Credit line a ‘sign of confidence’

Equitable gets $2B backstop from banks in the wake of Home Capital’s troubles

Alternative mortgage lender Equitable Group Inc. announced Monday it has lined up $2 billion in standby credit in a bid to stem any contagion from troubled competitor Home Capital Group Inc., which continues to experience a partial run on its funding.

Equitable, which also released its first-quarter earnings more than a week early, said Monday it saw an “elevated but manageable” decrease in deposit balances of roughly $225 million between April 26 and April 28, representing 2.4 per cent of its total deposit base.

This decline followed Home Capital’s disclosure April 26 that it was seeking a $2-billion emergency credit line to help mitigate a steep drop in its high interest rate savings deposits.

On Monday, Home Capital said the balance of these deposits was expected to fall to $391 million after the settlement of Friday’s transactions, down from $1.4 billion a week ago.

Equitable Group president and chief executive Andrew Moor says after Home Capital’s shares plummeted 65 per cent on Wednesday — pulling Equitable’s shares down more than 31 per cent — their team began to reach out to the Big Six banks.

“We realized it might cause concern amongst investors. … We eventually got on the phone to the various banks we deal with and have great relationships with, to really try to buy us some insurance to assure the market that we were going to be in good shape,” Moor said in an interview.

Equitable said Monday it has obtained a letter of commitment for a two-year, $2 billion secured backstop from a syndicate of Canadian banks, including Toronto-Dominion Bank, Canadian Imperial Bank of Commerce and National Bank.

It has since added Bank of Nova Scotia and Bank of Montreal to the syndicate, and is still working with another Big Six bank, said Moor.

“I think it’s just a testament to the reputation that we have with these people, and the fact that we’ve done business with them for many years. And they were willing to provide this sign of confidence in Equitable.”

Shares of Equitable closed at $47.35 on Monday, up nearly 30 per cent from Friday’s close of $36.49.

Equitable already had a $1-billion credit facility with one of the banks, said Moor. This new funding with the syndicate adds $2 billion on top of that, but at more costly terms.

The terms of the facility announced Monday include a 0.75 per cent commitment fee and a 0.5 per cent standby charge on any unused portion of the facility, Equitable said. The interest rate on the funding facility is approximately 60 basis points over the cost of Equitable Group’s Guaranteed Investment Certificates (GICs) — one of the mortgage lender’s sources of funding, the company said.

This credit line is a “critical piece of good news” for Equitable, said Jeff Fenwick, an analyst with Cormark Securities, on Monday.

“While the somewhat higher cost of funds will drag on earnings, EQB noted that it can still produce earnings growth if utilized, albeit closer to mid-single digit levels vs. the mid-teens level we had previously been forecasting,” he said in a note to clients on Monday.

Moor said Monday Equitable hasn’t seen “any change in behaviour on the GIC books” and regular GICS that mature in the next 12 months represent 21 per cent of its total liabilities.

Equitable also reported diluted earnings per share of $2.54 for the quarter ended March 31, up 49 per cent from $1.71 a year earlier and beating the consensus adjusted EPS estimate of $2.42, according to analysts surveyed by Bloomberg.

Moor also told analysts that it anticipates mortgage applications to Equitable to increase in the coming weeks as Home Capital continues to face liquidity problems.

In response to these new “lending opportunities,” Equitable plans to expand at a “measured pace, as faster growth is riskier growth,” he said.

“Even if we have the market opportunity to grow faster than normal, we will not be taking that route,” Moor told analysts.

Equitable’s disclosure on Monday came as Home Capital reported it expects to receive an initial draw of $1 billion from its $2-billion credit line, provided by a facility led by the Healthcare of Ontario Pension Plan. This credit line, announced last week, is aimed at mitigating the impact of the decline in Home Trust’s high interest savings account deposit balances.

Shares of Home Capital closed at $6.96 in Toronto, down 13.4 per cent from Friday’s close.

Home Capital also said last week it had retained RBC Capital Markets and BMO Capital Markets to “advise on further financing and strategic options” as analysts suggested a sale was possible.

Moor said Monday Equitable would not be interested in buying any of Home Capital’s assets.

We eventually got on the phone to the various banks we deal with ... to really try to buy us some insurance. ANDREW MOOR, CEO Equitable Group