The push to con­tain Home Cap­i­tal’s free fall

Fi­nance min­is­ter spoke to heads of Canada’s largest com­mer­cial lenders

The Hamilton Spectator - - BUSINESS - JOSH WIN­GROVE

As Home Cap­i­tal Group’s shares were in free fall last week, the fight to stop the bleed­ing at the Cana­dian mort­gage lender had al­ready be­gun.

It was late Tues­day, Ot­tawa time, when fed­eral Fi­nance Min­is­ter Bill Morneau re­ceived his first brief­ing from depart­ment of­fi­cials just as he was board­ing a plane in Bei­jing to head home.

Home Cap­i­tal had been reel­ing for a week after the On­tario Se­cu­ri­ties Com­mis­sion ac­cused the com­pany of mis­lead­ing in­vestors over fraud­u­lent mort­gages. That was spark­ing a run on de­posits, forc­ing the com­pany to take on a $2-bil­lion emer­gency credit line at an ef­fec­tive in­ter­est rate of 22.5 per cent on funds drawn so far.

On Wed­nes­day, April 26, Home Cap­i­tal’s shares dropped 60 per cent by lunchtime as in­vestors bet the oner­ous terms of the loan would squeeze the com­pany. There was also con­ta­gion risk. Canada’s ma­jor banks saw their shares slump, while Eq­ui­table Group, a ri­val of Home Cap­i­tal, plunged by al­most a third.

Morneau landed in Ot­tawa Wed­nes­day night, call­ing his de­part­men­tal of­fi­cials as he got off the plane for the lat­est in­for­ma­tion, ac­cord­ing to peo­ple fa­mil­iar with the dis­cus­sions. He later spoke with Jeremy Rudin, head of Canada’s Of­fice of the Su­per­in­ten­dent of Fi­nan­cial In­sti­tu­tions, who is re­spon­si­ble for reg­u­lat­ing what the World Eco­nomic Fo­rum has called the “sound­est” bank­ing sys­tem.

On Thurs­day, Morneau’s of­fice pledged his sup­port for Rudin’s OSFI and the bank­ing sec­tor.

“Our govern­ment has full con­fi­dence” in OSFI to “man­age the sit­u­a­tion,” Morneau spokesper­son An­nie Donolo said.

The pledge wasn’t enough to calm in­vestors. While Home Cap­i­tal’s stock re­cov­ered on Thurs­day on spec­u­la­tion a buyer for the com­pany might emerge, the de­posit run con­tin­ued, to­talling $892 mil­lion over three days to close the week. What’s more, the oner­ous terms of the high-in­ter­est life­line, later re­vealed to be from Health­care of On­tario Pen­sion Plan, res­onated be­yond the com­pany.

“We looked and felt, what on earth are they do­ing?” Eq­ui­table CEO An­drew Moor said. “We thought that might cause is­sues of con­fi­dence in the mar­ket, frankly, and so im­me­di­ately we started reach­ing out to our bankers.”

Eq­ui­table started to face a rash of with­drawals, too, los­ing about $75 mil­lion daily be­tween Wed­nes­day and Fri­day — even though the Canada De­posit In­sur­ance Cor­po­ra­tion pro­vides a safety net by guar­an­tee­ing de­posits of up to $100,000.

OSFI, mean­while, put out re­quests to lenders ask­ing for up­dates to get a han­dle on the dam­age, though spokesper­son An­nik Faucher called it part of “on­go­ing su­per­vi­sory activities.” In a sep­a­rate state­ment, she ac­knowl­edged the sit­u­a­tion has in­creased “our level of ac­tiv­ity and vig­i­lance.”

Canada’s al­ter­na­tive lenders, such as Home Cap­i­tal and Eq­ui­table, typ­i­cally of­fer mort­gages to bor­row­ers who have trou­ble get­ting home loans from big banks be­cause they lack a credit history, such as the self-em­ployed, new im­mi­grants and small-busi­ness own­ers.

Just as Moor was reach­ing out to banks, Morneau was do­ing the same. On the weekend, he spoke with heads of the big­gest com­mer­cial lenders to dis­cuss Home Cap­i­tal. While Morneau doesn’t con­sider Home Cap­i­tal a sys­temic prob­lem, he was fo­cused on as­sess­ing the risk its woes could spread to other al­ter­na­tive lenders, ac­cord­ing to peo­ple fa­mil­iar with the talks.

A core Morneau mes­sage over the past week has been to en­sure mar­ket sta­bil­ity.

By Sunday night, the com­mer­cial banks — in­clud­ing Toronto-Do­min­ion Bank and Bank of Nova Sco­tia — agreed to a $2-bil­lion loan for Eq­ui­table at a rate of about 1.6 per cent to 1.7 per cent.

It was Mon­day that Morneau is­sued his first pub­lic com­ments.

“Fi­nan­cial sta­bil­ity and se­cu­rity are the back­bone of a strong and re­silient econ­omy,” he said. “What I’ve seen over the last few days is proof the sys­tem is work­ing as it should.”

The ques­tion now is what to do next with Home Cap­i­tal. While it only ac­counts for one per cent of Canada’s $1.4-tril­lion mort­gage mar­ket, it still has al­most $18 bil­lion in mort­gages. If with­drawals con­tinue, it could be un­able to re­new them or bring in new busi­ness. That could de­prive po­ten­tial home buy­ers of credit, adding to a slow­down that’s al­ready show­ing signs of de­vel­op­ing in Toronto and Van­cou­ver.

“This could be just an iso­lated sit­u­a­tion and that’s the higher-prob­a­bil­ity out­come at this point, but you can­not ig­nore the risk that this can get messy,” said Aubrey Bas­deo, head of Cana­dian fixed in­come at Black­Rock.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.