Buffett buy-in hailed a Home Capital ‘turning point’
HARD- HIT STOCK RISES 27% AFTER WORLD’S MOST- FAMOUS INVESTOR BUYS INTO BELEAGUERED MORTGAGE LENDER
A surprise injection of capital — and cachet — from the world’s most famous investor appears to have marked a major “turning point” in embattled mortgage lender Home Capital Group Inc.’ s bid to end a crisis of confidence.
Warren Buffett’s Berkshire Hathaway Inc., said late Wednesday evening it had agreed to indirectly acquire up to $ 400 million of the Toronto- based company’s common shares in two private placements — giving it a 38.39 per cent equity stake, at a steep discount — and provide a new $2 billion line of credit to its subsidiary, Home Trust.
The deal with Berkshire, through its wholly- owned subsidiary Columbia Insurance Company, gives the alternative mortgage lender a much- needed cheaper funding arrangement. It also serves a major endorsement as Home Capital recently faced eroding market confidence and a partial run on its funding amid allegations of misleading disclosure.
“Home Capital’s strong assets, its ability to originate and underwrite well- performing mortgages, and its leading position in a growing market sector make this a very attractive investment,” said Buffett, Berkshire’s chairman and chief executive officer, in a statement.
News of the marquee backer resonated with investors, who sent shares of Home Capital surging following the announcement: They closed up more than 27 per cent at $19 in Toronto on Thursday.
But Buffe t’ s s upport comes at a high cost.
After the completion of two separate private placements, Berkshire will own 40 million common shares at an average price of about $10 per share.
Berkshire’s proposal was chosen by Home Capital’s board after “considering numerous alternative proposals,” the company said, including those that “would provide the potential for a sale of all of the shares.”
Home Capital board member Alan Hibben told analysts Thursday that roughly 70 parties signed non-disclosure agreements with the firm as part of its process to explore its options. The board decided it was key to have a big-name sponsor to boost its image with investors and in the deposit marketplace, said Hibben.
“Just to make sure if things all go to hell in the next couple of years, that there’s someone along with us that would be helpful,” Hibben said in an interview with the Financial Post.
This transaction “positions us to move beyond the liquidity event of earlier this year and get back to running this business in a long-term way,” he told analysts.
Shareholder David Taylor, founder and chief invest- ment officer of Taylor Asset Management, called the deal “positive” even with the discount. “This is the price that you have to pay to get Buffett,” he said.
Home Capital chair Brenda Eprile said this was a “very important moment” for the company.
“I belie ve t hat when people l ook back on the events of 2017 at Home Capital, they will see this as a turning point,” she told analysts Thursday morning.
Canada’s biggest alternative mortgage lender has faced eroding market confidence and a partial run on its funding — with depositors withdrawing roughly $ 2.9 billion of their guaranteed investment certificate and high-interest savings account balances from its subsidiary since the end of March — amid executive exits and allegations of misleading disclosure.
The falling balances from Home Trust’s high- interest savings accounts forced the company to seek a $ 2- billion emergency credit line in April as a backstop, the onerous terms of which the company said would make it tough to meet its previously announced financial targets.
The Hathaway announcement comes one week after Home Capital said the company and three of its former executives agreed to pay a total of $ 30.5 million to settle allegations by the OSC of misleading disclosure and a class-action 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 firm to cut ties with 45 brokers over falsified income documentation submitted for some loans.
Jeff Fenwick with Cormark Securities said having a major financial firm stand behind Home Capital “re- moves much of the financial risk from the story.”
“The path forward remains challenging as HCG digests a major turnover of management and the board ( a process that will be ongoing) and must work to regain the confidence of depositors, borrowers, and brokers,” he said. “However, it is clearer that the business can survive and has a good shot at rebuilding its franchise.”