- Represents a very strong validation and endorsement of Home
Capital from world-renowned long-term value investor
- Relationship enhances Home Capital's progress in capital and
deposit markets
- Proceeds from common equity investment provide additional
liquidity and capital in the near term
- Replacement of existing emergency credit facility on improved
terms, providing the Company with a lower cost backstop
facility
- Approximately C$247 million of
the C$400 million equity investment
is subject to shareholder approval
TORONTO, June 21, 2017 /CNW/ - Home Capital Group Inc.
(TSX: HCG) ("Home Capital" or the "Company") is pleased to announce
that Berkshire Hathaway Inc. ("Berkshire") has agreed to indirectly
acquire C$400 million of the
Company's common shares on a private placement basis and provide a
new C$2 billion line of credit
facility to Home Trust Company (together, the "Transaction").
"Berkshire's investment in Home Capital is a strong vote of
confidence in the fundamental, long-term value of our business,"
said Brenda Eprile, Chair of the
Home Capital Board of Directors. "We are pleased to partner with
such a renowned institution in a transaction that we believe will
reward all our investors for their patience and loyalty by
enhancing the value of Home Capital over time."
Ms. Eprile added: "Since April, the Board has been diligently
exploring solutions to restore the confidence of depositors and
shareholders and to create stability and value for all of the
Company's stakeholders. This is a very important step on that road.
This investment from Berkshire not only addresses Home Capital's
near-term requirements for additional liquidity and a lower-cost
credit agreement, but also facilitates what the Board feels is the
best available path to long-term success."
"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," said
Warren E. Buffett, Berkshire
Chairman and Chief Executive Officer.
After considering numerous alternative proposals, the Board
determined that the Berkshire transaction provides current
shareholders with the best available combination of transaction
certainty and the potential for enhanced shareholder value, and is
in the best interests of the Company, taking into account the
interests of its stakeholders including depositors.
Terms of Equity Investment
Initial Investment
Berkshire, through its wholly-owned subsidiary Columbia
Insurance Company, has agreed to make an initial investment (the
"Initial Investment") of C$153,225,739 to acquire 16,044,580 common shares
on a private placement basis, representing an approximate 19.99%
equity stake in the Company on a post-issuance basis (25% on a
pre-issuance basis). Each common share in the Initial Investment
will be issued at a price of C$9.55
per common share, which represented a 15% discount to the 5-day
volume-weighted average price (the "VWAP") of the common shares on
the TSX ending as of the close of trading on June 13, 2017, the date on which Berkshire made
its final proposal to the Company (a 20% discount to the 20-day
VWAP at the close of trading prior to this announcement).
Subject to TSX approval for reliance on the "financial hardship"
provisions of the TSX Company Manual (as described below), the
Initial Investment will not require approval of the Company's
shareholders and is expected to close on June 29, 2017. The Initial Investment is subject
to customary closing conditions and is not subject to any financing
or diligence condition.
Additional Investment
Berkshire, through its wholly-owned subsidiary Columbia
Insurance Company, has agreed to make an additional investment (the
"Additional Investment") of C$246,774,261 to acquire 23,955,420 common shares
on a private placement basis, which, together with its Initial
Investment, would represent an approximate 38.39% equity stake in
the Company. Each common share in the Additional Investment will be
issued at a price of approximately C$10.30 per common share, which represented an 8%
discount to the 5-day VWAP of the common shares on the TSX ending
as of the close of trading on June 13,
2017, the date on which Berkshire made its final proposal to
the Company (a 14% discount to the 20-day VWAP at the close of
trading prior to this announcement).
On completion of the Additional Investment, Berkshire will have
acquired 40 million common shares at an average price of
approximately C$10.00 per common
share and will indirectly hold an approximate 38.39% economic
interest in the Company on a post-issuance basis (62% on a
pre-issuance basis). However, Berkshire has agreed that for as long
as it owns more than 25% of the outstanding Common Shares it will
only be entitled to vote that number of shares that represents 25%
of the outstanding Common Shares, unless and until it obtains the
required regulatory approvals to enable it to vote greater than a
25% interest.
The Additional Investment will be subject to approval by not
less than a majority of the votes cast by the Company's
shareholders (excluding the common shares beneficially held by
Berkshire, or over which it exercises control or direction) at a
special meeting of shareholders that is expected to take place in
September 2017. The Additional
Investment is also subject to Canadian Competition Act clearance
and other customary closing conditions. The Additional Investment
is not subject to any financing or diligence condition. If approved
by the Company's shareholders, it is anticipated that the
Additional Investment by Berkshire would close shortly after the
required special shareholders meeting.
Replacement of Existing Credit Agreement
The Company has caused Home Trust Company, as borrower, to agree
to enter into a new C$2 billion loan facility (the "New Credit
Agreement") with a wholly-owned subsidiary of Berkshire, as the
agent and initial lender, to be secured against a portfolio of
mortgages originated by Home Trust Company. The New Credit
Agreement will replace the C$2
billion loan facility made as of May
1, 2017 between Home Trust Company, as borrower, and a major
institutional investor (the "Existing Credit Agreement"), and is
expected to be effective on June 29,
2017.
