Home Capital Warns of 'Knock-on Effects' If It Fails

2017-05-12 16:02:01

by Katia Dmitrieva and Kim Chipman, Bloomberg News

Home Capital Group Inc. said it’s seeking new sources of funding to counter a run on deposits and warned a failure of the Canadian lender would have “significant knock-on effects” in the mortgage market.

The struggling lender has “breathing room” to stabilize finances and pursue options following an C$1.8 billion ($1.3 billion) plunge in deposits and a 60 percent stock decline, director Alan Hibben, a former RBC Capital Markets managing director, said on a conference call Friday.

Selling off assets “is not our first priority,” said Hibben, who joined the company last week and is taking an active role at the company. “You don’t shrink your way to greatness.”

Home Capital’s troubles are being closely watched by investors concerned about possible contagion to other lenders and to the red-hot housing markets in Toronto and Vancouver. The Canadian dollar has slumped, and is the worst performing currency among Group of 10 nations this year. Moody’s Investors Service late Wednesday cut the credit ratings on six Canadian banks, citing rising household debt and soaring real estate prices that make the banks more vulnerable to losses.

If Home Capital collapses it would “have significant knock-on effects, particularly to new Canadians and others who this company services,” Hibben said, referring to the “alternative” market of borrowers, such as immigrants or small-business owners, who have trouble getting loans from big banks due to lack of credit or income history. Hibben estimates Home Capital has about 5 percent of this market.

The former investment banker said he doesn’t expect any “new significant transactions within the next days and weeks,” though stressed the company will aggressively seek a “range of options.”

Home Capital executives on the call said there are potential investors “in the data room.” They also emphasized their focus on finding new funding sources to stem deposit outflows and replace a costly C$2 billion credit line arranged last month by the Healthcare of Ontario Pension Fund.

Home Capital’s Survival Hinges on Asset Sales: Street Wrap

Ripple Effect

“There is much at stake,” Chair Brenda Eprile said on the call, in her first public comments since taking the position this month. “We are working diligently” to rebuild strength of the company. Eprile is the former chief accountant for the Ontario Securities Commission, which on April 19 accused Home Capital of misleading investors over fraudulent mortgage loan applications.

Hibben said he would welcome the type of backstop reached by rival Equitable Group Inc., which got a two-year, C$2 billion credit line this month from Canada’s six largest banks.

“The top priority if I would be able to point one is somebody who would write a liquidity piece” with medium-term notes, Hibben said. “Somewhat similar to the Equitable deal, but as you can imagine the market is thin for these sorts of things.”

The lender has lost almost C$1.8 billion in high-interest deposits in five weeks, draining the Toronto-based company of funds used to finance mortgages. The company said it’s facing liquidity issues because of reputational concerns raised by the Ontario Securities Commission allegations, as well as a class action lawsuit announced earlier this year. The lack of a chief executive officer and chief financial officer is also hurting, the company said.

Home Capital fell 12 percent to C$9.54 at 1 p.m. in Toronto. The stock has fallen by about two-thirds this year.

Going Concern

Home Capital executives addressed investors and analysts after warning Thursday that the reputational hit threatens the company’s viability.

“Material uncertainty exists regarding the company’s future funding capabilities as a result of reputational concerns that may cast significant doubt” about continued operations, the company said in its earnings statement. “Management’s focus is on finding more sources of funding in the near term so we can be more active serving our customers, and on seeking longer-term solutions that put the business back on track.”

High-interest savings deposits dropped to about C$125 million as of Friday from $1.9 billion at March 31, the company said. Home Capital also lost C$344 million in cashable GICs, or guaranteed investment certificates. Tightening lending criteria and broker incentive programs will lead to a decline in originations and renewals going forward, the company said.

Home Capital continues to see a net outflow of GICs, “as we would expect in a liquidity situation and a confidence crisis that we’ve just gone through,” interim CFO Robert Blowes said. He declined to provide specific figures.

“We are continuing to take in new deposits, which is encouraging,” he said. “It’s lower than we have experienced in the past, and we’ve built our models taking that into account.”

Pension Loan

The lender’s liquid assets are about C$962 million as of May 11, it said in a separate statement. It had drawn C$1.4 billion of a C$2 billion rescue loan from an Ontario pension fund that carries an effective interest rate of 22.5 percent, the firm disclosed. The company also sold a C$154 million portfolio of preferred shares to raise cash.

Total on-balance sheet loans grew 3.2 percent to C$18.6 billion in the first quarter from the end of 2016 as traditional single-family residential mortgages, which comprise half of total loans, grew 3.4 percent to C$11.4 billion.

Home Capital used its first quarter results to underscore its battle plan. It’s planning to sell assets to help pay down the C$2 billion loan. The lender’s priority is to fill the CEO and CFO roles, and is in talks with an external adviser on strategic options. The company is also talking to industry partners about funding mortgage commitments and renewals in the near-term, according to its statement.

Home Capital reached an agreement for MCAP Corp. to manage and service C$1.5 billion of its mortgages and renewals, MCAP Senior Vice President Don Ross said Friday. MCAP has a group of investors who hold the loans, he said, without identifying them. MCAP and the investors have capacity to take on more mortgages, he said.

The MCAP partnership is a “critical piece of good news for Home,” Cormark Securities Inc. Analyst Jeff Fenwick wrote in a note to clients after the call. He is maintaining his “buy” rating on the stock, though warned that estimates for the company “are likely to change significantly” depending on how the saga unfolds.

Hibben said he’s confident that a wind down of assets is “unlikely.”

“A run-off scenario is only going to occur if every other option that we’re exploring doesn’t work,” he said.


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