Home Capital falls 65% after big deposits decline

Move seeking $2B credit line would prevent company from meeting targets

Shares of Home Capital Group Inc. plunged 65 per cent Wednesday after the embattled mortgage lender said it was seeking a $2 billion line of credit to backstop a significant decline in deposits at its subsidiary.

Home Trust has seen deposits drop by nearly $600 million in recent weeks and Home Capital said that it expects the withdrawals to accelerate.

The mortgage lender said that the terms of the proposed credit line — negotiated with “a major institutional investor” — would “have a material impact on earnings, and would leave the Company unable to meet previously announced financial targets.”

Analysts suggested the loan could come with an effective interest rate as high as 22.5 per cent on the first $1 billion.

Home Capital said the non-binding agreement in principle would be secured against a portfolio of mortgages originated by Home Trust. “Access to these funds is intended to mitigate the impact of a decline in Home Trust’s HISA (high interest savings account) deposit balances that has occurred over the past four weeks and that has accelerated since April 20 … The Company anticipates that further declines will occur, and that the credit line would also mitigate the impact of those,” it said.

Home Capital added that it expected a “firm commitment” for the loan facility on Wednesday.

A spokeswoman for the Office of the Superintendent of Financial Institutions said it is “monitoring the situation closely.”

The development comes just days after Home Capital announced an executive and board shuffle in an effort to reassure investors after the Ontario Securities Commission accused the mortgage lender of misleading disclosure. The allegations relate to Home Capital’s disclosure following the discovery that some loan applications contained falsified income information, after which the company cut ties with dozens of brokers in 2014.

On April 19, the securities regulator filed a statement of allegations and notice of hearing against the company; founder and former chief executive Gerald Soloway; chief financial officer Robert Morton; and former president and chief executive Martin Reid.

None of the allegations have been proven, and Home Capital’s chairman of the board Kevin Smith has said the company will “continue to vigorously defend our approach to disclosure” in the OSC proceeding, to be held May 4.

Home Capital announced on Monday that Soloway would retire from the board of directors as soon as a suitable replacement is found, but run for re-election at its annual general meeting next month. Morton is set to step aside after the company’s first quarter results are filed next month, and will be assigned new responsibilities outside the financial reporting group. Reid was terminated as CEO of Home Capital in March.

“It is surprising to us to see the situation deteriorate so quickly given the related issues of concern occurred over two years ago,” said Jeff Fenwick, an analyst with Cormark Securities Inc, in a note to clients on Wednesday. “However, the constant vocal accusations by short-sellers combined with the OSC’s recent statement of allegations appear to have fanned the flames of uncertainty and triggered the HISA outflows.”

These demand deposits, as well as fixed deposits such as Home Trust’s Guaranteed Investment Certificate (GIC) deposits, help fund Home Capital’s mortgage lending.

Home Capital shares closed at $6 in Toronto on Wednesday, down 64.89 per cent from Tuesday’s close of $17.09.