Home Capital rebounds but rival lenders face downgrades on funding concerns
Home Capital reportedly secured a loan from the Healthcare of Ontario Pension Plan, people familiar with the process told Bloomberg
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Shares of Home Capital Group Inc. rebounded on Thursday after it confirmed it had secured a “firm commitment” for a $2 billion credit line to backstop a significant decline in deposits and had retained two investment banks to “advise on further financing and strategic options.”
The announcement comes after shares of the alternative mortgage lender plunged nearly 65 per cent on Wednesday after it said it needed the costly loan facility after its subsidiary Home Trust saw high interest savings account deposits drop by $591 million between March 28 and April 24.
Home Capital said Thursday those deposits declined by nearly the same amount in the days since. Home Trust now expects to have a high interest savings account balance of approximately $814 million on Thursday — down $586 million from $1.4 billion on April 24 — after the settlement of Wednesday’s transactions, Home Capital said in a statement.
The company added that the loan facility “from a major Canadian institutional investor” is secured against a portfolio of mortgages originated by Home Trust, and will provide Home Capital with approximately $3.5 billion in total funding.
“Access to these funds is intended to mitigate the impact of a decline in Home Trust’s HISA deposit balances that has occurred over the past four weeks and that has accelerated since April 20. The Company will work closely with the lender to have the funds available as soon as possible.”
Home Capital did not identify the identity of the lender, but Bloomberg reported it secured the loan from Healthcare of Ontario Pension Plan, according to people familiar with the process.
The Toronto-based pension plan represents more than 321,000 healthcare workers in Ontario, and its president and chief executive officer Jim Keohane sits on Home Capital’s board and is a shareholder of the mortgage lender, Bloomberg reported Thursday.
An external spokesman for Home Capital declined to comment on the lender’s identity on Thursday. A spokesman for HOOPP did not respond to a request for comment.
Home Capital also advised that the terms of the loan agreement will have a material impact on earnings, and will leave the Company unable to meet previously announced financial targets.
The company also said it had “retained RBC Capital Markets and BMO Capital Markets to advise on further financing and strategic options.” This came as analysts suggested a sale or run-off at Home Capital was a “growing possibility.”
Shares of Home Capital rose 33.89 per cent to close at $8.02 in Toronto on Thursday. The stock closed at $5.99 on Wednesday, down nearly 65 per cent from $17.09 a day earlier.
“We are taking important steps to seek to stabilize the business, starting with the announcement today of a new credit line,” said Kevin Smith, chair of the board of Home Capital in a statement on Thursday. “There is a great deal of value in Home’s business, and we provide a key service to an important segment of Canadian homebuyers. As rough as the past few days have been, we are very focused on getting this company back on track and doing everything we can to make that happen.”
Other alternative mortgage lenders are also facing downgrades Thursday amidst growing concern that Home Capital’s liquidity problems will continue, and potentially spread to its peers.
Home Trust’s demand deposits such as high interest savings accounts as well as fixed deposit products such as Guaranteed Investment Certificates (GICs) help fund Home Capital mortgage lending.
“We believe HCG’s ability to raise GIC deposits and maintain operations is uncertain,” said Stephen Boland, an analyst at GMP Securities, in a note to clients on Thursday, before Home Capital’s statement. “Unless GIC costs stabilize, a run-off scenario or sale is a growing possibility. Based on Wednesday’s market action, we believe the issues at HCG may be spreading into the broader broker GIC and alternative mortgage markets. We believe regulators may move quickly to protect the alternative mortgage market confidence and depositors.”
A spokeswoman for the Office of the Superintendent of Financial Institutions told the Financial Post in an email on Thursday that it is “continuing to monitor the situation closely.”
Shares of other non-bank mortgage lenders were also hit Wednesday, amid investor concern about the alternative mortgage lending model, on top of recent moves by both the federal and provincial governments to cool down the overheated housing market, particularly in Vancouver and Toronto.
The combination of rapid deposit redemptions and the now elevated cost to replace said deposits has caused us to change how we view the world of alternative mortgage lending
Equitable Group shares were down 31.65 per cent to $40.75, Genworth MI Canada shares were down 7.87 per cent to $33.12, and Street Capital Group shares were down 9.77 per cent to $1.20.
These companies’ shares rebounded on Thursday, with Equitable up as much as 14.3 per cent to $46.50 and Genworth up as much as 4.3 per cent to $34.45. Equitable shares closed at $43.88 (up 7.81 per cent) and Genworth shares closed at $34.02 (up 3 per cent). Street Capital was virtually unchanged, closing at $1.21 in Toronto.
“The combination of rapid deposit redemptions and the now elevated cost to replace said deposits has caused us to change how we view the world of alternative mortgage lending,” said Jaeme Gloyn, an analyst at National Bank of Canada Financial Markets in a note to clients on Thursday. “As a result, we are downgrading Equitable Group to Underperform from Outperform and Street Capital Group to Sector Perform from Outperform.”
The market reaction prompted Genworth Canada to issue a statement Wednesday to clarify its exposure to Home Capital originated mortgages. As of March 31, 2017, Home Capital originated mortgages represent approximately 1 per cent of Genworth Canada’s overall business, the company said.
“At present, our delinquency rate with respect to Home Capital originated mortgages is less than our overall business delinquency rate of 0.21 per cent as at December 31, 2016,” it said in a statement. “Genworth Canada continues to apply its rigorous underwriting standards to all mortgage insurance applications and maintains a high quality insurance portfolio.”
Concerns over Home Capital ignited after the Ontario Securities Commission filed a statement of allegations and notice of hearing against the company; founder and former chief executive Gerald Soloway; chief financial officer Robert Morton; and former president and chief executive Martin Reid. Earlier this week, Home Capital announced an executive and board shuffle in an effort to reassure investors after the regulator accused the mortgage lender of misleading disclosure.
The allegations relate to Home Capital’s disclosure following the discovery that some loan applications contained falsified income information, after which the company cut ties with dozens of brokers in 2014.
None of the allegations have been proven, and Smith has said the company will “continue to vigorously defend our approach to disclosure” in the OSC proceeding, to be held May 4.
