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Home Capital Sells $1.1 Billion in Mortgages to Third Party

Image: Home Capital Sells $1.1 Billion in Mortgages to Third Party
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Tuesday, 09 May 2017 10:27 AM

Home Capital Group Inc. agreed to sell as much as C$1.5 billion ($1.1 billion) worth of mortgages and loan renewals to an unidentified buyer as the struggling Canadian lender looks for ways to shore up its balance sheet and restore investor confidence.

The deal includes up to C$1 billion of uninsured mortgages and C$500 million of insured mortgages, or about 10 percent of the company’s total mortgage book.

“This purchase arrangement is designed to give us the ability to continue to serve as many customers as possible in the mortgage broker channel,” Bonita Then, interim chief executive officer, said in a statement Tuesday. “Meanwhile, we continue to work very hard to develop additional sources of funding.”

Home Capital, facing scrutiny from Canadian regulators for misleading investors about possible mortgage fraud, has faced a run on deposits, forcing it to consider a sale. The Toronto-based company’s troubles have sparked concerns the fallout could lead to a broader slowdown in the Canadian real estate market.

Home Capital’s high interest deposits continued to dwindle, falling to C$146 million as of May 9 from almost C$2 billion five weeks ago. Its guaranteed investment certificate deposits stood at about C$12.6 billion as of May 7. The company’s available liquidity and credit capacity totaled some C$1.7 billion, which includes C$1.1 billion of liquid assets and C$600 million of the undrawn facility led by Healthcare of Ontario Pension Plan.

"What this news really does is address a lot of the near-term liquidity challenges that they’ve been dealing with in terms of all the deposits that were running out the door and questions about their ability to sell more GICs down the road," said Jeff Fenwick, an equity analyst at Cormark Securities Inc. The arrangement gives them time to consider strategic options for the business, he said.

Home Capital didn’t disclose terms of the mortgage sales. The company is due to report first-quarter results on May 11 after they pushed back the date from May 3. Its shares surged 20 percent on Monday, paring to 68 percent their slide since April 19 when the Ontario Securities Commission made public its allegation that the company misled investors.

Paying Back Debt

Home Capital on Tuesday also announced that the C$2 billion credit line it received from HOOPP had been syndicated to Credit Suisse Group AG, Goldman Sachs Group Inc., Fortress Investment Group LLC, and a "major North American financial institution.” It pledged to pay back all of a C$325 million bond on its maturity date, May 24.

Canadian Imperial Bank of Commerce said Monday it has a Canadian institutional buyer for as much as C$100 million of the 2.35 percent bonds at 92.5 cents on the dollar. The offer closes at 5 p.m. in Toronto Tuesday.

Home Capital is also tightening its lending criteria, which would lead to fewer new mortgages. The focus will be to originate mortgages it can sell, rather than keep on its balance sheet, adding it will result in “lower overall mortgage balances, increased costs and reduced levels of profitability in the near term.”

The latest moves come after Home Capital on Monday announced a continued shake up of its board and suspended dividend payments.

The ripple effects are also being felt across Canada’s financial markets. The Canadian dollar fell to a 14-month low against its U.S. peer last week, bank stocks suffered, while at least two sales of mortgage-backed securities have been put on hold.

Yet the risk from Home Capital doesn’t stem from the company’s size or linkages -- it holds only about 1 percent of Canadian mortgages. However a disorderly fallout from Home Capital would damage a sector which is driving Canadian growth. Real estate, residential construction and finance sectors were responsible for around two-fifths of output in Canada’s fastest growing provinces.

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Deal comprises about 10 percent of the lender’s mortgage book; Also announces Credit Suisse, Goldman part of HOOPP syndicate
Home, Capital, Mortgages, Party
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2017-27-09
Tuesday, 09 May 2017 10:27 AM
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