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Home Capital Sells $1.5 Billion In Mortgages At Unknown Price To Shore Up Liquidity

May 9th, 2017 | by Richard Paul
Home Capital Sells $1.5 Billion In Mortgages At Unknown Price To Shore Up Liquidity
Business and Finance

As recently as a few weeks ago, the business model of Canada’s largest alt-mortgage lender, Home Capital Group, was originating and sourcing mortgages. Then a liquidity crisis struck, sending the company’s business into a tailspin and unleashing an unprecedented bank run on the company’s retail deposits. And, as of today, the company is now in the mortgage selling business. In a press release, the company announced it has entered into an arrangement with an undisclosed third party to sell up to a total of $1.5 billion in funded mortgages and loan renewals, in a desperate attempt to shore up liquidity, and confirmation that other attempts to raise capital have failed.

While Home Capital added that the deal includes up to C$1 billion of uninsured mortgages and C$500 million of insured mortgages, or about 10 percent of the company’s total mortgage book, it did not provide the most important information: at what price it sold the mortgages.

As HCG adds, the Third Party has “indicated an interest in further expansion of this arrangement at a later date” suggesting that the terms of the transasction were quite advantageous.

“This purchase arrangement is designed to give us the ability to continue to serve as many customers as possible in the mortgage broker channel, and we are optimistic that there can be opportunities for future growth,” said Bonita Then, interim Chief Executive Officer of Home Capital. “Meanwhile, we continue to work very hard to develop additional sources of funding, while carefully managing our liquidity.”

As Bloomberg notes, Home Capital also said it was tightening its lending criteria, which would lead to fewer new mortgages, effectively mothballing the company’s core business.

In addition, the terms of the new funding arrangement as well as the Company’s previously announced $2-billion credit line will lead to a greater focus in the near term on originating mortgages to sell, rather than holding them on balance sheet and funding through deposits, as Home has traditionally done. The Company anticipates that this will result in lower overall mortgage balances, increased costs and reduced levels of profitability in the near term. The existing mortgage portfolio continues to perform well.

Quite a pivot.

Some other details: the Company also announced its intention to pay back 100% or $325 million of the outstanding aggregate principal amount of the Company’s 2.35% Notes at the scheduled maturity date, May 24, 2017.

 As previously announced, Home Trust has drawn $1.4 billion from its $2 billion credit line, under a commitment originally provided on April 27, 2017. The credit line is led by the Healthcare of Ontario Pension Plan (HOOPP) and was successfully syndicated to (or to entities affiliated with) Credit Suisse, Goldman Sachs, Fortress Investment Group and a major North American financial institution.

The Company’s liquid assets stood at approximately $1.10 billion as of end of day May 8, 2017 and combined with the undrawn amount of $600 million under the facility led by HOOPP, the Company’s aggregate available liquidity and credit capacity totaled approximately $1.70 billion.

Finally, the company’s high interest deposits continued to dwindle, falling to C$146 million as of May 9, from almost C$2 billion five weeks ago.


Tyler Durden

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