Home Capital gets funding lifeline with Buffett deal
Home Capital Group Inc. got an injection of capital and cachet from the world’s most famous investor Warren Buffett, marking a major step for the embattled mortgage lender to move past a crisis of confidence from investors and depositors and “get back to running this business in a long-term way.”
The Omaha-based investor’s multinational conglomerate 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 — and provide a new $2-billion line of credit to its subsidiary, Home Trust.
The deal with Berkshire 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. Shares of Home Capital in Toronto surged after the announcement. They closed at $19, up 27.2 per cent.
News of the marquee backer resonated with investors, but came at a steep cost. After the completion of two separate private placements, Berkshire’s subsidiary 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.”
Berkshire agreed to make an initial investment of more than $153.2 million to acquire more than 16 million common shares of Home Capital at $9.55 per share, followed by an additional investment of more than $246.8 million to acquire nearly 24 million shares at $10.30 per share.
The initial investment would normally require shareholder approval, but Home Capital applied to the Toronto Stock Exchange for an exemption, given its financial hardship. The company expects the transaction to become effective on June 29.