Home Capital’s Saga: The Latest

There’s going to be a lot of Home Capital Group (HCG) announcements as this story unfolds in coming days. We’ll track them here…

Update #7: April 28, 3:35 P.M.

  • Equitable Group shares are down 16% following a 50 bps hike in its deposit rates.
  • Former Home Capital director Jim Keohane was on BNN today. Good on him for having the guts to speak publicly. His comments did much to assuage fears about an imminent demise of the company. Here’s some of what he said:
    • His fund’s investment was not a “high-risk” investment because it was overcollateralized by high-quality mortgages (effectively 2.8 times coverage for each dollar HOOPP lent, which makes fear mongering like that from ZeroHedge seem absurd)
    • The loan was intended to “keep the doors open” at Home and “prevent a liquidation of the company.”
    • “There’s a possibility it could continue as a going concern” and not be sold off, he said
    • Keohane was asked if Home would have folded in a few days had HOOPP not made that loan. His response was, “probably not” but it was a “cushion to protect that from happening.”
    • Keohane was not in a conflict of interest, he says, because he recused himself from all decision-making with respect to the deal.
    • Most of the fraud-related mortgages have already “rolled off the books” at Home and no longer present a default risk to the company.

Update #6: April 28, 10:55 A.M.

  • $291 million worth of depositors fled yesterday
    • Here’s Home’s release about it. If management is smart, it’ll keep making frequent disclosures of its status (like this) to win back some degree of investor confidence.
  • The stock is down 2% to $7.86 as of this writing
  • “We’re getting close to seeing action by the regulator.”—Veritas Investment Research analyst Mike Rizvanovic  (via Globe and Mail)
  • Former Home Capital director Jim Keohane will be on BNN at 2 p.m. ET. Investors will be watching his every word for clues about Home’s fate. It’s possible we won’t hear from Home’s CEO or Chair unless they’ve got a solid plan to stabilize the company.
  • On an editorial note, we will not keep chronicling Home’s deposit situation or stock performance going forward unless it changes materially. Suffice it to say, no one’s going to be surprised if the company sheds more high-interest deposits near-term, but the pace is slowing. Its all-important GICs have been much stickier, however, remaining near $13 billion.

Update #5: April 27, 10:35 P.M.

  • Due to media speculation, HOOPP has issued a press release on its loan to Home.
  • Director Jim Keohane has resigned from Home’s board after the fund he manages provided a $2-billion loan to the embattled company. (More from the Financial Post)
  • S&P downgraded Home Capital’s credit rating to junk status (B+).
  • Veritas Investment Research analyst Mike Rizvanovic estimates that its emergency credit facility “at best gives Home Capital a one- to two-month stopgap.” (src: Globe and Mail) You can bet Home’s fate will be clear well before 60 days. 

Update #4: April 27, 4:55 P.M.

  • The company’s shares rallied hard in the last hour, closing up 34% on the day. There was a constant bid with no material pullbacks, which doesn’t happen by accident (a lot of short covering, a lot of speculative buys and perhaps some strategic buys from well-informed parties).
  • “Over the past week..short bets turned out to be very profitable, but ironically for different reasons than most short-sellers anticipated. And their actions likely contributed to the current bank run.”—Michael McCloskey, founder GreensKeeper Asset Management (via Globe and Mail [sub.])
  • “As rough as the past few days have been, we are very focused on getting this company back on track and doing everything we can to make that happen.”—Chairman, Kevin Smith (via Reuters).
  • Bad loans account for just 0.24% of Home’s loan book, reports Reuters, down from 0.34% a year earlier.

Update #3: April 27, 3:40 P.M.

  • In an email today to brokers, Home Trust EVP, Pino Decina stated: “Home Trust has weathered difficult times during its 30-year history, and has always risen above…We are taking the necessary steps to deal with this situation…If your client has a mortgage with us, rest assured nothing has changed.”
  • Home’s apparent funder has a conflict, says law professor: “HOOPP President and Chief Executive Officer Jim Keohane sits on Home Capital’s board and is a shareholder of the mortgage lender.” (More from Bloomberg)
  • Home Capital’s stock has made a new high on the day (an important short-term positive that suggests the balance of investors aren’t giving up on the company and/or think it will be successfully sold).

Update #2: April 27, 1:05 P.M.