The New Credit Agreement is on substantially the same terms as
the Existing Credit Agreement, except as follows:
- the interest rate on outstanding balances will be decreased to
9.5% (from the current 10%) until completion of the Initial
Investment, at which time it will be further decreased to 9%
- the standby fee on undrawn funds will be decreased to 1.75%
(from the current 2.5%) until completion of the Initial Investment,
at which time it will be further decreased to 1%
- there will be no upfront commitment fee
- funds drawn on the facility will continue to be pre-payable at
any time
- the facility will mature in one year from the initial funding
and may not be terminated for one year
- all other terms of the New Credit Agreement are substantially
similar or identical to the Existing Credit Agreement
The Company will draw on the New Credit Agreement to repay all
amounts outstanding under the Existing Credit Agreement and the
Existing Credit Agreement will be terminated.
The Company does not currently intend to draw further on the New
Credit Agreement, except to the extent that alternative sources of
liquidity on better terms are unavailable to the Company. The
Company expects to have sufficient liquidity over the coming months
to repay all amounts outstanding under the New Credit Agreement
through other sources of liquidity currently under consideration.
However, there can be no assurance that such other sources of
liquidity will materialize or when, and therefore the Company may
be required to draw on the New Credit Agreement in greater amounts
and for longer periods than currently anticipated.
Other Material Terms of Transaction
Berkshire will not be granted any rights to nominate directors
of the Company or any governance rights as an equity holder.
Berkshire will be granted customary registration rights for
transactions with a significant shareholder.
The investment agreement contains non-solicitation covenants of
the Company, subject to fiduciary obligations of the board of
directors of the Company (the "Board"). The Board has agreed to
recommend to the shareholders that they vote in favour of the
Additional Investment. If the Board makes a change in its
recommendation for any reason and shareholder approval of the
Additional Investment by Berkshire is not obtained, then the terms
of the New Credit Agreement described above shall automatically
revert to an interest rate on outstanding balances of 9.5% and a
standby fee on undrawn funds of 1.75%. The cost to the Company of
the increased standby fee in these circumstances would be equal to
a maximum of C$15 million, or 3.75%
of Berkshire's total approximate C$400
million equity commitment. As noted above, although the
Company expects to have sufficient liquidity over the coming months
through other sources of liquidity currently under consideration,
those sources may not materialize on a timely basis and therefore
the Company may need to draw on the New Credit Agreement in greater
amounts and for longer periods than currently anticipated. If there
is a change in the Board's recommendation and shareholder approval
of the Additional Investment is not obtained, these amended terms
to the New Credit Agreement would be effective regardless of
whether the Company enters into any agreement to complete an
alternative transaction.
The above is a summary of the material terms of the investment
agreement. A copy of the investment agreement will be filed with
Canadian securities regulators and will be available at
www.sedar.com.
Board Recommendation
The Board, together with its legal and financial advisors, has
been conducting an ongoing and robust process starting in
April 2017, to explore a variety of
solutions to regain the confidence of depositors and shareholders
and create value for all of the Company's stakeholders. Through
this process, the Board has considered a wide range of
alternatives, including potential equity and debt investments, sale
transactions and replacement credit arrangements. While the Company
received non-binding proposals of a wide-ranging nature, including
those that would provide the potential for a sale of all of the
shares of the Company, the Board determined that the proposal from
Berkshire provides current shareholders with the best combination
of transaction certainty and the potential for enhanced shareholder
value, while meeting the need for strong sponsorship and lower cost
standby debt financing. The Board unanimously agreed that in order
to reduce the risk to the Company of future potential economic
downturns, policy and regulatory risk and to restore stakeholder
confidence, a strong corporate sponsor was required.
Accordingly, the Board, after consultation with its legal and
financial advisors, has unanimously determined that the Transaction
is in the best interests of the Company and recommends that
shareholders vote in favour of the Additional Investment by
Columbia Insurance Company.
The Company obtained fairness opinions dated as of June 18, 2017 from each of its financial
advisors, BMO Capital Markets and RBC Capital Markets and from its
independent financial advisor, Blair Franklin Capital Partners,
that, based upon and subject to the limitations and
qualifications therein, the terms of the Transaction are
fair, from a financial point of view, to the Company.
The Company will continue over the next year to refine its
approach to liquidity and capital management, including by
exploring further asset sales and financing transactions, but has
concluded its strategic review.
Toronto Stock Exchange Financial Hardship Exemption
Based on the 5-day VWAP of the common shares as of the close of
trading immediately prior to the execution of the investment
agreement, the common shares issued in the Initial Investment would
be issued at a 34% discount to the market price. Since the price of
C$9.55 per common share for the
Initial Investment is below the allowable discount to market price
under the Toronto Stock Exchange ("TSX") rules, shareholder
approval would normally be required by TSX.
