National Post

Deposit run slams Home Capital

- Armina Ligaya

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 nonbinding 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,” the company 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 told the Financial Post in an email that 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 from his role 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.

High interest savings account balances at Home Trust have fallen by $591 million in the period from March 28 to April 24 to $1.4 billion, Home Capital said Wednesday.

Jaeme Gloyn, an analyst with National Bank of Canada Financial Markets, said Home Capital’s announceme­nt could “spur other investors and deposit agents to continue redeeming high interest savings accounts and or demand deposits.

“This represents $ 2.5 billion, or 16 per cent of HCG’s total deposit funding structure. This will further impact margin pressure as HCG uses more of the expensive credit line,” he said in a note to clients on Wednesday.

The loan facility, combined with Home Trust’s current available liquidity, would give Home Trust access to more than $3.5 billion in total funding, more than twice the amount of outstandin­g high interest saving account balances, the company said.

As part of the agreement, Home Trust would be required to pay a non- refundable commitment fee of $100 million and make an initial draw of $ 1 billion. The interest rate on outstandin­g balances would be 10 per cent, and the standby fee on undrawn funds would be 2.5 per cent, Home Capital added.

Gloyn said this translates to an effective interest rate of 22.5 per cent on the first $1 billion, declining to 15 per cent if fully utilized.

Home Capital said Wednesday i ts GIC deposits remained essentiall­y unchanged between March 28 and April 24, when they stood at $13.01 billion.

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

 ??  ?? Gerald Soloway
Gerald Soloway

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