Home Capital stock makes a big move after settlement
Paying $30M to settle class-action suit and OSC penalties seen as step forward
Shares of Home Capital Group Inc. surged as much as 18.6 per cent on Thursday, one day after the embattled alternative mortgage lender announced it had agreed to jointly settle allegations of misleading disclosure with the Ontario Securities Commission and a classaction lawsuit.
Home Capital’s board chairwoman Brenda Eprile said late Wednesday that it “will accept full responsibility for failing to meet its disclosure obligations” in connection with the discovery of falsified income documentation in its broker channel and the severing of ties with 45 brokers in 2014 and 2015.
Analysts said the settlement agreement, which will see Home Capital and three former executives pay a total of $30.5-million to resolve both claims, was a “key step in the process of moving forward” but that risks remain.
“The settlements come much earlier than we had anticipated,” said Jeff Fenwick, an analyst at Cormark Securities Inc., in a note to clients on Thursday.
“We believe the company viewed this as a key priority to enable Home to more readily pursue the various strategic initiatives underway. It will help allay concerns for potential acquirers or strategic investors and will no doubt also be helpful when seeking to negotiate a liquidity facility to replace the existing one with (Healthcare of Ontario Pension Plan), which comes with a 10 per cent interest rate.”
However, Jaeme Gloyn, an analyst with National Bank of Canada Financial Markets, warned that taking responsibility for disclosure problems could be a “negative factor” in the eyes of depositors and investors.
“We still believe reputational damage, liquidity concerns, impaired funding capabilities, and persistent and material uncertainty have raised the probability the company is unable to continue as a going concern,” he told clients in a note on Thursday. “In our view, these factors continue to outweigh the positive steps management has taken to avoid such an outcome (e.g. recent board hires, third-party purchase funding arrangement and this settlement).”
Laurentian Bank Securities analyst Marc Charbin said the company still needs to find a permanent chief executive and form
The settlements could allow the group to attract new funding at more reasonable costs, since overall available liquidity has stabilized of late.
a long-term strategy, but valued Home Capital’s shares at $25.52 a share — roughly double Wednesday’s closing price.
According to the proposed settlement with OSC staff, the company has agreed to pay an administrative penalty of $10 million, and each of the three former Home Capital executives will be reprimanded. Founder Gerald Soloway must pay $1 million, and will be prohibited from acting as a director or officer of any reporting issuer for a period of four years. Former chief executive Martin Reid and former chief financial officer Robert Morton must pay $500,000 each, and will be prohibited from acting as a director or officer of any reporting issuer for two years.
The settlement must be approved by a panel of commissioners at a hearing set for Aug. 9.
Home Capital will also make a payment of $29.5 million to settle a proposed class-action lawsuit that was filed in the Ontario Superior Court of Justice in February but that had not yet been certified. $11 million of the payments made in the OSC settlement will go toward that total.
Ratings agency DBRS Limited said Thursday the settlement, if approved, would be viewed positively.
“The settlements could allow the group to attract new funding at more reasonable costs, especially since overall available liquidity has stabilized of late, albeit at significantly lower levels,” the agency said.
However, the company’s ratings remain under review with negative implications, it added.
“One consideration is HCG’s ability to stabilize liquidity and funding at a reasonable cost. Another consideration is its ability to hire key senior management,” DBRS said.
“The review will also consider the adverse impact of recent developments on the Group’s franchise strength, including its ability to maintain broker relationships for both mortgage originations and funding.”
Shares of Home Capital rose as high as $14.39 early Thursday, up 18.6 per cent from the $12.13 close a day earlier. The stock closed at $13.67, up 12.7 per cent. That’s a significant improvement from the $5.85 it hit in early May, but is still more than 47 per cent below its price at the end of March when an executive departure, which was followed by formal allegations of misleading disclosure, triggered a partial run on Home Capital’s funding.
More than $1.8-billion or more than 94 per cent of funds have been withdrawn from high interest rate savings accounts at Home Capital’s subsidiary, Home Trust, which stood at $103.9 million as of June 14. Home Trust’s guaranteed investment certificate balances — which make up a larger proportion of its mortgage funding — have fallen from $13.06 billion on March 28 to $12.06 billion as of June 13.