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Home Capital Group Update: May 10, 2017

On May 9, 2017, Home Capital Group (HCG) subsidiary Home Trust subsidiary entered into an arrangement with an unnamed “independent third party” (to quote HCG’s May 9, 2017 news release) to purchase “funded mortgages or accept mortgage commitments and renewals up to a total of $1.5 billion” from Home Trust.

According to HCG, this “Third Party” has stated its “non-binding intention” to purchase as much as $1 billion in qualifying uninsured mortgages, with an immediate interest in purchasing or accepting commitments and/or renewals for up to $500 million. As well, the unnamed Third Party wants to purchase or accept commitments for up to $500 million in insured mortgages. This same Third Party “has also indicated an interest in further expansion of this arrangement at a later date.”

There is Good News

The good news of this $1.5 billion deal was hailed by a TD Securities ‘Flash Note’ as providing Home Trust with “near-term liquidity to fund up to $1.5 billion of upcoming mortgage commitments and renewals.” Rating the deal as “Impact: POSITIVE”, the May 9, 2017 TD Securities Flash Note stated that, “This is not an asset sale from Home Capital’s existing balance sheet’. Instead, the sale involves “mortgage commitment and renewals …We view this as a positive step for the company (HCG) in dealing with its near-term liquidity needs.”

Continuing with its upbeat assessment, TD Securities speculated that this kind of third-party deal could provide “a potentially sustainable funding option” for Home Capital going forward. “Specifically, Home Capital could utilize its mortgage origination and servicing infrastructure to generate and manage mortgages, but fund them by selling them on to third-party buyers (a similar funding model to prime-borrower focused mortgage lenders First National Financial and Street Capital).”

TD Securities also noted that HCG has tightened up its lending criteria “and the company is reducing broker incentive programs”. Both actions are  presumably being confidence-building moves to deal with HCG’s earlier issues with the Ontario Securities Commission (OSC).  As well, HCG “intends to pay back 100% of its $325mm outstanding institutional deposit note due May 24, 2017,” said the same Flash Note.

New Governance Team

HCG Chair Brenda Eprile stressed the importance of rebuilding HCG’s reputation in the May 9, 2017 news release that announced the $1.5 billion Home Trust deal. “This is another step forward in the company’s efforts to restore confidence in our operations,” she said. “It follows the recent addition of four outstanding new Board members with corporate governance and banking experience.”

For the record, these four new HCG board members are Paul Haggis (former head of Ontario Municipal Employees Retirement System); Allan Hibben (former RBC Capital Markets managing director of mergers and acquisitions); Claude Lamoureux (former Ontario Teachers’ Pension Plan CEO); and Sharon Sallows (trustee of Riocan Real Estate Investment Trust and Chartwell Retirement Residences).

On May 10, 2017, HCG issued an update on its liquidity position. “At the end of May 9, 2017, Home Capital Group’s liquid assets “stood at approximately $1.01 billion,” said the May 10, 2017 HCG news release. Combined “with the undrawn amount of $600 million under the Company’s $2.0 billion credit facility led by HOOPP (Healthcare of Ontario Pension Plan), HCG’s “aggregate available liquidity and credit capacity totaled approximately $1.61 billion.”

Meanwhile, “Home Trust’s High Interest Savings Account (HISA) deposit balances are expected to be approximately $134 million on May 10, 2017,” said the same HCG news release. “Total Guaranteed Investment Certificate (GIC) deposits, including Oaken and broker GICs, stood at $12.58 billion and Oaken savings accounts stood at $159 million as at May 8, 2017. Home Trust’s GICs and HISA deposits are eligible for Canada Deposit Insurance Corp. coverage.”

The Home Capital Group/Home Trust situation is being closely monitored by Mortgage Professionals Canada, this country’s national mortgage broker industry association.

“As a long-standing member of our Association, Home Trust has demonstrated its commitment to professionalism in the mortgage brokerage industry through continued support of the Association’s education and channel community events,” said Association President Paul Taylor.  “A brokers’ value proposition is based upon the ability to offer independent advice about multiple products provided by multiple lending partners. Home Trust has been one of these lending partners for many years, and it would to the benefit of the industry and Canadian homeowners in general for Home Trust to emerge from these difficulties, and reclaim their strong position in the stable Canadian mortgage marketplace.”