DBRS Ltd. has downgraded its ratings on Toronto-based Home Capital Group Inc. (HCG) to BB from BBB amid concerns about the company’s funding and liquidity arrangements.
The Toronto-based credit rating agency downgraded its ratings for both HCG and its primary operating subsidiary, Home Capital Trust (HTC), and placed all the firms’ ratings under review with negative implications.
The rating actions are driven by the rating agency’s, “concern over the heightened pressure on HTC’s funding and liquidity profile as well as the potential impact of this pressure on the trust company’s earnings generation and franchise,” DBRS says in a statement.
DBRS notes that the company has “faced accelerated withdrawals” by depositors since the announcement of various senior management changes, and allegations of disclosure violations from the Ontario Securities Commission (OSC). Those allegations have not been proven, and the company has said that it intends to fight them. Its hearing is due to start on May 4.
Read: OSC accuses Home Capital, execs of misleading disclosure
HCG has arranged a $2 billion line of credit to shore up its financial position, but DBRS says that the cost of that credit could pressure earnings. “Moreover, other funding costs are likely to trend higher while originations are likely to decline, given the recent provincial government’s proposed measures to temper the overheated Ontario housing market, placing further pressure on earnings,” DBRS says.
Additionally, the rating agency says that the financial pressure also comes amid turnover in senior management, “which make it much more difficult for the group to focus on stabilizing, then improving upon, its financial position.”
On the upside, DBRS notes that HCG has a “substantial capital cushion in excess of the regulatory minimum,” and that the asset performance of its mortgage portfolio is “still sound”.
On Thursday, HCG announced that it has “retained RBC Capital Markets and BMO Capital Markets to advise on further financing and strategic options.”
Read: Home Capital secures firm commitment for $2-billion line of credit