Berkshire investing in Home Capital

Home Capital Group hopes a deal with Warren Buffett will help it win back depositors after it was announced that the legendary investor’s Berkshire Hathaway will buy a significant stake in the company for $400 million and provide a $2-billion line of credit.

The embattled mortgage lender’s interim chief executive called the investment a “clear vote of confidence” in the company which had faced a run on deposits by customers after allegations by regulators that it misled investors.

“We believe this represents a turning point for Home Capital as we look to restore investor and depositor confidence in the company,” Bonita Then said Thursday during a conference call with financial analysts.

Berkshire Hathaway has a history of making investments in troubled companies where it sees value. During the depths of the financial crisis it made a US$5billion investment in Goldman Sachs that included terms favourable to Buffett, but also saw the investment bank benefit from being associated with the famed investor.

Under the deal with Home Capital, Berkshire Hathaway will receive a significant discount on the shares it is purchasing, but the alternative lender also hopes to share in some of the Buffett glow.

In announcing the deal, Buffett praised the company.

“Home Capital’s strong assets, its ability to originate and underwrite well-performing mortgages, and its leading position in a growing market sector make this a very attractive investment,” said Buffett, who is Berkshire Hathaway’s chairman and chief executive.

The investment deal follows a move last week by Home Capital to settle both a class-action lawsuit and the Ontario Securities Commission allegations that the company misled investors in its disclosures surrounding a scandal involving falsified loan applications.

The company also said Thursday it was making progress in its search for a new chief executive and was hoping to make an announcement in July.

Shares in Home Capital, which had fallen bellow $10 per share but had been regaining ground in recent days, surged even higher on the news of Berkshire Hathaway deal.

The stock closed up $4.06, or about 27 per cent, at $19 in heaving trading on the Toronto Stock Exchange.