Canada's Home Capital Seeks to Further Shrink Debt Following Rescue by Berkshire Hathaway

By Jacquie McNish and Nicole Friedman Features Dow Jones Newswires

Home Capital Group Inc. said it is pursuing further asset sales and financings following a rescue package negotiated with Berkshire Hathaway Inc.

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Alan Hibben, an independent director with the troubled Canadian mortgage lender, said on a conference call Thursday morning that the board is seeking to further shrink the company's debt and its book of about 25 billion Canadian dollars ($18.9 billion) in mortgages for the short term as it moves to restore liquidity following a dramatic deposit flight during the past two months.

Over the longer term Mr. Hibben said he expects Home Capital will be on a "growth path," because "you can't shrink your way to greatness."

Home Capital's stock soared in early morning trading on news of Berkshire's backing, rising 17% to C$17.49.

The Toronto company, Canada's leading lender of residential mortgages to borrowers with less-than-stellar credit ratings, experienced an exodus of more than 95% of about C$2 billion of high-interest savings deposits in the past two months. The run followed allegations from Canada's leading securities regulator that the company and three senior executives materially mislead investors about the full extent of its mortgage application fraud problems. The company and officials have since settled the allegations.

Mr. Hibben said Berkshire's planned investment was a "turning point" for the beleaguered company that is aimed at restoring confidence and attracting new depositors.

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Berkshire Chairman Warren Buffett has a long history of making contrarian bets on troubled companies with financial lifelines that sometimes include deeply discounted stock purchases.

Under terms of a deal announced Wednesday night, Berkshire agreed to indirectly acquire a 38.39% stake in Home Capital and lend C$2 billion under a credit line that will be less expensive than an emergency line negotiated during the deposit run.

Berkshire said it would acquire the stake in two steps through its wholly owned subsidiary Columbia Insurance Co.

The initial purchase of a 20% stake, which is set to close June 29, calls for Home Capital to issue new shares for C$153 million, or C$9.55 a share. The company said the purchase amounts to a 20% discount to its stock price ahead of the deal announcement. The stock purchase isn't subject to a shareholder vote because Toronto Stock Exchange rules allow buyers to bypass investor approval at a time of financial hardship.

Berkshire agreed to purchase an additional 24 million shares for C$246.8 million or about C$10.30 per share. This investment will be subject to shareholder approval at a special meeting set for September.

The Berkshire package includes a C$2 billion credit line that is slightly less expensive than an emergency loan arranged with a Toronto pension fund in April when Home Capital was first hit with a dramatic deposit exodus.

The new loan will charge an interest rate of 9.5%, and a 1.75% standby fee on undrawn funds. Home Capital said its existing line with Healthcare of Ontario Pension Plan charges an interest rate of 10% and standby fee of 2.5%. Mr. Hibben said Home Capital hopes to pay down the new bank line by attracting new deposits and generating additional cash through asset sales and new financing.

Berkshire held $96.5 billion in cash as of March 31, and Mr. Buffett has been looking for ways to spend it. Berkshire and Brazilian private-equity firm 3G Capital made a $143 billion approach to take over Unilever PLC in February, but Unilever declined.

For Berkshire, the deal offers good returns but is "not going to have to same power to move the needle as had they been able to acquire Unilever, for example," said Thomas Russo, managing member of Gardner Russo & Gardner, which manages $10 billion and holds Berkshire shares. "The limitation of lending your capital out at a high rate for a short period of time [is that] that period ends, and you then have to redeploy it again."

Mr. Buffett has opened his wallet in the past to throw lifelines to struggling companies in exchange for lucrative returns. In addition to a cash infusion, the companies gained Mr. Buffett's public support. Berkshire earned more than $10 billion on deals Mr. Buffett struck during the financial crisis for blue-chip companies including Goldman Sachs Group Inc., Dow Chemical Co., General Electric Co. and Bank of America Corp.

Write to Jacquie McNish at Jacquie.McNish@wsj.com and Nicole Friedman at nicole.friedman@wsj.com

(END) Dow Jones Newswires

June 22, 2017 11:18 ET (15:18 GMT)