Home Capital Slide Deepens as Rival Seeks to Avoid Contagion

(Bloomberg) -- Home Capital Group Inc. extended declines after the Canadian mortgage lender reported additional deposit withdrawals, prompting one of its biggest rivals to seek a C$2 billion ($1.5 billion) credit line to stem any contagion across the country’s financial markets.

Home Capital fell 13 percent to C$6.96 in Toronto, bringing its two-week drop to about 69 percent, on concern that redemptions of guaranteed investment certificates by nervous investors would worsen a cash crunch. High-interest deposits have declined about C$1.6 billion, or 80 percent, over the past month to C$391 million, the company said Monday.

“They could be at risk,” said Jaeme Gloyn, an analyst at National Bank Financial Inc. “If investors are pulling their high-interest savings accounts, it’s natural to think that other clients would also be looking to pull their GIC investments.”

The selloff in Home Capital’s stock and bonds, sparked by allegations that it misled investors about its mortgage book, are raising concern that its funding woes may spread to other mortgage lenders. That could derail a red-hot housing market that’s been a key driver of growth for Canada’s economy, accounting for as much as a fifth of output.

Home Capital Slide Deepens as Rival Seeks to Avoid Contagion

Equitable Group Inc., another alternative mortgage lender, said Monday it took out a credit line with a group of Canadian banks after it started seeing “an elevated but manageable” decrease in deposit balances. Customers withdrew an average C$75 million a day between Wednesday and Friday. The withdrawals represented 2.4 percent of the total deposit base. Liquid assets remained at roughly C$1 billion after the outflows.

Better Terms

Equitable’s loans terms were much more favorable than Home Capital’s, which is paying an effective rate of 22.5 percent on the first half of the C$2 billion credit line that it tapped Monday from the Healthcare of Ontario Pension Plan. Equitable is paying a 1.25 percent interest rate on the drawn portion, and a 0.75 percent commitment fee and a 0.5 percent standby charge.

“The issues affecting the well-known trust company in Toronto are their issues alone, and it’s unfortunate the banking industry has been dragged into it,” Andrew Moor, chief executive officer of Equitable, said on a call Monday to discuss earnings. Results were published almost two weeks earlier than planned due to the Home Capital selloff.

Equitable shares soared 30 percent to C$47.35 in Toronto, helping recoup some of the 41 percent drop from last week. Other Canadian bank stocks that had fallen last week were little changed Monday. First National Financial Corp., a mortgage lender, rose 2.5 percent.

The Ontario Securities Commission last month accused Home Capital and executives including founder Gerald Soloway of misleading investors and breaking securities laws. The allegations stem from a 2014 internal probe that discovered 45 brokers who generated C$1 billion of mortgages for Home Capital falsified income information for borrowers on some of the mortgages. The OSC alleges that Home Capital failed to properly disclose the fraud to investors.

Home Capital said the allegations are without merit and will be “vigorously” defended. External spokesman Boyd Erman wasn’t available for comment.

Bonds Hit

The company’s debt has fallen along with the stock. Home Capital’s bonds maturing in December next year were trading little changed at 90.6 cents on the dollar on Monday, according to Bloomberg data, yielding about 10 percent, compared with less than 3 percent on April 19. Home Capital also has C$325 million in 2.35 percent bonds maturing on May 24.

“Things are perhaps all right from the bondholder’s perspective, but not certain and the bonds reflect that,” said Mark Carpani, a portfolio manager at Ridgewood Capital Asset Management, with C$1.1 billion in assets. He said he doesn’t hold any Home Capital bonds and declined to comment at what level he’d consider buying them.

Home Capital Woes Have Ex-Investor Mulling Contagion Odds

The company has a busy week in store. It’s scheduled to announce quarterly earnings Wednesday. The next day, the Ontario Securities Commission is slated to hold a hearing on Home Capital’s alleged breaches of securities rules.

Home Capital’s C$12.9 billion in GIC deposits are essential to fund its mortgage business, which represents 1 percent of the Canadian mortgage market. Withdrawals could accelerate as these short-term deposits mature.

Hired Banks 

Declining deposits could lead to a windup of the company, which would be monitored by the federal bank regulator, the Office of the Superintendent of Financial Institutions. The lender said Thursday it has hired BMO Capital Markets and RBC Capital Markets to conduct a review of strategic options, signaling that a sale may be on the table.

“OSFI maintains ongoing relationships with the financial institutions it supervises,” Annik Faucher, an OSFI spokeswoman, said by email. “While we are prevented by law from discussing the affairs of the individual financial institutions we regulate, or our ongoing supervisory work, I can confirm that OSFI is continuing to monitor the situation closely.”

Canadian Finance Minister Bill Morneau has been monitoring the Home Capital situation “very closely,” according to a statement released through his spokesman on Monday.

“I was pleased to see Home Capital’s funding issues resolved by market participants,’’ Morneau was quoted as saying. “What I’ve seen over the last few days is proof the system is working as it should, where institutions facing challenges find market-based solutions.”

Big Holders

Meanwhile, Home Capital’s biggest investor is sticking with the company, adding to its position.

Toronto-based Turtle Creek Asset Management Inc., which owned almost 14 percent of Home Capital as of the end of February, praised the lender for its low loss rate and underwriting practices.

“To be clear, we have not sold shares; indeed, the opposite is the case," according to an investor letter, signed by Chief Executive Officer Andrew Brenton, managing partner Jeffrey Cole, and managing partner Jeffrey Hebel. “We are obviously not happy with recent developments at Home Capital, but we remain focused on long-term value creation for you, our fellow investors.”