Alternative mortgage lender Home Capital Group Inc. is considering a sale of its non-core assets such as certain loan portfolios, but will “be taking the time” to evaluate its options to shore up its liquidity and help restore its reputation, says its new board chairwoman.
Brenda Eprile — who was appointed as chair on Monday as part of a governance overhaul to reassure the market as Home Capital faces a partial run on its funding and a crisis of confidence — said on Friday that the mortgage lender’s investment bankers are looking at a range of options to address their near-term liquidity and long-term funding issues.
“Sale of some non-core assets is being considered … With the couple of deals that have been announced, we’ve got some breathing room,” she said in an interview. “So, now we’re taking the time to try to carefully see what are the options. A lot of parties have come forward, but we want to be smart about what we do.”
Eprile’s comments come a day after Home Capital put out its first-quarter earnings release, in which the company said that the recent reputational hit has impacted its future funding abilities and cast “significant doubt on the Company’s ability to continue as a going concern.”
Canada’s largest non-bank lender has been mired in liquidity issues after a series of executive departures and formal allegations filed against the company, and three of its former and current executives last month by the Ontario Securities Commission. The allegations, which the company has said are “without merit”, are in connection with the discovery of fraud in its broker channel and the termination of 45 brokers in 2014 and 2015.
Shares of Home Capital slipped as much as 18 per cent to $8.84 on Friday. The Toronto-based company’s stock is down more than 63 per cent since the end of March.
For the quarter ended March 31, Home Capital reported diluted earnings per share of 90 cents and $1.02 adjusted diluted earnings per share, compared to 92 cents and 96 cents a year ago, it said late Thursday. That beat the 96.5 cents adjusted diluted earnings per share analysts had expected, according to those surveyed by Bloomberg.
Total loans on its balance sheet were worth $18.6 billion, up from $17.9 billion in the same period a year ago. Of that, $11.4 billion were single-family residential mortgages.
New government rules introduced last October to cool down the housing market were actually “positive to Home’s core business,” said Eprile.
“If we didn’t have these other problems, recent problems, it would have been a great year,” she said.
Eprile told analysts Friday these issues — including more than $1.8 billion in deposits being withdrawn from its subsidiary since the end of March, forcing it to take on a pricey $2 billion credit line as a backstop — will have a long-term impact on the company and more immediately on Home Capital’s financial performance in 2017. It has already drawn $1.4 billion from the loan facility.
“Reputational damage, liquidity concerns, impaired funding capabilities, and persistent and material uncertainty have raised the probability the company is unable to continue as a going concern,” said Jaeme Gloyn, an analyst with National Bank Financial in a note to clients before the analyst call. “In our view, these factors continue to outweigh the positive steps management has taken to avoid such an outcome.”
Eprile said there will be “some restructuring” within the company.
“We haven’t mapped it out yet in any detail,” she said. “Obviously, we know there will be some shrinkage in the short term.”
Alan Hibben, a former RBC Capital Markets managing director who was named to Home Capital’s board last week, warned Friday the failure of Home Capital could have wider repercussions.
Home Capital services a “niche within the market place,” he said. It primarily provides mortgages to those who do not qualify for loans at traditional lenders, for reasons such as spotty credit history or self-employment.
“If this company were to not succeed, it would have significant knock-on effects,” Hibben told analysts.
Hibben also said he has taken on a greater role alongside management as they move to stabilize the company and secure more cost-effective funding.
“I don’t expect there to be any new significant transactions within the next days and weeks,” he said. “However, that should not be misconstrued. We will be extremely active in bringing a range of options forward.”
He also echoed Eprile’s comments that Home Capital would not be rushing to sell off the company.
“Asset sales here is not our first priority…. We’ve got to have enough time to be able to stablize the right hand side of the balance sheet here, and give us the time actually not to sell. Because, there’s just no way you can shrink this company to greatness.”
When asked how much time the company’s current funding arrangements have bought them, Eprile said, “it’s not a matter of weeks. We are comfortable that given those two financing arrangements that are in place, and the other options that are being discussed and pursued, that we’ve got adequate time to address our long-term funding.”
In addition to the $2 billion rescue loan facility from a syndicate of lenders led by the Healthcare of Ontario Pension Plan, Home Capital announced on Tuesday a non-binding deal with an “independent third party” to buy or place up to $1.5 billion of its mortgages.
The deal, analysts said, helped the company avoid default on a $325 million bond due on May 24.
Hibben said Friday it was in discussions to expand the $1.5 billion deal, and “other parties have indicated interest.”
“Nobody likes the fact that we’re going to have to give our customers away to a third party,” Hibben said. “But it gives us more than enough time to execute on alternative transactions.”
The company also continues to search for a new chief executive and chief financial officer, he added.
More “board renewal” in addition to the four new directors announced this week is in the pipeline, and is expected to be included in Home Capital’s proxy circular due for release in a couple of weeks, said Eprile. The company’s annual general meeting of shareholders was postponed from Thursday until June 29.
Meanwhile, Home Capital’s high-interest savings account balances continue to fall, but at a slower rate, and is expected to hit $125 milion on Friday after the settlement of Thursday’s transactions. That’s down from $1.991 billion on March 28.
The company’s total Guaranteed Investment Certificate (GIC) deposits, which make up a larger portion of its funding, stood at $12.52 billion on May 10 compared to $13.06 on March 28.
Home Capital has begun tightening its lending criteria, said Eprile. The company’s rates have gone up “quite a bit” as part of an overall shift in the market, and “probably as a result of the liquidity crisis.”
“That cuts off a number of parties that wouldn’t meet the tighter criteria,” she said. “And then broker incentives have been reduced somewhat. So, again, it’s a way of shrinking volumes so that we can manage.”
The company has also begun adjusting deposit rates in a bid to bring depositors back, she said.
When asked whether Home Capital’s reputation will be able to fully recover, Eprile said: “I certainly hope so. And I think the recent changes we’ve made to the board are instrumental in doing that, as well as getting new leadership running the company. I do think those things will make a huge difference to the way the company functions in the market, and the future of the business.”
With files from Barbara Shecter