Troubled lending firm Home Capital Group Inc. has announced plans to sell up to $1.5-billion worth of mortgages, a move that would give the company financial breathing room as it battles a funding crisis.
The news, announced one day after the company appointed three finance veterans to its board in a bid to restore the confidence of investors, sent the price of shares of Home Capital up nearly 30 per cent in Toronto.
Home Capital also revealed that several blue-chip financial institutions are involved in a $2-billion emergency line of credit it secured late last month. Investment banks Goldman Sachs and Credit Suisse, private equity firm Fortress Investment Group and "a major North American financial institution" that the company did not name are all part of the group lending the money.
That unnamed institution is Toronto-Dominion Bank, according to a person familiar with the financing who spoke on condition of anonymity. Representatives of TD and Home Capital declined to comment. The lead lender on the line of credit is the Healthcare of Ontario Pension Plan (HOOPP), and the purpose was to help Home Capital deal with a rapid withdrawal of deposits, mainly from high-interest savings accounts.
The drama at Home Capital, the largest provider of house loans to Canadians who cannot get a mortgage from a major bank, has been playing out for weeks. On April 19, the Ontario Securities Commission alleged the company and three former senior executives failed to properly disclose problems of income-verification fraud in its mortgage business. Home Capital has said the allegations are "without merit" and none have been proven.
Those allegations came at a time of intense scrutiny on the white-hot housing market in Ontario, where Home Capital does a significant proportion of its business. The Ontario government recently brought in measures designed to reduce speculation and temper rising prices, including a tax of 15 per cent on foreign buyers.
Around the time the OSC revealed its case, Home Capital began to suffer a so-called run on the bank, as depositors began to remove money from high-interest savings accounts. In late March, the company had about $2-billion in those accounts; as of Tuesday, the company expected those accounts would have less than $150-million left.
The rapid withdrawal of cash threatened the survival of the firm, forcing it to seek the $2-billion emergency loan and now to put part of its $18-billion mortgage portfolio up for sale. If the company were to fail, it could have knock-on effects in the housing market, because some borrowers would have a more difficult time finding credit.
An independent third party that Home Capital would not name signed a "non-binding intention" to buy up to $1-billion in uninsured mortgages, and as much as $500-million in insured mortgages, the company said in a release on Tuesday. (The deal would also include commitments to fund new mortgages or renew existing ones.) In a news release, interim chief executive officer Bonita Then called the tentative deal "another step forward in the company's efforts to restore confidence" in Home Capital.
Still, questions linger over who the buyer might be and what price the beleaguered lender might fetch for the mortgages.
The lack of disclosure on price and lack of information on the identity of the prospective purchaser "limits our ability to evaluate the transaction and its impact on profitability," analyst Brenna Phelan of the financial services company Raymond James wrote in a research note to clients.
When asked for further details on the deal, Home Capital declined comment.
"On a standalone basis, this is positive for [Home Capital] as it represents another liquidity alternative in addition to its prohibitively expensive [line of credit] and declining deposit balances," Marc Charbin, an analyst at Laurentian Bank Securities, wrote in a research report.
About two weeks ago, Home Capital retained investment banks RBC Dominion Securities Inc. and BMO Nesbitt Burns Inc. to explore "strategic options," which could include selling the company.
Home Capital said it is working "very hard to develop additional sources of funding." It has used $1.4-billion of the $2-billion credit line that was announced on April 27, which carries an interest rate of 10 per cent.
Home Capital says it will increasingly focus on selling its mortgages rather than keeping them on its balance sheet – a model the company says will cause its business to shrink. "This will result in lower overall mortgage balances, increased costs and reduced levels of profitability in the near term," the company said in the release.
TD Securities analyst Graham Ryding called this development "a potentially sustainable funding option" and one that other lenders such as First National Financial Corp. and Street Capital Bank of Canada already use.
Home Capital's previous strategy was based on the firm's ability to raise money for mortgages through its high-interest savings accounts and guaranteed investment certificates (GICs).
GIC balances with the company have remained relatively stable in recent weeks at more than $12.5-billion, which has been an important offset against the steep decline in the savings accounts.
On Monday, the company announced the appointment of three seasoned executives to its board of directors, including Claude Lamoureux, former chief executive officer of the Ontario Teachers' Pension Plan.
With reports from Jacqueline Nelson and Janet McFarland