Home Capital sells its commercial mortgage portfolio to KingSett for $ 1.2 billion

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Alternative mortgage lender Home Capital Group Inc. announced on Tuesday that its subsidiary has reached a definitive agreement with KingSett Capital to sell a portfolio of commercial mortgage assets valued at approximately $ 1.2 billion, giving the company struggling with cash needed to pay for a costly emergency. line of credit and potentially paving the way for its replacement.

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After the transaction, which is expected to close in two installments in the third quarter, Home Capital said it expects to record a loss on the transaction of around $ 15 million, before income taxes.

“This transaction will help the company to further stabilize its liquidity position and highlights the flexibility and options created by the quality of our assets,” Bonita Then, interim managing director of Home Capital, said in a statement. “The proceeds from the transaction are expected to have an immediate impact by enabling us to improve our liquidity and reduce outstanding debt under the Company’s $ 2 billion credit facility.

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KingSett Capital, a private equity real estate investment company, will purchase the portfolio for 99.61% of the value of the outstanding principal, less a share of future credit losses.

Home Capital had previously said it was pursuing funding and strategic options, including the sale of certain non-core assets such as certain loan portfolios. These options were aimed at bolstering her liquidity and paying off an expensive line of credit she obtained as an emergency safety net after her deposit balances – which help fund her mortgages – began to plummet in late March. amid allegations of misleading disclosure and, subsequently, executive departures at Home Capital.

The deal is a big step towards easing the pressure and a big positive for earnings, said Jeff Fenwick, analyst at Cormark Securities.

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“We see this event as a key positive step for Home, demonstrating an ability to monetize assets and increase liquidity without having a significant impact on equity. Notably, while the transaction will result in a small loss, the offsetting reduction in the 10% interest rate credit facility makes the transaction a positive bottom line for profits, ”he said in a note. to customers on Tuesday.

A reduction of $ 1 billion in the amount drawn on the credit facility equates to $ 25 million per quarter in interest savings, he noted.

Yet Home Capital “is far from out of the woods and the long-term prospects of its mortgage franchise remain in question. However, news (from Tuesday) shows that HCG is able to find a way forward that preserves much of the shareholder value, especially if credit quality continues to hold up. “

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Stephen Boland, analyst at GMP Securities, said the KingSett transaction “can pave the way for a new replacement line of credit at a much lower rate.

“In our opinion, the HCG turnaround continues to be well executed by the interim management team and the new board members,” he said in a note to clients on Tuesday. “We believe the OSC settlement and this sale are important steps in preserving equity and make a new line of credit (potentially including large Canadian banks) much more likely. The required size of a new line of credit can now be significantly reduced. The establishment of a permanent management team can be another positive catalyst. “

The executive search firm Caldwell Partners has been selected to recruit a permanent managing director and a financial director.

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Home Capital shares closed 4.3% higher at $ 15.42 in Toronto on Tuesday.

Tuesday’s announcement comes less than a week after Home Capital announced that the company and three of its former executives agreed to pay a total of $ 30.5 million to settle allegations of misleading disclosure by the Commission on Ontario Securities and Class Action. Canada’s largest securities regulator has accused Home Capital and three former executives of misleading investors for months about an internal investigation in 2014 and 2015 that led the company to sever ties with 45 brokers for falsified income documents submitted for some loans.

Home Capital founder Gerald Soloway, former chief executive Martin Reid and former CFO Robert Morton are all part of the proposed settlement deal with the regulator, which must be approved by a panel of OSC commissioners which will meet for a hearing in August 9. Settlement of the class action is subject to court approval and the two settlements are mutually dependent.

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In the OSC settlement, the company agreed to pay an administrative penalty of $ 10 million. In addition, Soloway will pay $ 1 million, and each of the other two named will pay $ 500,000. Most of the money to be paid to the OSC in the form of penalties, up to $ 11 million of the $ 12 million in total, will be used to meet the settlement of the $ 29.5 million class action lawsuit.

“These regulations will allow us to move forward and regain the confidence of our depositors and shareholders,” Board chair Brenda Eprile said in a statement on Wednesday.

After closing the deal with KingSett, the company expects net cash proceeds of $ 1.16 billion, he added. This will help Home Capital repay the $ 1.65 billion it drew on the emergency line of credit it obtained in late April from a syndicate of lenders led by Healthcare of Ontario Pension Plan, as of this date. which analysts have set as an effective interest rate as high as 22.5 percent, eroding its future profitability.

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Rating agency DBRS Limited said on Tuesday it viewed the deal with KingSett as “positive for HCG as it will improve the Group’s liquidity and funding profile, although to the detriment of future recurring revenues linked to the holding of loans on its balance sheet.

“Moreover, DBRS considers the very modest discount to par on the sale of the portfolio as illustrating the still strong credit performance of the group’s assets,” the agency said in a statement. DBRS placed Home Capital’s ratings under review with negative implications on May 3, and said on Tuesday the placement would remain.

Home Trust has lost 94% or $ 1.9 billion in high interest savings account balances since March 28. These account balances stood at $ 112.3 million as of June 19, compared to $ 98.5 million on June 16. Home Trust’s Guaranteed Investment Certificates (GICs), which account for a larger portion of its mortgage funding, fell from $ 13.06 billion on March 28 to $ 12.01 billion on June 19, from $ 12.03 billion billion dollars on June 16.

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