BYE BYE, BUYOUT
Mortgage lender fails to draw buyout interest amid mass customer withdrawals
Home Capital Inc. struggles to drum up interest among banks and lenders,
Canadian banks and financial firms are so far showing little interest in buying Home Capital Group Inc., vindicating short sellers who say the embattled mortgage lender could be sold off piecemeal, driving the stock down further.
“People in the industry would rather see these guys go out of business because the loans aren’t worth the risk, and they’re so leveraged,” said Marc Cohodes, a private investor and part-time chicken farmer in California who has been shorting the stock, or betting on declines, for more than two years.
Home Capital’s rival Equitable Group Inc. joined a list of companies that have said they aren’t interested in taking over the struggling mortgage lender, which hired investment banks last week for a possible sale after the stock plunged by two-thirds amid a regulatory probe.
“The bottom line is no,” Equitable chief executive officer Andrew Moor said in an interview at Bloomberg’s Toronto office. “We have some concerns based on what we’ve read about how they underwrote their loans and their internal controls.”
Home Capital is looking for buyers amid an outflow of deposits that has seen customers withdraw about $1.6 billion in a month. The withdrawals led to a debt rating cut by S&P Global Ratings late Tuesday to B- from B+, the second downgrade in six days. The company postponed the release of its first-quarter earnings, scheduled for after markets Wednesday, to May 11.
Other banks have indicated that they aren’t interested in the lender. Canadian Western Bank CEO Chris Fowler said his Edmonton-based lender, which has an alternative mortgage business, would not be a buyer for all of Home Capital. He added the bank will consider “selectively” acquiring loan portfolios. A Laurentian Bank of Canada spokesperson said that for the lender to be interested in an acquisition, it needs to be financially sound and a good strategic fit. Laurentian is active in the alternative lending space. Canada’s biggest commercial banks, meanwhile, are unlikely to be interested because Home Capital’s mortgages are with customers who wouldn’t qualify for a loan with them, Sumit Malhotra, an analyst at Bank of Nova Scotia, said in a research note. They might be interested in the loan book, he added.
One of Canada’s biggest subprime lenders has also passed. J.C. Flowers & Co., which agreed in November to buy Citigroup Inc.’s Canadian lending business, was among groups to have initial discussions with Home Capital’s advisers. They are not currently pursuing an acquisition, according to a person familiar with the matter. A representative for J.C. Flowers declined to comment.
Home Capital may attract some interest from private equity firms such as Apollo Global Management LLC and Blackstone Group LP, Reuters reported Tuesday, citing people familiar with the situation.
Potential buyers would also have to deal with debt. Home Capital has $325 million in bonds maturing this month, and another $475 million due next year. That’s on top of the $2-billion credit line from an Ontario pension fund announced last week to help counter a run on deposits. The firm also had about $17 billion worth of mortgages, according to its latest financial disclosures.