Home Capital Looks to Replace Costly Loan as Policy Makers Rally

(Bloomberg) -- Home Capital Group Inc. is in talks to replace its costly rescue loan from Healthcare of Ontario Pension Plan as policy makers sought to reassure investors there is little sign of contagion in Canada’s financial system.

“I’m talking to all sorts of entities -- banks and others on this," said Alan Hibben, a former investment banker who took founder Gerald Soloway’s place on the mortgage lender’s board. “The replacement on the HOOPP deal is really a debt-like financing, so we’re looking at people who can actually provide deposit note-type support to this thing."

Home Capital’s woes intensified last month, when Ontario’s securities regulator accused the company of misleading investors on the firm’s probe into falsified mortgage applications some two years earlier. A resulting run on deposits and plunging shares forced it to take the C$2 billion ($1.5 billion) loan from HOOPP at terms that analysts have called "exorbitant."

As concern about contagion unfurled, policy makers have stepped out several times over the past weeks to assure investors about the soundness of Canada’s financial system. Bank of Canada Governor Stephen Poloz and Finance Minister Bill Morneau said Home Capital’s troubles are unique to the company and there’s no evidence they’re spreading.

"They are obviously trying to work through to find a market-based solution to their funding challenges. We support them taking that market-based approach," Morneau told reporters in Ottawa on Monday. "In the interim, we will stay very focused on monitoring the situation to make sure we protect anyone involved either as a depositor or a mortgage holder at that institution. We see the Canadian banks as strong and resilient."

Buying Time

Home Capital pays an effective rate of 22.5 percent on the first C$1 billion of the one-year HOOPP loan, which is secured with a C$5.4 billion portfolio of mortgages. The terms also prevent it from taking on more debt or pursue asset sales, mergers or a wind-up without permission from HOOPP.

“We’ve bought ourselves enough time to run a couple of months, but that’s obviously not our time frame on this," Hibben said in a phone interview Monday. “I am hoping that I can have some degree of stability within the deposit base, because it’s just easier to talk to people about a deal with better term and better terms, if we have some element of stability underlying the company."

Home Capital’s high interest savings deposit balances stood at about C$125 million as of May 12 -- roughly the same as the day earlier but down from C$2 billion March 28. Available liquidity and credit capacity totaled about C$1.51 billion, including an undrawn C$600 million under the HOOPP facility, the firm said in a Monday statement.

Cancel the Facility

“Investors may be concerned that the over-collateralization is higher than what they may have initially believed,” RBC Capital Markets analyst Geoffrey Kwan wrote in a May 12 note. “Given there is no penalty to cancel the facility, we think it makes it that much more important” for Home Capital to secure funds -- such as an alternative funding facility with better terms, or asset sales -- to cancel the facility, he said.

Other deals have already been put in place to help stabilize Home Capital. Mortgage financing firm MCAP Corp. said last week it reached a deal to service C$1.5 billion of Home Capital’s mortgages and renewals. Hibben said there’s the potential to bring in other partners or upsize the deal -- without naming MCAP as the third-party -- though he said private equity players are unlikely.

“There are other players in the marketplace that we are talking to about that," he said. "We’ve had some very early indications of interest in upsizing that, but nothing has been done."

Asset sales are also an option in case things get worse than expected, though Hibben said it’s not a priority. Calls to the office of HOOPP President Jim Keohane were unanswered. Home Capital rose 1.9 percent to C$9.17 at 4 p.m. in Toronto, paring its decline over the past month to 58 percent.

‘Nowhere Near Last Resort’

One option that doesn’t seem to be on the table is seeking support from the Bank of Canada. Home Capital is “nowhere near last resort time" at this stage, Hibben said. “A market-driven solution is our first, second and third choice."

Poloz described Home Capital’s troubles as "idiosyncratic" and unique to the mortgage lender in a weekend interview with the Globe and Mail, adding that there’s no evidence they’re spreading to other parts of the nation’s financial system.

Hibben meanwhile is doing his best to contain any fallout by outlining his plan to get Home Capital back on its feet. First comes governance, with the addition of new directors. The HOOPP loan replacement and other possible financing deals come next, which will help repair Home Capital’s reputation with its depositors and broker network. Then management, which includes the search for a new chief executive officer, though this could mean "45 to 60 days, if we’re really lucky."

Hibben -- who was named to the board May 5 to help restore confidence -- has the skill to do that. He’s a retired RBC Capital Markets investment banker who was once a managing director for mergers and acquisitions. His career highlights include helping advise Ontario’s government on the sale of Hydro One Ltd. in 2015, overseeing strategy at Royal Bank of Canada, and leading North American Trust Co. through a restructuring and eventual sale in the early 1990s after its previous management were relieved.

"I’m not looking at a partial solution to the HOOPP facility," Hibben said when asked about the difficulty of overcoming restrictions in the terms of the loan. "I’m looking for a total solution."