HCG secures $2B credit line
Mortgage lender’s shares rise after falling nearly 65 per cent
Home Capital Group Inc. confirmed Thursday it has secured a “firm commitment” for a $2 billion credit line to backstop a significant decline in deposits and has retained two investment banks to “advise on further financing and strategic options.”
The announcement comes after shares of the alternative mortgage lender plunged nearly 65 per cent on Wednesday after it said it needed a the costly loan facility after its subsidiary Home Trust saw high interest savings account deposits drop by $591 million between March 28 and April 24.
Home Capital said Thursday those deposits declined by nearly the same amount in the days since. Home Trust now expects to have a high interest savings account balance of approximately $814 million on Thursday — down $586 million from $1.4 billion on April 24 — after the settlement of Wednesday’s transactions, Home Capital said in a statement.
The company added that the loan facility “from a major Canadian institutional investor” is secured against a portfolio of mortgages originated by Home Trust, and will provide Home Capital with approximately $3.5 billion in total funding.
“Access to these funds is intended to mitigate the impact of a decline in Home Trust’s HISA deposit balances that has occurred over the past four weeks and that has accelerated since April 20. The Company will work closely with the lender to have the funds available as soon as possible.”
Home Capital did not identify the identity of the lender, but Bloomberg reported it secured the loan from Healthcare of Ontario Pension Plan, according to people familiar with the process.
The Toronto-based pension plan represents more than 321,000 health-care workers in Ontario, and its president and chief executive officer Jim Keohane sits on Home Capital’s board and is a shareholder of the mortgage lender, Bloomberg reported Thursday.
An external spokesman for Home Capital declined to comment on the lender’s identity on Thursday.
Home Capital also advised that the terms of the loan agreement will have a material impact on earnings, and will leave the Company unable to meet previously announced financial targets.
The company also said it had “retained RBC Capital Markets and BMO Capital Markets to advise on further financing and strategic options.”
Shares of Home Capital were up as much as 18 per cent to $7.32 in Toronto on Thursday. The stock closed at $5.99 on Wednesday, down nearly 65 per cent from $17.09 a day earlier.
Other alternative mortgage lenders are also facing downgrades Thursday amidst growing concern that Home Capital’s liquidity problems will continue, and potentially spread to its peers.
Home Trust’s demand deposits such as high interest savings accounts as well as fixed deposit products such as Guaranteed Investment Certificates (GICs) help fund Home Capital mortgage lending.
“We believe HCG’s ability to raise GIC deposits and maintain operations is uncertain,” said Stephen Boland, an analyst at GMP Securities, in a note to clients on Thursday, before Home Capital’s statement. “Unless GIC costs stabilize, a run-off scenario or sale is a growing possibility. Based on Wednesday’s market action, we believe the issues at HCG may be spreading into the broader broker GIC and alternative mortgage markets. We believe regulators may move quickly to protect the alternative mortgage market confidence and depositors.”
A spokeswoman for the Office of the Superintendent of Financial Institutions said in an e-mail on Wednesday that it is “monitoring the situation closely.”
Shares of other non-bank mortgage lenders were also hit Wednesday, amid investor concern about the alternative mortgage lending model, on top of recent moves by both the federal and provincial governments to cool down the overheated housing market, particularly in Vancouver and Toronto.
Concerns over Home Capital ignited after the Ontario Securities Commission filed a statement of allegations and notice of hearing against the company; founder and former chief executive Gerald Soloway; chief financial officer Robert Morton; and former president and chief executive Martin Reid. Earlier this week, Home Capital announced an executive and board shuffle in an effort to reassure investors after the regulator accused the mortgage lender of misleading disclosure.
The allegations relate to Home Capital’s disclosure following the discovery that some loan applications contained falsified income information, after which the company cut ties with dozens of brokers in 2014. None of the allegations have been proven.