Home Capital strikes $1.5B deal
Third-party agrees to mortgage purchase as lender announces plan to repay debt
Embattled mortgage lender Home Capital says it has entered into an arrangement with an “independent third party” that wishes to either purchase funded mortgages or take on its mortgage commitments and renewals, up to a total of $1.5 billion.
The third party, which Home Capital did not identify, has indicated its non-binding intention to buy as much as $1 billion in qualifying uninsured mortgages, with an “immediate interest” in purchasing or accepting commitments and/or renewals for up to $500 million, the company said in a statement on Tuesday.
The third party also indicated it is interested in Home Capital’s insured mortgages, and may purchase or accept commitments for up to $500 million worth, subject to appropriate documentation.
“This purchase arrangement is designed to give us the ability to continue to serve as many customers as possible in the mortgage broker channel, and we are optimistic that there can be opportunities for future growth,” said Bonita Then, interim chief executive of Home Capital in a statement. “Meanwhile, we continue to work very hard to develop additional sources of funding, while carefully managing our liquidity.”
Home Capital shares surged roughly 30 per cent Tuesday to as high as $8.98 in Toronto, adding to a 20 per cent rally on Monday. The stock closed at $8.86, up 25.85 per cent.
Even with this rally, Home Capital’s stock is down 60 per cent since April 19 when the Ontario Securities Commission made public its allegation that the company misled investors.
The unnamed third party is also interested in “further expansion of this arrangement at a later date,” the company added.
Home Capital also announced its intention to pay back 100 per cent, or $325 million in debt, due on May 24, when its 2.35 per cent deposit notes mature.
These are the latest steps in Home Capital’s efforts to restore confidence since the Ontario Securities Commission accused the company and some of its former executives of misleading disclosure. This triggered a crisis of confidence and a partial run on its funding, with clients pulling out their demand deposits from Home Capital’s subsidiary Home Trust, forcing it to take on a costly $2-billion credit line as an emergency backstop.
Home Capital has since retained BMO Capital Markets and RBC Capital Markets to “advise on further financing and strategic options” as analysts speculated that a sale was a growing possibility.
Jaeme Gloyn, an analyst with National Bank of Canada Financial Markets, says Home Capital’s third-party arrangement is “purely a means to avoid default on the May 24, 2017 bonds, while continuing to buy the company time to refinance the $2 billion (Healthcare of Ontario Pension Plan) credit facility and restructure the business as a going concern.”
The arrangement announced Tuesday is not a sale of on-balance sheet mortgages, but rather a third-party buying mortgages coming due for renewal in the coming weeks or already committed to, Gloyn said in a note to clients.
“Without the third-party funding, HCG would have had to fund these mortgages with its own liquidity... if HCG funded its upcoming mortgage commitments/ renewals, we believe this may have caused the company to default” on the $325 million of debt, he said Tuesday. “In our view, HCG solved a significant near-term liquidity risk, but acknowledged the current state of the business model is broken.”
Then also said in a statement Tuesday the company is “tightening our lending criteria and reducing some of our broker incentive programs and expect that will result in a decline in our (mortgage) originations and renewals... We will continue to evaluate opportunities that could enable us to return to more normal levels of activity in our traditional onbalance sheet business.”
Home Capital will continue to offer mortgages in most of its existing product categories, however at reduced volumes. “In addition, the terms of the new funding arrangement as well as the company’s previously announced $2-billion credit line will lead to a greater focus in the near term on originating mortgages to sell, rather than holding them on balance sheet and funding through deposits, as Home has traditionally done,” Home Capital said Tuesday.
“The company anticipates that this will result in lower overall mortgage balances, increased costs and reduced levels of profitability in the near term. The existing mortgage portfolio continues to perform well.”
Home Capital also disclosed the other parties in the syndicate backing its $2-billion credit line. In addition to the previously announced Healthcare of Ontario Pension Plan (HOOPP), the credit line was “successfully syndicated to (or to entities affiliated with) Credit Suisse, Goldman Sachs, Fortress Investment Group and a major North American financial institution.”
Meanwhile, Home Capital’s high interest savings account deposit balances continued to fall. Home Trust’s high-interest deposit balances are expected to be about $146 million on May 9 after the settlement of transactions that took place on May 8, down from $192 million on Monday and roughly $1.991 billion on March 28.
Home Trust’s Guaranteed Investment Certificate deposits, which make up a larger share of its funding, held steady, at $12.64 billion as of May 7, same as two days earlier. That balance, which includes Oaken Financial and broker GICs, however is down from $12.86 billion on April 28, and $13.06 billion on March 28.
This comes a day after Home Capital named a new chair, Brenda Eprile, and three Canadian business heavyweights to its board. It also named three new directors on Monday. Home Capital had previously announced the appointment of former RBC Capital Markets managing director of mergers and acquisitions Alan Hibben.
In our view, HCG solved a significant near-term liquidity risk, but acknowledged the current state of the business model is broken.