After three weeks of playing defence, lender Home Capital Group Inc. is attempting to move forward by cutting a deal with rival MCAP Corp. that allows Home Capital to make new mortgages and roll over existing ones.
Home Capital, Canada's largest alternative-mortgage provider, said Tuesday that an "independent third party" intends to buy up to $1.5-billion of its commitments to new mortgages, along with home loans that are up for renewal and existing mortgages in its $18-billion portfolio. On Wednesday, sources familiar with the situation identified the third party as MCAP, a sizable Toronto-based firm that does mortgage finance.
A spokesperson for Home Capital declined to comment, and MCAP did not return calls. Under the deal, which has not been finalized, MCAP would initially initially facilitate the acquisition of $500-million worth of home-loan commitments, and potentially follow that with an additional $1-billion of renewals, new mortgages and existing loans.
The arrangement with MCAP would let Home Capital maintain its relationship with clients and take a small fee for landing the home loan, while MCAP would collect the interest paid.
Several rival Canadian mortgage lenders use this business model. The relationship with MCAP allows Home Capital to make new home loans and renew existing mortgages without raising more capital to shore up its finances.
Toronto-based MCAP is partly owned by the deep-pocketed Caisse de dépôt et placement du Québec. On Wednesday, Caisse senior director Maxime Chagnon said: "MCAP is facilitator for the sale of these loans. MCAP will manage and service the loans for the buyer and will not own them."
Mr. Chagnon decline to comment on the ultimate owner of the Home Capital mortgages. MCAP typically sells mortgage loans to pension fund clients.
Home Capital, a lender to home owners who cannot get mortgages from the big banks, has been dealing with a liquidity crisis in recent weeks, with clients pulling their funds from savings accounts. To date, the company has been focused on stopping the run on these deposits rather than growing its mortgage business. In April, the Ontario Securities Commission alleged the company and three executives failed to disclose fraudulent sales practices in 2015. Home Capital has said the allegations are "without merit" and none have been proven.
Toronto-based Home Capital said shifting mortgages to a third party will reduce near-term profitability and shrink its assets. Sources familiar with the deal said MCAP's support gives Home Capital time to renew management – the company currently has an interim CEO – and refinance or sell the business.
"We view this solution as a near-term positive that provides some breathing room and allows the business to remain ongoing, albeit at a slower and less-profitable pace," said anlyst Brenna Phelan of investment bank Raymond James Ltd.
MCAP is one of Canada's largest lenders on residential and commercial properties, with about $61-billion in assets under administration. The Toronto-based company was founded in 1981, and got a deep-pocketed backer in 2002, when the Caisse de dépôt et placement du Québec took an equity interest and rolled its mortgage business into MCAP.
Bay Street money managers are showing their faith in Home Capital by acquiring significant stakes in the company. CIBC Asset Management Inc. reported on Tuesday it owned a 15.1 per cent position, worth about $85-million at current share prices. The investment was made on behalf of clients rather than the parent bank. At the beginning of the year, filings show, CIBC Asset Management held a 1.3 per cent stake in the company.
"We like to take advantage of market volatility," Colum McKinley, a portfolio manager with CIBC Asset Management, said in an interview with Bloomberg. "If there's an asset that we think the stock price is overreacting to the news, that's an opportunity for us to add to our position."
Late on Wednesday, long-time Home Capital shareholder Turtle Creek Asset Management Inc. announced it increased its stake to 19 per cent, up from 13.7 per cent at the end of February. Shares in Home Capital started the year at $30 levels, plunged to just above $5 in late April on news of the liquidity crisis, and closed on Wednesday at $8.76 a share.
Home Capital updated its capital position on Wednesday, saying overall liquidity is virtually unchanged at $1.6-billion. Clients continue to take money out of high-interest savings accounts, and balances fell to $134-million on Wednesday morning, compared to $146-million on Tuesday – a decline of 8 per cent. Deposits at the company's retail savings bank, Oaken, fell to $159-million as of Monday, compared to $165-million on Sunday.
Late last month, a syndicate led by the Healthcare of Ontario Pension Plan (HOOPP) arranged an emergency $2-billion credit line for Home Capital at an initial interest rate of 10 per cent, and a $100-million up-front fee. Home Capital has borrowed $1.4-billion from these lenders.
Sources working with Home Capital said in coming months, if the company can stabilize its operations, management will attempt to replace the HOOPP financing with less expensive capital.
Home Capital is scheduled to report its first quarter results after the market closes on Thursday. Management will hold a conference call the next morning.
Analysts will listen for any more details the company might provide on loan originations, funding and current profitability.
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