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Street Capital Group Inc. has struck an all-cash deal to be acquired by RFA Capital Inc. for $85-million, securing a much-needed infusion of capital as the mortgage lender has struggled to keep pace in a competitive market.

RFA Capital will pay 68 cents a share to acquire all of Street Capital’s shares and take the lender private – a 36-per-cent premium to Friday’s closing price, subject to approvals from shareholders and authorities.

By selling to RFA, Street Capital will get immediate access to up to $5-billion in new mortgage funding. And if the deal closes, RFA has pledged to pump at least $50-million in equity capital into Street Capital up front, and make follow-on capital available to help fund more loans and add to its balance sheet.

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“That will create an immediate positive impact for our business," said Street Capital’s chief executive, Duncan Hannay, in an interview. “It’s patient, long-term money.”

Toronto-based Street Capital has spent months exploring a range of options to boost its capital levels and secure new funding. The lender ultimately put itself up for sale, faced with pressure from Canada’s banking regulator to find a solution, as first reported by The Globe and Mail last week. When Street Capital embarked on an expansion plan early in 2017, its shares traded near $2. But as new stress tests and foreign-buyers taxes applied to some mortgages tempered activity in major housing markets, competition in the sector intensified, squeezing Street Capital’s profit margins.

“We didn’t go into this effort with the intention of selling the business," Mr. Hannay said. “We needed to identify an ongoing source of financial strength for the bank."

Street Capital has about 130,000 customers and nearly $28-billion in mortgage loans under administration, most of which are sold directly to third parties or pooled for sale to investors. But the company also raises deposits to fund mortgages through its Street Capital Bank of Canada subsidiary, and holds $1-billion in assets on its balance sheet, which requires the bank to hold more capital.

“Street Capital was hit particularly hard by both recent regulatory mortgage market reform and heightened competition in the space,” said Brenna Phelan, an analyst at Raymond James Ltd., in a research note. “While there were some greenshoots in [the company’s first-quarter] results, both funding and capital remained constraints to the growth needed to scale up to profitability."

RFA Capital is a commercial real estate investment firm that invests in office, retail, industrial and multifamily apartment properties in major cities, but has kept a low profile. Co-founded by former Olympic water polo player Alan Pyle, and based in Toronto, the company has invested more than $15-billion in commercial real estate since its founding in 1996. RFA typically invests in deals alongside third-party investors, and also owns a 15-per-cent stake in Nexus REIT, an investment trust that owns industrial, office and retail properties in Canada.

RFA Capital managing partner Ben Rodney could not be reached for comment. But in a statement, he said his company plans to invest in “new capabilities” to help Street Capital "overcome current barriers to sustained financial performance and growth.”

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The deal, which is structured as a plan of arrangement under the Business Corporations Act, is expected to close by the end of the year. But it still requires approval from two thirds of Street Capital shareholders, including a majority of the votes cast by shareholders excluding three senior officers who would benefit financially from the deal. Company directors and senior executives own about 14 per cent of its shares, and will vote in favour of the acquisition.

Street Capital’s board of directors unanimously recommends the deal. And BMO Nesbitt Burns Inc., which acted as Street Capital’s financial adviser, has provided an opinion that deems the deal “fair" to shareholders.

“We agree with the board’s conclusion that a sale of the company was in the best interest of shareholders at this time, and view the purchase price ... as fair,” Ms. Phelan said.

With a report from Janet McFarland

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