While the Company intends to seek shareholder approval of the
Additional Investment, Berkshire has required under the terms of
the Transaction that the Initial Investment not be subject to the
delay and uncertainty of shareholder approval. Additionally, as
noted above, at the time the proposal was made by Berkshire, the
price of C$9.55 per common share
represented a 15% discount to the market price and would have been
within the allowable discount under TSX rules at such time.
However, following receipt of Berkshire's proposal, the Company
announced its settlement with the Ontario Securities Commission and
of the related class action, and an agreement to sell assets to
enhance liquidity, and the market price of the common shares
increased.
The Transaction is designed to improve the Company's financial
situation, was negotiated at arm's length, and was considered by
the Board, all of whom are free from any interest in the
Transaction and unrelated to Berkshire. The Board noted that the
Company has suffered an extraordinary and well-publicized loss of
stakeholder confidence since April
2017, which led to a liquidity crisis that seriously
threatened the Company's ability to continue to operate, and which
has resulted in ongoing instability. In addition, there has been
significant public discussion and commentary regarding possible
steps that Home Trust Company's and Home Bank's prudential
regulator and other government agencies may take to cool the
housing and mortgage market. Any such regulatory steps could happen
in the near term and could have a serious and adverse effect on the
Company's business. In connection with its application to TSX, the
Board determined that, due to the significant uncertainty created,
the Company is in serious financial difficulty and, after
consultation with its legal and financial advisors, that the
Transaction is reasonable for the Company in the circumstances and
is in the best interests of the Company. It provides access to
lower cost debt financing than under the Existing Credit Facility,
and it is designed to restore confidence in the Company,
particularly by its depositors, and therefore ultimately improves
the Company's future prospects. The Company intends to use the net
proceeds of the Initial Investment for general corporate purposes,
which may include investing in securities or instruments that
qualify as regulatory capital of Home Trust Company and/or deposit
notes or other debt instruments of Home Trust Company.
For the reasons above, the Company has applied to TSX pursuant
to the "financial hardship" provisions of section 604(e) of the TSX
Company Manual for an exemption from the requirement under section
607(e) of the TSX Company Manual to obtain shareholder approval for
the Initial Investment. The completion of the Initial Investment is
subject to the acceptance of notice of the investment by TSX with
an exemption from the requirement to obtain shareholder approval
pursuant to the aforementioned section 604(e).
BMO Capital Markets and RBC Capital Markets acted as financial
advisors, and Blair Franklin Capital Partners has provided an
independent fairness opinion, to Home Capital in connection with
the Transaction.
Conference Call
Home Capital Group Inc. (TSX:HCG) will host a conference call
for analysts on Thursday, June 22,
2017 at 8:30 a.m. ET to
discuss this transaction followed by a question and answer
period.
The conference call will be made available by dialing (647)
427-7450 or 1 (888) 231-8191 (toll-free in North America). Please call 10 minutes before
the start of the call. To listen to the call via live audio
webcast, visit Home Capital's website at www.homecapital.com
A replay of the call will be available at 11:30 am ET on Thursday,
June 22, 2017 until midnight
ET on June 29, 2017. To listen
to the replay, call 1 (855) 859-2056, passcode 43805862.
Caution Regarding Forward-looking Statements
This press release contains forward-looking information
within the meaning of applicable Canadian securities legislation,
including relating to the timing, completion and consequences of
the Transaction and the Company's expectations regarding its future
liquidity and access to debt financing. Please refer to the Home
Capital's 2016 Annual Report, available on Home Capital's website
at www.homecapital.com, and on the Canadian Securities
Administrators' website at www.sedar.com, for Home Capital's
Caution Regarding Forward-looking Statements.
About Home Capital Group Inc.
Home Capital Group Inc. is a public company, traded on the
Toronto Stock Exchange (HCG), operating through its principal
subsidiary, Home Trust Company. Home Trust is a federally regulated
trust company offering residential and non-residential mortgage
lending, securitization of insured residential mortgage products,
consumer lending and credit card services. In addition, Home Trust
offers deposits via brokers and financial planners, and through its
direct to consumer deposit brand, Oaken Financial. Home Trust also
conducts business through its wholly owned subsidiary, Home Bank.
Licensed to conduct business across Canada, Home Trust has offices in Ontario, Alberta, British
Columbia, Nova Scotia,
Quebec and Manitoba.
About Berkshire Hathaway Inc.
Berkshire Hathaway and its subsidiaries engage in diverse
business activities including insurance and reinsurance, utilities
and energy, freight rail transportation, finance, manufacturing,
retailing and services. Common stock of Berkshire is listed on the
New York Stock Exchange, trading symbols BRK.A and BRK.B.
SOURCE Home Capital Group Inc.