Home Cap­i­tal in­vestors brace for key meet­ing

Edmonton Journal - - FINANCIAL POST - ARMINA LIGAYA

Em­bat­tled mort­gage lender Home Cap­i­tal Group Inc. will face tough ques­tions Thurs­day when it re­ports its first-quar­ter earn­ings, as its sub­sidiary’s de­mand de­posits con­tinue to fall and share­hold­ers in­creased their hold­ings.

Canada’s big­gest non-bank mort­gage lender was orig­i­nally due to re­lease its lat­est re­sults May 3, and pre-an­nounced its earn­ings per share April 21 to re­as­sure in­vestors af­ter the com­pany and three of its cur­rent and for­mer ex­ec­u­tives were ac­cused by the On­tario Se­cu­ri­ties Com­mis­sion of mis­lead­ing dis­clo­sure.

That re­lease, how­ever, was post­poned last week to al­low Home Cap­i­tal man­age­ment to up­date for events that have oc­curred since the close of the first quar­ter.

Those events in­clude a par­tial run on its fund­ing, with its high­in­ter­est sav­ings ac­counts ex­pected to fall to $134 mil­lion by Wed­nes­day, down eight per cent from a day ear­lier. Those bal­ances, which help fund Home Cap­i­tal’s mort­gage lend­ing, are down from $1.4 bil­lion on April 24, and $1.991 bil­lion on March 28.

In turn, Home Cap­i­tal sought a $2-bil­lion emer­gency credit line as a back­stop, the terms of which the com­pany said would have a “ma­te­rial im­pact on earn­ings, and would leave the Com­pany un­able to meet pre­vi­ously an­nounced fi­nan­cial tar­gets.”

Yet, de­spite Home Cap­i­tal’s on­go­ing liq­uid­ity is­sues, share­holder Tur­tle Creek As­set Man­age­ment boosted its stake in the Toron­to­based al­ter­na­tive mort­gage lender last month to 12.2 mil­lion shares, or 19 per cent, Bloomberg re­ported Wed­nes­day based on a fil­ing.

Tur­tle Creek’s dis­clo­sure comes a day af­ter it emerged that Cana­dian Im­pe­rial Bank of Com­merce’s as­set man­ager raised its hold­ings in Home Cap­i­tal to 9.69 mil­lion shares, or 15.10 per cent, as of April 30, ac­cord­ing to a reg­u­la­tory fil­ing.

An­a­lysts don’t ex­pect Home Cap­i­tal’s pre-an­nounced firstquar­ter earn­ings of $0.90 di­luted earn­ings per share and $1.02 on an ad­justed di­luted earn­ings per share ba­sis (com­pared to $0.92 and $0.96 a year ago) to change, as the com­pany’s liq­uid­ity strug­gles and cri­sis of con­fi­dence oc­curred af­ter the quar­ter ended on March 31.

“We ex­pect the Q1 earn­ings call to help pro­vide some colour on the way for­ward,” said Jeff Fen­wick, an an­a­lyst with Cor­mark Se­cu­ri­ties, in a note Tues­day.

An­a­lysts will also be look­ing for more de­tails on Home Cap­i­tal’s non-bind­ing ar­range­ment with an “in­de­pen­dent third party” to buy or take on up to $1.5 bil­lion of its mort­gages com­ing due or for re­newal in the com­ing weeks or al­ready com­mit­ted to, a move that an­a­lysts say bought the com­pany some time.

A re­port in the Globe and Mail named the buyer as mort­gage lender MCAP Corp. When reached via email, MCAP chief ex­ec­u­tive Derek Nor­ton de­clined to com­ment.

If not for this non-bind­ing agree­ment, Home Cap­i­tal would have to fund these mort­gages with its own liq­uid­ity and may have de­faulted on a $325-mil­lion bond due on May 24, said Jaeme Gloyn, an an­a­lyst with Na­tional Bank Fi­nan­cial.

Com­pany watch­ers will also be look­ing out for more de­tails on Home Cap­i­tal’s an­nounce­ment Tues­day it is “tightening our lend­ing cri­te­ria and re­duc­ing some of our bro­ker in­cen­tive pro­grams and ex­pect that will re­sult in a de­cline in our orig­i­na­tions and re­newals.”

On Wed­nes­day, the chief ex­ec­u­tive of na­tional mort­gage and leas­ing com­pany Do­min­ion Lend­ing Cen­tres said his com­pany had stopped rec­om­mend­ing Home Cap­i­tal’s mort­gages to its clients “in or­der to best pro­tect our cus­tomers and their in­vest­ments” in light of re­cent de­vel­op­ments, which it called “con­cern­ing.”

Shares of Home Cap­i­tal were down more than five per cent in Wed­nes­day morn­ing trad­ing, but closed roughly flat. Home Cap­i­tal stock soared as much as 30 per cent on Tues­day af­ter it an­nounced the third-party agree­ment.

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