Warren Buffett's Berkshire Hathaway Rescues Canada's Home Capital--2nd Update
June 22 2017 - 6:33PM
Dow Jones News
By Jacquie McNish and Nicole Friedman
TORONTO -- Warren Buffett's rescue of struggling Canadian
mortgage lender Home Capital Group Inc. is his latest move to
secure generous returns in exchange for backing businesses that
other investors are fleeing.
By agreeing to provide a loan for 2.4 billion Canadian dollars
($1.8 billion) and the purchase of a minority stake in the lender,
Mr. Buffett's Berkshire Hathaway Inc. is betting against scores of
bearish investors who recently sold Canadian bank stocks and
shorted shares of smaller mortgage lenders amid worries about
overpriced Canadian real estate.
The deal, announced Wednesday night, provided a much-needed
boost to Home Capital. Director Alan Hibben said in an interview
that the board weighed several financing offers, but it opted for
Mr. Buffett's because it brought the kind of "pay attention"
backing the company needed to restore confidence after a
devastating deposit flight.
"He's the best hope of getting that validation," Mr. Hibben
said.
Talks were initiated after Mr. Buffett was approached by Home
Capital's bankers, the director said.
Berkshire has long benefited from Mr. Buffett's reputation as a
skilled judge of businesses who is known for closing deals quickly
without teams of bankers or consultants. Berkshire earned more than
$10 billion on deals Mr. Buffett struck during and after the
financial crisis with blue-chip companies including Goldman Sachs
Group Inc., Dow Chemical Co., General Electric Co. and Bank of
America Corp.
The deal with Home Capital was another bold move, because some
analysts have said that if Canada's real estate bubble bursts,
midsize lenders like Home Capital could be the among the most
vulnerable to losses.
Berkshire secured generous terms, getting a nearly 40% stake at
a steep discount. Mr. Buffett's company also agreed to extend a C$2
billion line of credit at a rate of 9.5%, as well as 1.75% standby
fee on undrawn funds.
Berkshire held $96.5 billion in cash as of March 31, and Mr.
Buffett has been looking for ways to spend it. The recent deal
offers Berkshire attractive returns and demonstrates "the benefit
of having that kind of cash available a phone call away," said
Thomas Russo, partner at Gardner Russo & Gardner, which manages
$10 billion and holds Berkshire shares.
Home Capital's stock soared Thursday, rising 27% to C$19 a
share, its highest level since April when it was hit with the
deposit exodus.
The Berkshire investment comes as governments in Ontario and
British Columbia have taken steps to restrain housing speculation,
slowing the pace of house sales in the two provinces' largest
cities. Earlier this month, Bank of Canada Gov. Stephen Poloz
sought to quell concerns that Home Capital's problems reflected an
underlying malaise in Canada's mortgage-finance system, saying its
issues were due to "firm-specific factors."
Home Capital is one of Canada's largest mortgage lenders to
higher risk borrowers, many of them immigrants or self employed
workers who have poor ratings or scarce credit history. The lender
relies primarily on independent brokers to underwrite its mortgages
and it terminated more than 40 brokers in 2014 after it discovered
the incomes of borrowers hadn't been verified.
Home Capital experienced a dramatic outflow of about 95% of its
more than C$2 billion high interest savings deposits in April and
May after Canada's leading securities regulator alleged the company
and three executives materially misled investors about the full
extent of the mortgage fraud problem.
The company and the executives last week struck settlements,
without admitting wrong doing, to pay C$29.5 million in penalties
and other payments to the regulator and shareholders.
Berkshire said it would acquire a minority stake in Home Capital
for about C$400 million through two private placements at an
average price of C$10 a share, 33% less than the company's C$14.94
closing share price on Wednesday.
The initial purchase of a 20% stake, set to close June 29, calls
for Home Capital to issue new shares for C$153 million, or C$9.55 a
share. The company said the purchase amounts to a 20% discount to
the weighted-average price for the 20 days before the announcement.
The stock purchase isn't subject to a shareholder vote because
Toronto Stock Exchange rules allow buyers to bypass it at a time of
financial hardship.
Berkshire agreed to purchase an additional 24 million shares for
C$246.8 million, or about C$10.30 a share. This investment will be
subject to shareholder approval at a special meeting in
September.
When the purchases are complete, Berkshire said it would only
vote 25% of its Home Capital stock, to comply with Canadian
regulations that restrict investors from voting more than 25% of
bank shares.
--Vipal Monga contributed to this article.
Write to Jacquie McNish at Jacquie.McNish@wsj.com and Nicole
Friedman at nicole.friedman@wsj.com
(END) Dow Jones Newswires
June 22, 2017 18:18 ET (22:18 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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