Home Capital gets funding lifeline with Buffett deal

Home Capital Group Inc. got an injection of capital and cachet from the world’s most famous investor Warren Buffett, marking a major step for the embattled mortgage lender to move past a crisis of confidence from investors and depositors and “get back to running this business in a long-term way.”

The Omaha-based investor’s multinational conglomerate Berkshire Hathaway Inc., said late Wednesday evening it had agreed to indirectly acquire up to $400 million of the Toronto-based company’s common shares in two private placements — giving it a 38.39 per cent equity stake — and provide a new $2-billion line of credit to its subsidiary, Home Trust.

The deal with Berkshire gives the alternative mortgage lender a much-needed cheaper funding arrangement. It also serves a major endorsement as Home Capital recently faced eroding market confidence and a partial run on its funding amid allegations of misleading disclosure.

“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, Berkshire’s chairman and chief executive officer in a statement.

Shares of Home Capital in Toronto surged after the announcement. They closed at $19, up 27.2 per cent.

News of the marquee backer resonated with investors, but came at a steep cost. After the completion of two separate private placements, Berkshire’s subsidiary will own 40 million common shares at an average price of about $10 per share.

Berkshire’s proposal was chosen by Home Capital’s board after “considering numerous alternative proposals,” the company said, including those that “would provide the potential for a sale of all of the shares.”