EMBATTLED HOME CAPITAL SUSPENDS DIVIDEND
Beefs up board as deposits continue to slide
• Embattled alternative mortgage lender Home Capital Group Inc. said Monday i t has suspended its dividend to “prudently manage liquidity” and beefed up its board as its deposits continue to plummet and it draws more f unding f rom its pricey emergency credit line.
It also named a new chair and added some Canadian business heavyweights to its board in its latest bid to restore confidence.
High interest savings account deposit balances at Home Capital’s subsidiary, Home Trust, are expected to fall more than 50 per cent to $ 192 million on Monday after the settlement of Friday’s transactions. Those deposits, which help Home Capital fund its mortgage lending, have fallen from $ 391 million one week earlier, and are down 90 per cent from roughly $ 1.991 billion on March 28.
In turn, the company says it has now drawn $ 1.4 billion from its $2 billion emergency backstop credit line. It drew $ 1 billion one week ago.
Home Capital shares fell as much as 13.5 per cent to $ 5.06 in early Monday trading, their lowest level since August 2003, before regaining some ground. The stock is down more than 75 per cent since early April.
“The Company and its advisers continue to work towards seeking lower cost sustainable funding solutions and to evaluate strategic alternatives to solidify and strengthen its successful mortgage origination platform,” Home Capital said in a statement.
“In addition, the Company announced the suspension of its quarterly dividend to prudently manage liquidity.”
Home Trust’s Guaranteed Investment Certificate deposits, which make up a larger share of its funding, also fell, to $ 12.64 billion as of May 5, as brokers say they’re wary of the mortgage lender’s deposit products.
That balance, which includes Oaken Financial and broker GICs, is down from $ 12.86 billion on April 28, and $13.06 billion on March 28. Holders of these GICs may not redeem them early either because of a built- in penalty, or because the product is non-cashable and they are unable to.
These announcements come days after Home Capital said it was adding Alan Hibben, a former RBC Capital Markets managing director of mergers and acquisitions, to its board to replace the mortgage lender’s founder and former chief executive Gerald Soloway.
Home Capital, which has retained RBC Capital Markets and BMO Capital markets to “advise on further financing and strategic options,” took more steps on Monday to revamp its board.
The Toronto- based company also announced that board member Brenda J. Eprile would replace Kevin Smith as chair of the board. Smith, who is also president and chief executive officer of St. Joseph’s Health System, will remain as an independent director.
The company named three new directors: Claude Lamoureux, former chief executive officer of the Ontario Teachers’ Pension Plan; Paul Haggis, former head of Ontario Municipal Employees Retirement System (OMERS) and risk consultant; and Sharon Sallow, risk consultant, former director at Ontario Teachers and former Ontario Securities Commission staffer.
“We have now come a very long way in a short time toward our goal of significant governance renewal,” Eprile said in a statement.
Stephen Boland, an analyst with GMP Securities, said the latest announcements were “positive” but do not change his company’s views on Home Capital’s liquidity position. “We believe the company has enough liquidity to absorb a runoff of the remaining demand deposits and repay $325 million of debt when it comes due May 24th,” he said in a note to clients. “Rolling over the GIC deposits remains the key, in our view, and we continue to closely monitor the situation.”
The company has been trying to shore up its liquidity and assuage investors and shareholders since the Ontario Securities Commission accused the mortgage lender, Soloway, former chief executive Martin Reid and chief financial officer Robert Morton of misleading disclosure on April 19.
Since then, Home Capital has faced a partial run on its funding, with clients withdrawing their demand deposits from Home Trust. This forced the company to obtain a $2 billion credit line from a syndicate of lenders.
Home Capital’s new board members are of a “very high calibre,” said Jeff Fenwick, an analyst with Cormark Securities. “These additions offer significant credibility to the view that a solution will be found to stabilize Home sufficiently to support an orderly process for pursuing the best strategic options for the firm,” he said in a note to clients on Monday.
The company also said Monday its annual shareholders meeting is set for June 29.