Buffett agrees to buy 38% stake in embattled Home Capital

Warren Buffett has become the lender of last resort for Home Capital Group. The billionaire investor agreed to buy shares at a deep discount and provide a fresh credit line for the Canadian mortgage company, tapping a formula he used to prop up lenders from Goldman Sachs Group to Bank of America.

Buffett’s Berkshire Hathaway will buy a 38% stake for about C$400m ($300m) and provide a C$2bn credit line with an interest rate of 9% to backstop the Toronto-based lender, Home Capital said late on Wednesday. The interest on the one-year loan would net Berkshire at least C$180m if it is fully tapped.

“While the terms of the new credit line with Berkshire Hathaway remain harsh, we believe the purpose of this loan is to motivate Home Capital’s management to bolster their own funding sources,” said Hugo Chan, chief investment officer at Kingsferry Capital in Shanghai, which owns shares in Home Capital. “This again shows Buffett’s masterful capital allocation skills,” said Chan, citing his investment motto: “Be greedy when others are fearful.”

The financial backing from the billionaire investor is poised to send the stock higher though it comes at a cost, in keeping with his past bailouts of financial firms. Buffett has buoyed some of the biggest US corporations in times of trouble, including a combined $8bn injection to prop up Goldman Sachs and General Electric when credit markets froze during the 2008 crisis.

Berkshire’s purchase of $5bn of Goldman Sachs preferred stock paid Buffett’s company an annual dividend of 10% and the billionaire also got warrants he later used to get more than $2bn of the bank’s shares in a cashless transaction.

In the Home Capital deal, Buffett’s firm agreed to pay an average price of C$10 a share, a 33% discount to Wednesday’s closing price of C$14.94. Berkshire will become Home Capital’s largest shareholder, which has a market value of C$959m.

The investment “is a strong vote of confidence” in the longterm value of the business, Home Capital chairwoman Brenda Eprile said.