Warren Buffett's Berkshire Hathaway Rescues Canada's Home Capital--2nd Update

By Jacquie McNish and Nicole Friedman Features Dow Jones Newswires

Warren Buffett's rescue of struggling Canadian mortgage lender Home Capital Group Inc. is his latest move to secure generous returns in exchange for backing businesses that other investors are fleeing.

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The deal, announced Wednesday night, provided a much-needed boost to Home Capital. Director Alan Hibben said in an interview that the board weighed several financing offers, but it opted for Mr. Buffett's because it brought the kind of "pay attention" backing the company needed to restore confidence after a devastating deposit flight.

"He's the best hope of getting that validation," Mr. Hibben said.

Talks were initiated after Mr. Buffett was approached by Home Capital's bankers, the director said.

Berkshire has long benefited from Mr. Buffett's reputation as a skilled judge of businesses who is known for closing deals quickly without teams of bankers or consultants. Berkshire earned more than $10 billion on deals Mr. Buffett struck during and after the financial crisis with blue-chip companies including Goldman Sachs Group Inc., Dow Chemical Co., General Electric Co. and Bank of America Corp.

The deal with Home Capital was another bold move, because some analysts have said that if Canada's real estate bubble bursts, midsize lenders like Home Capital could be the among the most vulnerable to losses.

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Berkshire secured generous terms, getting a nearly 40% stake at a steep discount. Mr. Buffett's company also agreed to extend a C$2 billion line of credit at a rate of 9.5%, as well as 1.75% standby fee on undrawn funds.

Berkshire held $96.5 billion in cash as of March 31, and Mr. Buffett has been looking for ways to spend it. The recent deal offers Berkshire attractive returns and demonstrates "the benefit of having that kind of cash available a phone call away," said Thomas Russo, partner at Gardner Russo & Gardner, which manages $10 billion and holds Berkshire shares.

Home Capital's stock soared Thursday, rising 27% to C$19 a share, its highest level since April when it was hit with the deposit exodus.

The Berkshire investment comes as governments in Ontario and British Columbia have taken steps to restrain housing speculation, slowing the pace of house sales in the two provinces' largest cities. Earlier this month, Bank of Canada Gov. Stephen Poloz sought to quell concerns that Home Capital's problems reflected an underlying malaise in Canada's mortgage-finance system, saying its issues were due to "firm-specific factors."

Home Capital is one of Canada's largest mortgage lenders to higher risk borrowers, many of them immigrants or self employed workers who have poor ratings or scarce credit history. The lender relies primarily on independent brokers to underwrite its mortgages and it terminated more than 40 brokers in 2014 after it discovered the incomes of borrowers hadn't been verified.

Home Capital experienced a dramatic outflow of about 95% of its more than C$2 billion high interest savings deposits in April and May after Canada's leading securities regulator alleged the company and three executives materially misled investors about the full extent of the mortgage fraud problem.

The company and the executives last week struck settlements, without admitting wrong doing, to pay C$29.5 million in penalties and other payments to the regulator and shareholders.

Berkshire said it would acquire a minority stake in Home Capital for about C$400 million through two private placements at an average price of C$10 a share, 33% less than the company's C$14.94 closing share price on Wednesday.

The initial purchase of a 20% stake, 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 the weighted-average price for the 20 days before the announcement. The stock purchase isn't subject to a shareholder vote because Toronto Stock Exchange rules allow buyers to bypass it 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 a share. This investment will be subject to shareholder approval at a special meeting in September.

When the purchases are complete, Berkshire said it would only vote 25% of its Home Capital stock, to comply with Canadian regulations that restrict investors from voting more than 25% of bank shares.

--Vipal Monga contributed to this article.

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

(END) Dow Jones Newswires

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