Warren Buffett is coming to the rescue of Home Capital Group Inc.
One of the world's most famous investors is backing the Toronto-based mortgage company in a financing deal that is designed to shore up confidence in the beleaguered firm as it tries to stabilize its deposit base.
Home Capital shares jumped more than 10 per cent in early trading Thursday.
Mr. Buffett's Berkshire Hathaway Inc. has agreed to indirectly acquire $400-million of Home Capital's common shares — at a steep discount to the current trading price — and provide a new $2-billion line of credit on slightly better terms than the emergency loan it received in April from the Healthcare of Ontario Pension Plan (HOOPP).
This kind of bet is in keeping with Mr. Buffett's history of investing in distressed financial institutions on favourable terms, most famously in the United States during the 2008 financial crisis, when he invested billions in Goldman Sachs Group Inc. and other firms.
Home Capital has been in financial distress since April, when the Ontario Securities Commission levelled allegations against the firm and three former high-level executives of violating securities rules by failing to disclose problems in its mortgage underwriting business in 2014-15.
Depositors began pulling money rapidly out of Home Capital savings accounts and guaranteed investment certificates – a run on the bank that nearly led to the firm's collapse in early May. Since then, it has been selling off assets, making changes to the board of directors and advertising lucrative interest rates on deposits in an attempt to win back the confidence of depositors. It also agreed to a settlement with the OSC on the allegations that, if approved, will see it pay more than $10-million in fines and costs.
"Berkshire's investment in Home Capital is a strong vote of confidence in the fundamental, long-term value of our business," Home Capital's new chair, Brenda Eprile, said in a news release. "We are pleased to partner with such a renowned institution in a transaction that we believe will reward all our investors for their patience and loyalty by enhancing the value of Home Capital over time."
The Berkshire Hathaway investment is another step in the company's attempt to regain the market's favour. But it comes at a price.
The equity portion of the Home Capital deal is broken up into two chunks. Through a subsidiary, Columbia Insurance Co., Berkshire will make an initial investment of $153.2-million to acquire more than 16 million common shares of Home Capital, which represents a stake of nearly 20 per cent in the company. Each share will be issued at $9.55, which is a 36 per cent discount to Wednesday's closing price of $14.94.
While such a deal would normally be subject to a shareholder vote, Home Capital is relying on infrequently-used clause in the Toronto Stock Exchange's company manual that allows companies to bypass a shareholder vote at a time of "financial hardship." The company expects the initial investment to close on June 29.
Then, Berkshire will make another investment – also through Columbia – of $246.8-million to acquire another 24-million shares of Home Capital at $10.30 per share. This deal, however, is subject to shareholder approval, which will be sought at a special meeting in September 2017, and Canadian Competition Act clearance.
Once both transactions are completed, Berkshire would own a total stake of almost 39 per cent in Home Capital at an average price of $10 per share.
Berkshire is also lending Home Capital $2-billion to repay its all amounts outstanding on its existing credit facility. The new credit agreement is also expected to be effective June 29, the news release said.
It is slightly cheaper than the HOOPP loan: There is no upfront commitment fee. The interest rate on outstanding balances will decline to 9.5 per cent from the current 10 per cent, while the standby fee on undrawn funds will decrease to 1.75 per cent from the current 2.5 per cent.
Once Berkshire makes its initial investment, these amounts will drop to 9 per cent and 1 per cent, respectively.
Representatives for Berkshire Hathaway could not immediately be reached.