HOME CAPITAL SELL-OFF
Decline in company’s stock has other mortgage lenders worried funding woes may spread,
Home Capital Group Inc. extended declines after the Canadian mortgage lender reported additional deposit withdrawals, prompting one of its biggest rivals to seek a $2-billion ($1.5 billion) credit line to stem any contagion across the country’s financial markets.
Home Capital fell 13 per cent to $6.96 in Toronto, bringing its twoweek drop to about 69 per cent, on concern that redemptions of guaranteed investment certificates by nervous investors would worsen a cash crunch. High-interest deposits have declined about $1.6 billion, or 80 per cent, over the past month to $391 million, the company said Monday.
“If investors are pulling their highinterest savings accounts, it’s natural to think that other clients would also be looking to pull their GIC investments,” said Jaeme Gloyn, an analyst at National Bank Financial Inc.
The sell-off in Home Capital’s stock and bonds, sparked by allegations that it misled investors about its mortgage book, are raising concerns that its funding woes may spread to other mortgage lenders. That could derail a red-hot housing market that’s been a key driver of growth for Canada’s economy, accounting for as much as a fifth of output.
Equitable Group Inc., another alternative mortgage lender, said Monday it took out a credit line with a group of Canadian banks after it started seeing “an elevated but manageable” decrease in deposit balances. Customers withdrew an average $75 million a day between Wednesday and Friday. The withdrawals represented 2.4 per cent of the total deposit base. Liquid assets remained at roughly $1 billion after the outflows. Equitable’s loans terms were much more favourable than Home Capital’s, which is paying an effective rate of 22.5 per cent on the first half of the $2-billion credit line that it tapped Monday from the Healthcare of Ontario Pension Plan. Equitable is paying a 1.25-per-cent interest rate on the drawn portion, and a 0.75per-cent commitment fee and a 0.5per-cent standby charge.
“The issues affecting the wellknown trust company in Toronto are their issues alone, and it’s unfortunate the banking industry has been dragged into it,” Andrew Moor, chief executive officer of Equitable, said on a call Monday to discuss earnings. Results were published almost two weeks earlier than planned due to the Home Capital sell-off.
Equitable shares soared 30 per cent to $47.35 in Toronto, helping recoup some of the 41-per-cent drop from last week. Other Canadian bank stocks that had fallen last week were little changed Monday. First National Financial Corp., a mortgage lender, rose 2.5 per cent.
The company’s debt has fallen along with the stock. Home Capital’s bonds maturing in December next year were trading little changed at 90.6 cents on the dollar on Monday, according to Bloomberg data, yielding about 10 per cent, compared with less than 3 per cent on April19. Home Capital also has $325 million in 2.35- per-cent bonds maturing on May 24.
“Things are perhaps all right from the bondholder’s perspective, but not certain and the bonds reflect that,” said Mark Carpani, a portfolio manager at Ridgewood Capital Asset Management, with $1.1 billion in assets. He said he doesn’t hold any Home Capital bonds and declined to comment at what level he’d consider buying them. The company has a busy week in store. It’s scheduled to announce quarterly earnings Wednesday. The next day, the OSC is slated to hold a hearing on Home Capital’s alleged breaches of securities rules.
Home Capital’s $12.9 billion in GIC deposits are essential to fund its mortgage business, which represents 1 per cent of the Canadian mortgage market. Withdrawals could accelerate as these short-term deposits mature.
Declining deposits could lead to a windup of the company, which would be monitored by the federal bank regulator, the Office of the Superintendent of Financial Institutions. The lender said Thursday it has hired BMO Capital Markets and RBC Capital Markets to conduct a review of strategic options, signalling that a sale may be on the table.
“OSFI maintains ongoing relationships with the financial institutions it supervises,” Annik Faucher, an OSFI spokesperson, said by email. “While we are prevented by law from discussing the affairs of the individual financial institutions we regulate, or our ongoing supervisory work, I can confirm that OSFI is continuing to monitor the situation closely.”
Meanwhile, Home Capital’s biggest investor is sticking with the company, adding to its position.
Toronto-based Turtle Creek Asset Management Inc., which owned almost 14 per cent of Home Capital as of the end of February, praised the lender for its low loss rate and underwriting practices.
“To be clear, we have not sold shares; indeed, the opposite is the case,” according to an investor letter, signed by chief executive officer Andrew Brenton managing partner Jeffrey Cole, and managing partner Jeffrey Hebel. “We are obviously not happy with recent developments at Home Capital, but we remain focused on long-term value creation for you, our fellow investors.”