HCG shares downgraded
Macquarie Research cites delays, challenges in downgrading shares to neutral
Home Capital Group Inc. has been downgraded by Macquarie Research despite a slowdown in the pace of withdrawals from deposit accounts at the alternative mortgage lender’s subsidiary.
Analysts Jason Bilodeau and Adarsh Iyer said while Home Capital has tangible asset value, there is much uncertainty surrounding its future earnings potential and the ability to realize this value “is in question and includes potentially realizing zero value.”
“We have been underwhelmed by delays/challenges in the company’s ability to secure permanent funding or to substantially monetize the company and this elevates our concerns,” the Macquarie analysts said in a note to clients on Monday, in which they downgraded shares to neutral from outperform.
The Toronto-based mortgage lender has been facing a liquidity crisis, with deposit holders withdrawing more than $1.8 billion — or more than 90 per cent of the funds — from high-interest savings accounts at its subsidiary, Home Trust since the end of March.
The run on deposits followed a series of executive departures and allegations of misleading disclosure by the Ontario Securities Commission.
Home Capital has said the allegations, in connection with the discovery of falsified information in its broker channel and the subsequent cutting of ties with 45 brokers, are “without merit.”
This rapid withdrawal of deposit balances forced Home Capital to obtain a $2 billion emergency credit line as a backstop last month, but at onerous terms that the company has said leaves it unable to meet previously announced financial targets.
Canada’s largest non-bank lender said in its first-quarter earnings release last Thursday that the recent hit to its reputation has impacted its future funding abilities and cast “significant doubt on the Company’s ability to continue as a going concern.”
Macquarie told clients in a note on Monday that it has “no credible basis on which to make detailed forecasts or estimates. The audit requirement to include the ‘going concern’ disclosure underscores just how limited the going forward visibility is within the company itself.”
Home Capital has said it is examining many options to stabilize the company, including the sale of noncore assets such as certain portfolios to shore up its liquidity. It has drawn $1.4 billion on the facility so far.
HCG’s ability to continue as a going concern remains dependent on its ability to fund through broker GICs
However, the stop-gap funding obtained by Home Capital “provides some breathing room,” the analysts added.
Home Capital has the option to refinance the $2 billion deal without penalties, and replacing the facility with less costly terms would be a “positive catalyst” for the company, Macquarie said.
With deposit withdrawals levelling off, Macquarie said it believed that Home Capital’s $1.6 billion in liquid assets could “provide the needed time for management to enact on their turnaround plan.”
Stephen Boland, an analyst with GMP Securities, estimates that Home Capital has enough liquidity to navigate a full drawdown of its high-interest savings account balances and repay a $325 million deposit note due on May 24.
“A sale of either the commercial mortgages or the prime business could add more,” Boland, which rates Home Capital at buy, told clients in a note on Monday. “We believe management is looking at both of these options. In our view, HCG’s ability to continue as a going concern remains dependent on its ability to fund through broker GICs.”
Meanwhile, Home Capital said Monday that its deposit levels have “stabilized over the past few days” and its liquid assets now stand at $1.51 billion.
Home Trust’s high-interest savings accounts balances were $125.4 million as of May 12, virtually flat from $125.5 million a day earlier, Home Capital said. That’s compared to roughly $1.991 billion on March 28.