Berkshire Hathaway Invests in Embattled Lender Home Capital

  • Buffett’s firm to buy shares, supply C$2 billion credit line
  • Alternative lender attempts comeback after regulatory woes

Home Capital Secures $1.5 Billion Buffett Lifeline

Warren Buffett’s Berkshire Hathaway Inc. is providing a lifeline to Home Capital Group Inc., the embattled Canadian alternative lender whose near collapse sparked intense scrutiny of the country’s fraught housing market.

Berkshire agreed to indirectly acquire C$400 million ($300 million) of the firm’s shares for a 38.4 percent stake and provide a C$2 billion credit line to subsidiary Home Trust Co., Home Capital said late Wednesday in Toronto.

“Home Capital’s strong assets, its ability to originate and underwrite well-performing mortgages, and its leading position in a growing market sector make this a very attractive investment,” Buffett said in the statement.

The move is the latest sign of a turnaround in the 30-year-old lender after a regulator in April accused it of misleading shareholders on mortgage fraud, which sent its shares tumbling, sparked withdrawals and threatened to disrupt Canada’s real estate sector. Earlier this week, Home Capital agreed to sell a clutch of commercial mortgages to affiliates of KingSett Capital Inc. for C$1.16 billion in cash.

Buffett’s firm is investing through its unit Columbia Insurance Co. and the average price per share will be about C$10, compared with yesterday’s closing price of C$14.94.

The investment “is a strong vote of confidence,” in the long-term value of the business, Brenda Eprile, Home Capital’s chairwoman, said in the statement.

Better Terms

The deal replaces an existing emergency credit facility on better terms, Home Capital said. The share purchase will be done in two parts: an initial investment of C$153 million for about a 20 percent equity stake, then an additional investment of C$247 million taking the stake to about 38 percent. The second phase requires extra approvals.

Berkshire will not be granted any rights to nominate directors and has agreed to only vote shares representing 25 percent of the company’s stock, Home Capital said.

Under the new credit agreement, the interest rate on outstanding balances will fall to 9.5 percent from 10 percent until the initial investment is completed, then it will fall to 9 percent. The standby fee will fall to 1.75 percent from 2.5 percent, then 1 percent.

Home Capital shares have more than doubled since bottoming in April when its troubles began to accelerate but remain about 73 percent down from their peak in 2014. The company last week took full responsibility over allegations the lender misled shareholders about mortgage fraud and agreed with three former executives to pay more than C$30 million to reach settlements with regulators and investors. 

Buffett’s Berkshire Hathaway is wading into a tense Canadian housing market, with Toronto house prices cooling after being hit with a 15 percent tax on foreign buyers and tighter mortgage regulations, and confidence shake by the Home Capital drama. Meanwhile, prices are surging in Vancouver again after being sideswiped by similar policy moves. 

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