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The entry to the Home Capital Group's headquarters in Toronto on May 1, 2017.Chris Helgren/Reuters

Home Capital Group Inc., HCG-T a non-bank mortgage lender whose share price has tumbled this year, said it received an unsolicited takeover offer from an unnamed bidder, but the company’s board of directors has rejected the proposal.

Early Monday, Home Capital disclosed the all-cash offer, describing it as “non-binding” and “conditional,” and rejected it because the board said it is “not in the best interests of the company or its shareholders.”

Before the announcement, Home Capital’s shares had dropped nearly 40 per cent since November, 2021, making the company vulnerable to suitors. The company said it received the takeover proposal after it commenced a large share buyback plan on Aug. 8. It is the second time Home Capital has received a non-binding proposal from the same bidder, and the first one was made with a takeover partner, the company said.

Under Home Capital’s new buyback plan, which is designed to support its sagging stock price, the company is looking to repurchase $115-million worth of its common shares, or roughly 11 per cent of its outstanding stock. The offer range for this program is $25.20 to $28.60 a share, and Home Capital said the takeover proposal is higher than $28.60 a share.

Last week, Home Capital’s shares traded around 0.7 times book value on the Toronto Stock Exchange, closing at Friday at $28.47. They gained almost 10 per cent Monday after the takeover offer was announced, and closed at $31.28, giving the company a $1.2-billion market value.

Home Capital’s shares have been volatile over the past decade, and at their current level they are trading for roughly the same price as they did in mid-2013. The company used to be Canada’s clear leader in what the industry calls “near-prime” mortgage lending, but it was pushed to the brink of insolvency in 2017 following allegations that management misled investors about fraud in its mortgage-broker channel.

Near-prime customers cannot get mortgages from major chartered banks for a variety of reasons, such as having a volatile income or a low credit score. Many of Home Capital’s clients traditionally have been new immigrants with short credit histories in Canada, or self-employed workers who find it harder than salaried employees to prove their incomes. Both are growing demographics.

Home Capital ultimately stabilized itself, with help from an equity infusion by Warren Buffett’s Berkshire Hathaway Inc., and its shares soared last year as the housing market boomed. However, its 2021 high near $45 a share was still nearly 20 per cent lower than its all-time high set in 2014. At that point, the shares traded for roughly three times book value.

The lender reported quarterly earnings in early August and its mortgage originations jumped 43 per cent relative to a strong second quarter in 2021. However, falling margins are hurting Home Capital’s outlook.

Mortgage lenders tend to fund their loans by taking in deposits, and Home Capital does so through its subsidiary, Oaken Financial. Depositors are typically paid a low interest rate, and mortgage lenders use their money to make loans for five years at higher rates, earning the differential.

Yet short-term rates have soared, because they are directly affected by the Bank of Canada benchmark rate, which jumped a full percentage point alone in early July. Mortgages, meanwhile, are priced off of five-year bond yields, and Canada’s five-year government bond yield has dropped around 80 basis points, or 0.8 percentage points, since mid-June.

“Rapidly rising interest rates continue to pressure margins.” Home Capital chief executive Yousry Bissada said on a conference call with analysts and investors last week.

Many mortgage lenders are also falling out of favour with investors because housing prices are dropping in Canada, which is expected to sap mortgage demand. Home Capital generates most of its mortgage business in Ontario, and home prices in the Greater Toronto Area have been some of the hardest hit so far.

Ottawa’s banking watchdog, the Office of the Superintendent of Financial Institutions, has also said it is conducting an assessment of its mortgage underwriting rules to try to reduce the risks in certain areas of the market, particularly investor-owned properties. There has been speculation this could dampen Home Capital’s growth in the future.

By Monday’s market close, Home Capital’s unnamed bidder had not gone public and revealed its identity. “We believe privately owned strategic players and private equity are the most likely suitors,” National Bank Financial analyst Jaeme Gloyn wrote in a note to clients.

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