Private equity fund Catalyst Capital Group Inc. has joined the growing line of suitors for mortgage lender Home Capital Group Inc. with a plan to recapitalize the struggling firm.
Catalyst, an asset manager that focuses on distressed companies, recently proposed a "strategic partnership" with Home Capital that would inject new capital into the lender, according to sources familiar with the offer.
Catalyst, led by financier Newton Glassman, also put forward a proposed new management team for Home Capital with banking experience, these sources said. The company is currently recruiting a new chief executive and chief financial officer, having fired the former CEO and demoted the former CFO, both of whom are named in an Ontario Securities Commission case.
Home Capital, which provides home loans to borrowers who cannot get mortgages from the country's banks, experienced a run on deposits in April that nearly bought the company down. The flight of nearly $2-billion in deposits from its high-interest savings accounts accelerated following the release of OSC allegations that the company violated securities law by failing to disclose problems in its mortgage business in a timely way in 2015.
As part of a move to restore market confidence, Home Capital hired investment banks RBC Capital Markets and BMO Capital Markets for advice on its "financing and strategic options," which opened the door to offers such as the Catalyst proposal. Home Capital also lined up emergency funding in the form of a $2-billion line of credit from the Healthcare of Ontario Pension Plan (HOOPP) that sports an interest rate of 10 per cent. Catalyst's proposal, according to sources familiar with the plan, would replace the HOOPP loan with lower-cost debt.
The proposal from Catalyst comes as at least two other Canadian private equity firms, Brookfield Business Partners LP and Onex Corp., and several U.S. private equity funds also circle Home Capital, with some of these suitors in talks about potential takeover offers, according to sources familiar with the situation.
Spokespeople for Home Capital and Catalyst declined to comment.
Toronto-based Catalyst is pitching its offer as a made-in-Canada solution to lender's financial issues that would allow Home Capital to remain a public company. This would mean existing Home Capital shareholders could continue to own a stake in the company. Catalyst is understood to have lined up support for the proposal from a group of institutional investors.
Home Capital has caught the eye of Catalyst and other private equity firms because it is the market leader in alternative mortgages, a niche that makes up an estimated 13 per cent of the $1.3-trillion Canadian residential mortgage market. Home Capital has an $18.5-billion mortgage portfolio, focused on homeowners in Ontario and British Columbia.
While the company is listening to outside offers, a source said, Home Capital's board and its advisers are also moving forward with plans to restore the company's financial health and remaining independence through steps that include recruiting new board members, raising capital by selling smaller lines of business and hiring new management.
Home Capital's stock price was up 6 per cent on Friday to $11.54. Home Capital shares peaked at about $52 in 2014, and plunged below $6 in early May amid questions about whether it could survive.
Andrew Willis