Buffett's company lends $1.5B to Home Capital, invests $300M
Warren Buffett's company is lending $1.5 billion to Home Capital and spending roughly $300 million to purchase nearly 40 percent of the troubled Canadian lender's stock.
Berkshire said Thursday that the credit line will carry a relatively hefty 9 percent interest rate once Berkshire completes its initial stock investment later this month. The rate is similar to what Berkshire charged on loans it made during the financial crisis to companies including Goldman Sachs and General Electric.
Toronto-based Home Capital has struggled with liquidity issues since Canadian regulators announced in April they were investigating the mortgage lender.
"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," Buffett said.
Berkshire is also getting a discount on Home Capital's stock. Buffett's company will pay roughly $10 Canadian per share. Home Capital's shares jumped 22 percent Thursday to $18.23 Canadian after the financing deal was announced.
Home Capital's board decided the deal was the best option even with the expensive terms. Chairwoman Brenda Eprile touted it as an endorsement from Buffett's company.
"Berkshire's investment in Home Capital is a strong vote of confidence in the fundamental, long-term value of our business," Eprile said.
Berkshire's stock purchases, which will be made through its Columbia Insurance Co. subsidiary, will be split into two parts.
The initial purchase of 16,044,580 shares later this month will need only regulatory approval. The second purchase of 23,955,420 shares will need approval of Home Capital's shareholders.
If Berkshire makes both investments, it will control 38 percent of Home Capital's stock, but it agreed to vote only 25 percent of the lender's shares.
Berkshire Hathaway Inc. owns more than 90 subsidiaries, including BNSF railroad, Geico insurance, Fruit of the Loom, several major utilities, manufacturers and jewelry firms. The company also has major investments in such companies as Coca-Cola Co., IBM and Wells Fargo & Co.