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

By Jacquie McNish and Nicole Friedman Features Dow Jones Newswires

Mortgage lender Home Capital Group Inc. said it is pursuing further asset sales and financings following a rescue package from Warren Buffett's Berkshire Hathaway Inc.

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Under terms of a deal announced Wednesday night, Berkshire agreed to indirectly acquire a 38.39% stake in Home Capital and lend 2 billion Canadian dollars ($1.5 billion) under a credit line.

Alan Hibben, an independent director with the Canadian lender, said on a conference call Thursday that the board is seeking to further shrink the company's debt and its book of about C$25 billion in mortgages for the short term as it moves to restore funding following a large deposit flight the past two months. The Berkshire loan will be less expensive than an emergency line negotiated during the deposit run.

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 climbed after news of Berkshire's backing, rising 10%, to C$16.45, in early afternoon trading on Thursday.

The Toronto-based company, Canada's No. 1 lender of residential mortgages by total assets 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.

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The run followed allegations from the Ontario Securities Commission, which alleged Home Capital misled investors in 2015 about the extent of mortgage fraud it had uncovered in 2014 and the loss of business it would suffer when it said that it fired an unidentified number of mortgage brokers. The company and officials have since settled the allegations without admitting wrongdoing.

The company and executives struck agreements to pay C$29.5 million in penalties and other payments to the regulator and shareholders belonging to a class-action lawsuit.

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

Mr. Buffett, Berkshire's chairman and CEO, has a long history of making contrarian bets on troubled companies with financial lifelines that sometimes include deeply discounted stock purchases.

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

"Home Capital's strong assets, its ability to originate and underwrite well-performing mortgages, and its leading position in a growing market sector make this a very attractive investment," Mr. Buffett said.

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 a share. This investment will be subject to shareholder approval at a special meeting in September.

The Berkshire loan will charge an interest rate of 9.5% and a 1.75% fee on undrawn funds. Home Capital said its existing line with Healthcare of Ontario Pension Plan -- arranged in April when it was hit by the deposit exodus -- charges an interest rate of 10% and a 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 the 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 13:41 ET (17:41 GMT)