Home Capital Director Keohane Resigns After Fund Backs LoanScott Deveau, Allison McNeely and Doug Alexander
Mortgage lender said to borrow C$2 billion from HOOPP
Ability to raise GIC deposits, maintain operations uncertain
The head of an Ontario pension plan has stepped down as a director of Home Capital Group Inc. after his fund agreed to provide a C$2 billion ($1.5 billion) loan to help offset a run on deposits at the struggling Canadian mortgage lender.
Healthcare of Ontario Pension Plan 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.
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 is backing the loan. The Toronto-based lender said it hired RBC Capital Markets and BMO Capital Markets to advise on “strategic options” after it secured the one-year loan, according to the statement.
HOOPP confirmed in a separate statement late Thursday that it has agreed, along with a syndicate of lenders, to provide the C$2 billion credit line.
“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.
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 investigation. Home Capital’s internal probe found 45 outside brokers falsified income information on mortgage applications.
A sale becomes more likely if the firm can’t reverse a decline in its Guaranteed Investment Securities deposits, GMP Securities analyst Stephen Boland said earlier in a note.
“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 Thursday, rising 34 percent to C$8.02 in Toronto. The stock traded as high as C$56 less than three years ago.
The credit line from the pension fund provides additional liquidity for Home Capital. 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.
The one-year credit line from HOOPP has a 10 percent interest rate on outstanding balances and a 2.5 percent rate on undrawn amounts. The finalized agreement follows an announcement early Wednesday that Home Capital had reached a non-binding agreement in principle with an institutional investor for the loan.
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.
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.
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 think this is at a substantial premium to current levels,” he said. “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.”
Meanwhile, short-sellers are betting against Home Capital and rival mortgage lender Equitable Group Inc., with short interest positions surging since mid April. Shares of the two firms are the most shorted among Canadian financial companies, with investors having short interest in more than 56 percent of the shares available to the public, according to data compiled by Markit. Genworth MI Canada Inc., a mortgage insurer, also has about 31 percent of its stock shorted, the data show.