Home Capital Group to sell About Half of Its Commercial Mortgages

By Jacquie McNish and Paul Vieira Features Dow Jones Newswires

Embattled Canadian mortgage lender Home Capital Group Inc. on Tuesday agreed to sell about half of its commercial mortgages for 1.16 billion Canadian dollars ($873.1 million) to a unit of KingSett Capital, a private-equity investor.

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Home Capital said the mortgage sale, aimed at boosting liquidity, is at a slight discount to the mortgages' principal value and is less a portion of future losses on the loans.

Home Capital said it expects to record a pretax loss of about C$15 million on the deal. The deal follows another agreement last month to sell or transfer about C$1 billion of Home Capital's residential home loans to a mortgage investment company.

Home Capital held C$25. 7 billion of mortgages as of last year, of which about C$2.2 billion were commercial. The company is Canada's leading mortgage lender to residential homeowners with less-than-stellar credit ratings.

The company said in a statement that proceeds from the sale, which is expected to close in the third quarter, will be used to pay down a high-cost, C$2 billion emergency loan the lender arranged in April in the wake of a sudden exodus of deposits. As of this week, the company said it has borrowed C$1.65 billion under the loan.

The expensive loan was struck with a Toronto pension fund, which is charging 10.2% in interest and fees for the one-year loan.

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Home Capital's deposit flight was triggered by allegations from Canada's leading securities regulator that the company and three top executives failed to properly disclose the full extent of mortgage-application fraud that the lender uncovered in 2014. The company and executives struck settlements last week to pay C$29.5 million to the regulator and shareholders belonging to a class-action lawsuit.

Home Capital's woes have attracted widespread investor interest because of the dramatic increase in prices in the Toronto-area housing market in the past several years, where most of Home Capital's mortgages are based. Recently, the pace of home sales in the region has slowed in the wake of Ontario government initiatives to temper real-estate speculation.

A spokeswoman for Canadian Finance Minister Bill Morneau said Tuesday the government was "encouraged by market developments" related to Home Capital. She added Mr. Morneau and government officials continue to closely monitor developments at Home Capital.

Earlier this month, Bank of Canada Gov. Stephen Poloz tried to quell concerns that Home Capital's woes reflected an underlying malaise in Canada's mortgage-finance system. He said the situation at Home Capital was due to "firm-specific factors," and there were no signs of broader stress in the financial system.

Home Capital has replaced a number of directors on its board, which last month initiated a strategic review. According to people familiar with the review the company is in discussions with a variety of suitors who are seeking to buy some or most of the company's assets.

One bidder that has entered talks for a potential purchase of mortgages is the private-equity arm of Brookfield Asset Management Inc., according to a person familiar with the talks. Brookfield CEO Bruce Flatt said at the company's annual meeting last week that the company would consider a transaction with Home Capital if the terms are attractive.

A spokesman for Home Capital declined to comment.

Write to Jacquie McNish at Jacquie.McNish@wsj.com and Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

June 20, 2017 13:46 ET (17:46 GMT)