manageable” decrease in its deposit balances — which helps the company fund its mortgage lending — of roughly $225 million between April 26 and April 28, representing 2.4 per cent of its total deposit base.

In turn, Equitable started reaching out to the Big Six banks as “insurance” in case its liquidity became eroded further, Moor told the Financial Post on Monday.

Equitable already had a $1-billion credit facility with one of the banks, said Moor. This new funding with the syndicate adds $2 billion on top of that, but at more costly terms.

The terms of the facility announced Monday include a 0.75-per-cent commitment fee and a 0.5-per-cent standby charge on any unused portion of the facility, Equitable said Monday. The interest rate on the funding facility is approximately 60 basis points over the cost of Equitable Group’s Guaranteed Investment Certificates (GICs) — one of the mortgage lender’s sources of funding, it added.

Ratings agency DBRS said in a statement Wednesday the funding facility’s terms “should still allow (Equitable) Group to deliver sound financial results, if drawn upon.”

Its competitor Home Capital has been mired in liquidity problems since the Ontario Securities Commission submitted formal allegations on April 19 against the Toronto-based alternative mortgage lender and some of its current and former executives. The securities regulator accused Home Capital of misleading disclosure in connection with the discovery of fraud in its broker channel, and the termination of 45 brokers in 2014 and 2015.

On April 26, Home Capital disclosed that its high interest savings account balances fell $591 million to $1.4 billion between March 28 and April 24, and it needed a $2-billion credit line as an emergency backstop. On Monday, Home Capital said it expected its high interest savings account balances — which help fund its mortgage lending — to fall to $391 million, after the settlement of Friday’s transactions.

It secured one from a syndicate of lenders led by the Healthcare of Ontario Pension Plan, but at costly terms that analysts pegged at an effective rate of 22.5 per cent for the first $1 billion.

On Tuesday, Home Capital postponed its first-quarter earnings release from May 3 to May 11.

Home Capital also postponed its annual shareholders meeting from May 11 until June, at a date to be determined.

(With the Big Six banks’ support) it is evident that our customers ... should have similar confidence.