Home Capital pushes on with rebuild after rejection of Buffett’s tranche

Chair suggests investors’ vote reflects company’s ‘diminished need for capital’

TORONTO Home Capital Group Inc. officials pledged to continue rebuilding the battered mortgage lender Tuesday after shareholders overwhelmingly rejected a second investment in the company by Warren Buffett’s Berkshire Hathaway at a price below the current share value.

Only 11.21 per cent of votes cast were in favour of the additional investment of nearly $247 million, which would have boosted Buffett’s stake to 38.4 per cent from 19.9.

Home Capital’s board of directors had recommended approving the second tranche, which was negotiated as part of the initial investment in June but required a shareholder vote.

Brenda Eprile, chair of Home Capital, said the company remains “grateful” to have Berkshire as a major shareholder, and suggested the vote reflected the mortgage loan company’s “diminished need for capital” after an eventful year.

Eprile, who was the only Home Capital official to speak at the meeting Tuesday morning, said the company would remain focused on building deposits to shore up funding for new loans.

Don Johnson, a former Bank of Montreal mergers and acquisitions specialist whose email to Buffett triggered the initial investment in the Canadian lender, said he believes the rejection of the additional tranche stemmed primarily from concerns about shortterm dilution.

The $10.30 a share price negotiated with Buffett in June is below the $13 to $14 range where Home Capital stock has been trading for the past couple of months.

“I was disappointed,” Johnson said shortly after the vote, adding that he believes the larger stake would have given Buffett more reason to help Home Capital in the months and years ahead.

Industry watchers suggest companies like Home Capital, which lend money to home buyers whose credit histories don’t qualify for mortgage loans from big banks, are most vulnerable to policy and regulatory changes aimed at cooling Canada’s hot housing market.

Buffett indicated last month that a rejection by shareholders of his plan to take a larger stake in Home Capital would not be cause for him to walk away from the investment.

“We knew that could go either way,” he said on Bloomberg Television. “We’d like to buy the stock but if they vote it down, if the shareholders vote it down, we’ll be fine.”

But Johnson, who met Buffett over 20 years ago when the renowned global investor was looking at an opportunity in Canada, said it’s not clear how committed Berkshire will remain in what amounts to a very small investment, despite his reputation as a long-term investor. “Only time will tell,” Johnson said.

One Home Capital investor who was in favour of Berkshire taking the larger position in the Canadian lender said Tuesday he plans to remain for the long term.

“Despite the unfavourable result from the vote, we continue to believe Home Capital has a bright future ahead with the renewed management and board, a wellcapitalized balance sheet, and strong support from Berkshire Hathaway,” Hugo Chan, chairman and chief investment officer of Kingsferry Capital Management Group Ltd., said in an emailed statement to the Financial Post.

Berkshire’s investment was seen as a lifeline for Home Capital, which faced a crisis of confidence last spring amid executive departures and regulatory accusations of misleading disclosure to shareholders.