‘IT’S TOO EARLY TO DECLARE VICTORY’
HOME CAPITAL FACES TOUGH QUESTIONS FROM SHAREHOLDERS
TORONTO• Home Capital Group Inc.’ s leaders faced sharp questions about the company’s future on Thursday, as shareholders pressed them on a range of issues including the dilutive impact of a white-knight deal with renowned investor Warren Buffett and the $210-million loss the company said it expects to post for the latest quarter.
The company’s directors and senior executives, however, used the company’s annual general meeting in Toronto to defend the Buffett deal and emphasize their “confidence” in Home Capital’s viability, months after allegations of misleading disclosure, executive departures and a partial run on its funding pushed it to the brink.
“It is too early to declare victory,” board member Alan Hibben told shareholders. "However, we have accomplished a lot and look forward to a more stable and profitable future.”
Hibben said the Buffett deal — which in total could see a subsidiary of Buffett’s Berkshire Hathaway Inc. invest up to $ 400 million for a 38.39- per- cent stake in Toronto- based Home Capital while providing a new, cheaper $ 2 billion credit facility — has been “positive for us, positive for shareholders.”
While the first phase of the deal won approval from the Toronto Stock Exchange on Thursday, one shareholder expressed concern about the “huge dilutive effect” of the second tranche of that deal, in which Buffett will acquire nearly 24 million of shares at roughly $10.30 per share.
“Shareholders will have to defeat this ... if they can,” the shareholder said.
A s pecial meeting is scheduled for September to vote on the second portion. Since the arrangement with Buffett was announced, shares have jumped from $14.94 to roughly $17.
Hibben said having Buffett as a bigger- stake sponsor is key for “when it hits the fan the next time.” There was likely no room to negotiate on the price of Buffett’s additional investment, but Buffett “has nothing to say” if shareholders vote against it, he added.
“It might be nice for us to think things could be better, but I think the answer is really a binary one,” Hibben said. “You either like the fact that you have a 38- per- cent shareholder from Berkshire Hathaway, or you like fact that there is a 19.99-per-cent of a shareholding by Berkshire Hathaway. But it’s in your hands.”
Ahead of the meeting, Home Capital also quantified the financial hit it took in the latest quarter, when it grappled with a liquidity crisis after depositors withdrew hundred of millions from its subsidiary’s deposit balances. The company said in a statement early Thursday it expects to record a loss after its expenses increased by $175 million for the quarter ending June 30. That includes a $ 100- million commitment fee related to the a $ 2- billion emergency credit line it secured in May from the Healthcare of Ontario Pension Plan as a backstop.
Hibben s aid t he new $2-billion credit facility with Berkshire Hathaway has a 1- per- cent standby fee on undrawn funds, allowing Home Capital to pay a pretax standby annual fee of $20 million, down from $50 million at 2.5 per cent with HOOPP.
On top of the previously announced deal to sell $ 1.2 billion worth of commercial mortgages to KingSett Capital, Home Capital has a “number of sale and financing transactions underway that could be executed over the course of the next month or so” that will go toward paying down the $ 1.65 billion it has drawn, Hibben added.
The goal is to reduce the amount drawn on the credit facility to zero, which would make the 9-per-cent interest rate on the Berkshire loan “moot,” he added.
“We i ntend to use the credit facility as a pure backstop,” he said.
Home Capital’s board did have “extraordinarily slow and cumbersome” discussions with Canadian banks for a credit facility, but their offers were not “competitive,” said Hibben.
Now, the company’s plan is to “slow the shrinkage of the balance sheet and eventually return to a path of mortgage growth,” he added.
That path, however, may be different from the one that Home Capital has taken thus far. Home Capital chair Brenda Eprile told shareholders that it may either maintain the mortgages it originates on its balance sheet, as it always has, but also sell them as whole loans into securitization vehicles.
“We really need to have a more- diversified approach for our revenue stream,” Eprile told reporters after the meeting.
Eprile also touted the “loyalty” it has seen from deposit brokers as it aims to ramp up its GIC balances which are the “bread and butter” f or i ts mortgage funding.
The company later Thursday said it had entered into an agreement with a “third party” to sell approximately 1,100 residential mortgage loans for roughly $249.6 million. The sale, which represents a purchase price equal to 99.07 per cent of the aggregate principal amount of the loans, is expected to close on June 30 and the proceeds will be used to repay outstanding amounts under its new credit agreement with Berkshire Hathaway, Home Capital said in a statement.
Since the Buffett deal, Home Capital’s deposit balances have stabilized. Its guaranteed investment certificates have also grown for five consecutive days to $12.1 billion as of June 27, albeit still down from $ 13.06 billion on March 28.
The company has settled both its case with the Ontario Securities Commission, which accused it and some of its former executives of misleading investors after the discovery of falsified information in its broker channel, and a related class- action lawsuit.
Meanwhile, the board is down to a “very short, short list” for chief executive candidates, and will name their choice “shortly,” said Eprile.
Hibben said he was not one of the candidates, despite a report that said he was interested in the top job.
“The short- short list is way better than me,” Hibben told reporters.