Mortgage assets sale gives Home Capital some breathing room
Alternative mortgage lender Home Capital Group Inc. announced Tuesday that its subsidiary has entered into a definitive agreement with KingSett Capital to sell a portfolio of commercial mortgage assets valued at approximately $1.2 billion, giving the embattled company some much needed liquidity to pay down a pricey emergency credit line and potentially clearing the way to replace it.
Home Capital says it expects to record a loss on the transaction, which is expected to close in two tranches during the third quarter, of approximately $15 million, before income taxes.
“This transaction will help the Company further stabilize its liquidity position and highlights the flexibility and options created by the quality of our assets,” said Bonita Then, Home Capital’s interim chief executive in a statement. “Proceeds from the transaction are expected to have an immediate impact by enabling us to enhance our liquidity and reduce the outstanding debt under the Company’s $2 billion credit facility.”
KingSett Capital, a private equity real estate investment business, will purchase the portfolio for 99.61 per cent of outstanding principal value, but future credit losses could reduce that figure.
Home Capital had said previously that it was pursuing financing and strategic options, including the sale of some non-core assets such as certain loan portfolios. Those options were aimed at shoring up its liquidity and paying down a costly credit line it obtained as an emergency backstop after its deposit balances — which help fund its mortgage lending — began plummeting at the end of March amid allegations of misleading disclosure and executive departures.
This deal is a big step toward relieving pressure and a net positive for earnings, said Jeff Fenwick, an analyst with Cormark Securities.
“We view this event as a key positive step for Home, demonstrating an ability to monetize assets and boost liquidity without having a meaningful impact on shareholders’ equity. Notably, while the transaction will trigger a small loss, the offsetting reduction in the 10 per cent interest rate credit facility results in the transaction being a net positive to earnings,” he said in a note to clients on Tuesday.
A $1 billion reduction in the amount drawn from the credit facility equates to $25 million per quarter in interest savings, he noted.
Still, Home Capital “is far from being out of the woods and the long-term outlook for its mortgage lending franchise remains in question. However, (Tuesday’s) news reflects that HCG is capable of finding a path forward that preserves a large portion of shareholder value, particularly if credit quality continues to hold steady.”
Stephen Boland, an analyst at GMP Securities, said the KingSett transaction “may pave the route to a new replacement credit line at a much more favourable rate.”
“In our view, HCG’s recovery continues to be well executed by the interim management team and new board members,” he said in a note to clients on Tuesday. “We believe the OSC settlement and this sale are important steps
towards preserving shareholder’s equity and make a new credit line (possibly including large Canadian banks) much more likely. The required size of a new credit line may now be significantly reduced. Bringing in a permanent management team may be another positive catalyst.”
Executive search firm Caldwell Partners has been retained to bring in a permanent chief executive officer and chief financial officer.
The announcement Tuesday comes less than a week after Home Capital announced the company and three of its former executives have agreed to pay a total of $30.5 million to settle allegations of misleading disclosure by the Ontario Securities Commission and a classaction lawsuit. Canada’s biggest securities regulator had accused Home Capital and the former executives of misleading investors for months about an internal probe in 2014 and 2015 that led the company to cut ties with 45 brokers over falsified income documentation submitted for some loans.
Ratings agency DBRS Limited said Tuesday it sees the KingSett transaction as “positive for HCG as it will improve the Group’s liquidity and funding profile, albeit at the cost of future recurring revenues related to holding the loans on its balance sheet.”
DBRS placed Home Capital’s ratings under review with negative implications on May 3, and said Tuesday that placement will remain.
Depositor withdrawals have since slowed, but Home Trust has lost 94 per cent or $1.9 billion in high interest savings account balances since March 28. Those account balance s stood at $112.3 million as of June 19, up from $98.5 million on June 16.