Home Capital Buys Time With Pension Loan as Deposits Erode

(Bloomberg) -- Home Capital Group Inc.’s C$2 billion ($1.5 billion) credit line from a Canadian pension fund buys it some time as the country’s biggest alternative mortgage lender faces a run on deposits that may spark a sale of the company.

Healthcare of Ontario Pension Plan agreed to provide the one-year loan to offset the withdrawals sparked by allegations from regulators that the company misled investors about mortgage applications. Customers withdrew another C$290 million from its high-interest savings accounts Thursday, adding to the C$472 million pulled out the previous day, the company said in a statement. Balances have plunged more than 70 percent in a month. The company also has C$13 billion in guaranteed investment certificates.

Home Capital, which dropped 65 percent Wednesday before recouping some losses, is being watched closely by investors concerned about early signs of a collapse in Canada’s frothy housing market. Prices have soared more than 30 percent in Toronto and surrounding cities, and household debt has jumped to record highs.

Though Home Capital’s mortgage book of almost C$16 billion accounts for less than 1 percent of Canada’s mortgage market, it will have trouble financing its loans if deposits continue to erode. Home Capital’s woes also dragged down stocks of other alternative lenders this week, including Equitable Group Inc. and First National Financial Corp.
The fallout from Home Capital may lead to a cooling of the housing market if these alternative lenders withdraw and some homebuyers lose access to mortgages, said Sumit Malhotra, an analyst at Bank of Nova Scotia. Home Capital lends to clients who can’t get loans from commercial banks.

“There is an argument to be made that a reduced level of participation from alternative lenders would restrict funding for certain buyers, not necessarily a bad thing in a surging home price environment,” Malhotra wrote in a note to clients.

Loan Costs

The pension fund loan comes at a steep cost for Home Capital, which also has a C$325 million bond maturing next month. The one-year credit line led by HOOPP has a 10 percent interest rate on outstanding balances and a 2.5 percent rate on undrawn amounts.

Under the terms of the loan, Home Capital is required to make an initial C$1 billion draw and pay a non-refundable commitment fee of C$100 million. The loan is secured by a pool of mortgages originated by Home Trust, the company’s mortgage origination subsidiary.

Malhotra estimates the cost to access half the credit line will be C$225 million, or two-thirds of Home Capital’s pretax profit last year.

“The hefty cost associated with this financing once again underscores that a stable funding profile is the lifeblood of the banking system and a disruption in this regard will destabilize a lender,” he said, adding that credit quality isn’t an issue for Home Capital. The lender’s delinquency rate is just 0.21 percent.

Credit Downgrade

S&P Global Ratings downgraded Home Capital Thursday to junk with a B+ rating, from BBB-, the lowest level of investment grade. The senior unsecured rating on Home Trust was lowered to BB from BBB. DBRS Ltd. downgraded Home Capital to BB from BBB (low) and placed all ratings under review with negative implications on April 26.

Separately, HOOPP’s President and Chief Executive Officer Jim Keohane said he recused himself from the lending talks and stepped away from Home Capital’s board last Tuesday before formally resigning on Thursday. He also said that Kevin Smith, Home Capital’s chairman, has stepped down from HOOPP’s board.

“We were involved in the deal with a syndicate of other lenders,” Keohane said in a telephone interview. “With the possibility of us getting involved with a deal with Home, clearly that changes the business relationship between HOOPP and Home. It’s obvious a conflict exists there.” 

“I was not involved in any decision making on the other side of this at all,” he said.

Not Disclosed

Home Capital didn’t identify the lender in separate statements Wednesday and Thursday, though people familiar with the process told Bloomberg News that the health-care workers pension fund is backing the loan.

“Normally HOOPP’s policy is not to disclose information on our investments, however, given the amount of media speculation, we have decided to disclose this information,” according to the statement late Thursday.

HOOPP is a Toronto-based pension plan which represents more than 321,000 health-care workers in Ontario, with assets of about C$70 billion. Home Capital’s external spokesman Boyd Erman declined to comment.

A Home Capital sale could be the next step for the mortgage lender, which faces allegations by Ontario’s securities regulator that it misled investors on disclosures about an internal mortgage investigation. Home Capital’s probe found 45 outside brokers falsified income information on mortgage applications.

GIC Erosion

A sale becomes more likely if the firm can’t reverse a decline in deposits, GMP Securities analyst Stephen Boland said earlier in a note. The company has about C$13 billion in GICs and C$815 million in high-interest deposits to fund its mortgages, the company said Thursday. The high-interest deposits plunged from C$1.4 billion on Monday.

“We believe HCG’s ability to raise GIC deposits and maintain operations is uncertain,” Boland said in the note before Home Capital’s statement Thursday. “Unless GIC costs stabilize, a run off scenario or sale is a growing possibility.”

Home Capital shares fell 65 percent Wednesday, after the lender said the terms of the loan will make it hard to meet financial targets. The stock rebounded 34 percent the next day and extended gains Friday, rising 2.7 percent to C$8.24 at 10:06 a.m. in Toronto. The stock traded as high as C$56 less than three years ago.

Bank Buyers

Boland said estimates on a sale price for Home Capital would be speculative, but said commercial banks may be interested. Home Capital’s market value has plunged to C$515 million, from about C$3.5 billion in 2014.

“We believe HCG’s book may be attractive to several banks that could run the business with materially lower funding costs, particularly if they have regulatory support for the deal,” he wrote.

Malhotra said the commercial banks may be more interested in buying the loan book than the company itself.