Home Capital Sells $1.16 Million Commercial Loans to KingSett

2017-06-20 16:06:45

By Scott Deveau and Allison McNeely, Bloomberg News

Home Capital Group Inc., the embattled alternative lender, agreed to sell a clutch of commercial mortgages to affiliates of KingSett Capital Inc. for C$1.16 billion ($874 million) in cash.

Proceeds will be used to boost liquidity and reduce the amount drawn on its C$2 billion credit facility, the Toronto-based company said in a statement on Tuesday. While the mortgages are valued at C$1.2 billion — some 6 percent of Home Capital’s total C$18.5 billion loan portfolio — about 97 percent of this will be realized with the balance subject to credit losses.

“This transaction will help the company further stabilize its liquidity position and highlights the flexibility and options created by the quality of our assets,” interim Chief Executive Officer Bonita Then said in the statement.

The sale is the latest step in the turnaround of the 30-year-old lender from near-collapse after the regulator in April accused it of misleading shareholders on mortgage fraud, which could have disrupted Canada’s real estate sector that’s driving the economy. Home Capital has since seen its deposits stabilize and stocks surge, and last week it settled with the Ontario Securities Commission.

Shares have risen 27 percent since June 14, when Home Capital and three former executives agreed to pay more than C$30 million to  settle with the OSC and other investors, paring this year’s drop to 51 percent. Still, the company hasn’t managed to refinance the onerous one-year rescue loan and is yet to find a fulltime CEO.

Read: Home Capital Said to See Long Road to Revive Firm’s Fortunes

It’s been paying about 22 percent on the first half of the credit line from Healthcare of Ontario Pension Plan, and Home Capital hired RBC Capital Markets and BMO Capital Markets to advise on “strategic options” as deposits dwindled. High interest savings account balances have fallen to C$98.5 million from around C$1.4 billion at the time of securing the HOOPP loan.

“This transaction may pave the route to a new replacement credit line at a much more favorable rate,” GMP Securities LP analyst Stephen Boland wrote in a note. “The recovery is now well underway and the stock may return to trading on fundamentals.”

He raised his target price on Home Capital to C$17 from C$16 and downgraded the recommendation to hold from buy, saying a successful restructuring may be priced in and the smaller loan portfolio will lower earnings. Laurentian Bank of Canada’s Marc Charbin kept his hold call and raised the target to C$15 from C$11, saying that while Home Capital’s financial assets add up to C$25.52, “it could take years for investors to monetize this return.”

Home Capital’s shares rose 4.5 percent to C$15.50 as of 3 p.m. in Toronto on Tuesday. The transaction is expected to close during the third quarter of 2017.

The mortgages are being sold by Home Trust Company, a subsidiary of Home Capital, and will be managed by KingSett Real Estate Mortgage LP and KingSett High Yield Fund, the company said. KingSett Capital is a Toronto-based real estate private equity firm which, with partners, holds stakes in Scotia Plaza — Canada’s second-tallest office building — and the historic Fairmont Royal York hotel.

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