Home Capital Sells $1.5 Billion in Loans as Deposits Fall

2017-05-09 15:42:31

By Allison McNeely, Maciej Onoszko and Gerrit De Vynck, Bloomberg News

Home Capital Group Inc. agreed to sell as much as C$1.5 billion ($1.1 billion) worth of mortgage renewals to an unidentified buyer as the struggling Canadian lender looks to shore up its balance sheet and restore investor confidence. The stock surged for a second day.

The non-binding deal includes up to C$1 billion of uninsured mortgages and C$500 million of insured mortgages, equal to about 10 percent of the company’s total mortgage book. The sale includes mortgages coming due for renewal, not on-balance sheet loans, Jaeme Gloyn, an analyst at National Bank of Canada, said in a research note. The lender also plans to shift its strategy away from funding mortgages from its deposit base.

Home Capital “solved a significant near-term liquidity risk, but acknowledged the current state of the business model is broken,” Gloyn said.

Home Capital, under scrutiny from Canadian regulators for misleading investors about possible mortgage fraud, has faced a run of about C$1.9 billion on deposits, forcing it to consider a sale. The Toronto-based company’s troubles have sparked concerns the fallout could lead to a broader slowdown in the Canadian real estate market.

Home Capital’s high interest deposits continued to dwindle, falling to C$146 million as of May 9 from almost C$2 billion five weeks ago. Its guaranteed investment certificate deposits stood at about C$12.6 billion as of May 7, according to a statement Tuesday. The company’s available liquidity and credit capacity totaled C$1.7 billion, which includes C$1.1 billion of liquid assets and C$600 million of the undrawn facility led by Healthcare of Ontario Pension Plan.

“What this news really does is address a lot of the near-term liquidity challenges that they’ve been dealing with in terms of all the deposits that were running out the door and questions about their ability to sell more GICs down the road,” said Jeff Fenwick, an equity analyst at Cormark Securities Inc. The arrangement gives them time to consider strategic options for the business, he said.

Results Delayed

Home Capital didn’t disclose terms of the mortgage sales. The company is due to report first-quarter results on May 11 after they pushed back the date from May 3.

Its shares surged 20 percent Tuesday to C$8.45 at 10:40 a.m. in Toronto, adding to a 20 percent rally on Monday. The stock has plunged 62 percent since April 19 when the Ontario Securities Commission made public its allegation that the company misled investors.

“This is another positive step towards HCG continuing as a going concern,” Stephen Boland, an analyst at GMP Securities, said in a research note. He rates the stock a “buy” with a C$16 target.

Paying Back Debt

Home Capital on Tuesday also announced that the C$2 billion credit line it received from HOOPP had been syndicated to Credit Suisse Group AG, Goldman Sachs Group Inc., Fortress Investment Group LLC, and a “major North American financial institution.” It pledged to pay back all of a C$325 million bond on its maturity date, May 24.

“This confirms our view the arrangement is purely a means to avoid default on the May 24, 2017 bonds, while continuing to buy the company time,” National’s Gloyn said.

Canadian Imperial Bank of Commerce said Monday it has a Canadian institutional buyer for as much as C$100 million of the 2.35 percent bonds at 92.5 cents on the dollar. The offer closes at 5 p.m. in Toronto Tuesday.

CIBC declined to comment whether the offer would be renewed at a different price.

Strategy Shift

Home Capital is also tightening its lending criteria, which would lead to fewer new mortgages. The focus will be to originate mortgages it can sell, rather than keep on its balance sheet, adding it will result in “lower overall mortgage balances, increased costs and reduced levels of profitability in the near term.”

“We do believe margins may be squeezed under this arrangement,” Boland said. “We will be looking for more details in the coming days on the structure of the agreement including origination and administration fees.”

The latest moves come after Home Capital on Monday announced a continued shake up of its board and suspended dividend payments.

“This purchase arrangement is designed to give us the ability to continue to serve as many customers as possible in the mortgage broker channel,” Bonita Then, interim chief executive officer, said in a statement Tuesday. “Meanwhile, we continue to work very hard to develop additional sources of funding.”

Read more on management changes at Home Capital

The ripple effects are also being felt across Canada’s financial markets. The Canadian dollar fell to a 14-month low against its U.S. peer last week, bank stocks suffered, while at least two sales of mortgage-backed securities have been put on hold.


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