  • Bank analyst: “We now assume that Home Capital will not be able to access sufficient deposit funding going forward, and the company will likely move into liquidation mode.” (This same analyst simultaneously raised his rating of HCG from hold to speculative buy.)
  • “We think [a sale] is at a substantial premium to current levels. 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.”—GMP Securities analyst Stephen Boland (via Bloomberg)
  • HCG is expected to axe its dividend to preserve cash flow.

Update #1: April 27, 11:00 A.M.

  • A sale seems increasingly likely. HCG has retained RBC Capital Markets and BMO Capital Markets “to advise on further financing and strategic options.”
  • Its high interest savings deposits are reportedly down to roughly $814 million versus ~$2 billion last month, a roughly $600-million outflow of depositors in the last few days
  • The company now says it has a firm $3.5-billion in current liquidity and $12.98-billion in outstanding GICs.
  • Healthcare of Ontario Pension Plan is reportedly the emergency lender that gave Home a liquidity lifeline yesterday.
  • The stock (symbol: HCG-TSX) has rebounded 13% to $6.99 (too early to call it a dead cat bounce).
  • Amid all the downgrades, a few analysts have raised their ratings of Home’s stock to “buy” and “outperform.”
  • Big banks are reportedly limiting client investments in Home GIC’s to $100,000, CDIC’s insurance limit.

Quotes:

  • “We have a hard time viewing the challenges (Home Capital) is facing as a systemic event, particularly since there is no indication of credit deterioration in the mortgage portfolio of (the company)…With the market cap of HCG having dropped to ~$400m we are skeptical that any of the banks will step up as a buyer of the company. At this stage of the HCG fallout a purchase of the underlying loan book would be a more straight-forward process than an acquisition of the common equity.”—Scotiabank (via BNN)

 

  1. @Tomas

    GICs don’t have to be sticky. They mature all the time and many are short term. Investors don’t have to reinvest those proceeds with Home Trust/Oaken but many have, even after the OSC’s enforcement notice in February.

    The company also sells redeemable GICs that people can cash in anytime, just so you know.

      1. obviously not, considering nearly 2/3 of their demand deposits are gone. There might as well not been any CDIC with the rate that depositors have withdrawn from Home Capital.

        If anything, I am surprised the CDIC hasn’t made a statement reminding depositors about insurance. A continued run on the Home Trust/Oaken would mean a potential liability on the behalf of the CDIC. CDIC making a statement saying the existence of deposit insurance would go a long way to reassure nervous depositors. Can’t believe a deposit run is the thing that might kill Home Capital Group.

  2. We haven’t heard much from the lenders who are carrying the private seconds from the bundled products. Alta West would have had the majority I would think but again secured by real estate are they at risk as well?

    Len Lane

  3. The house of fraud is being exposed. Canadas mortgage fraud is out of control. CMHC should be shut down and the free and open markets should be allowed to correct this housing mess. Without CMHC fraud wouls be in trouble. CMHC allows fraud to flourish.
    The panic from mortgage brokers is obvious.

  4. I think the OSC’s actions with respect to Home Capital are a disgrace. I think the OSC is motivated by a combination of

    1. a lack of understanding of Home Capital’s business, and the minor impact on the profitability of the problematic originations on Home’s core profitability
    2. latent anti-semitism
    3. regulatory capture, where the frequent unethical actions of the investment dealers and wealth managers owned by the big banks are seen as “the free market”, while much more minor, from a social welfare point of view, issues by Home are disproportionately punished

    The OSC has made some strides recently do to the right thing. CRM2 should be a useful step in opening the eyes of Canadian to how the big banks and their minions simply can’t generally be trusted. But there actions with respect to Home are a big step backwards. The lack of true competition in the Canadian market for financial services costs consumers billions every year. The OSC has done the Canadian consumer no favours by their misfiring with the Home Capital issue. They’ve encouraged retail customers to trust institutions that are using behavioural science to screw them.

    In the last year, I’ve seen my 92 year old grandmother ripped off by Scotiabank, and my parents ripped off by TD bank. What both TD and BNS did was perfectly legal, because of inadequacies in the regulatory framework in Canada. The OSC should be spending their time and energy on making ripping off 92 year old grandmothers more difficult, not on persecuting Home.

    1. I’m not worried. I have Home Trust GICs maturing in July, and another maturing in September. My intention is to renew both.

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