Toronto-based Home Capital Group Inc. is selling $1.2 billion in mortgage assets to KingSett Capital, a private equity firm focused on real estate, as it looks to regain its financial footing following a flood of customer withdrawals from their savings accounts.
The deal will allow Home Capital to reduce its debt, after taking on an emergency $2-billion line of credit on costly terms from the Healthcare of Ontario Pension Plan.
The alternative mortgage lender says it expects to lose approximately $15 million on the transaction with KingSett.
Home Capital says Toronto-based KingSett will buy the portfolio for 99.61% of its outstanding principal value, less a share of future credit losses.
The company will initially receive 97% of the outstanding principal value of the mortgages. The remainder will be subject to any credit losses in the portfolio.
“This transaction will help the company further stabilize its liquidity position and highlights the flexibility and options created by the quality of our assets,” Bonita Then, Home Capital’s interim president and CEO, said in a statement Tuesday.
Shares of Home Capital were up 4.19%, or 62¢, to $15.41 in afternoon trading on the Toronto stock market Tuesday.
Veritas analyst Mike Rizvanovic says the deal is a positive for the company’s earnings, as it allows Home Capital to pay down the majority of its debt with HOOP.
“That was just done at such a ridiculously high interest rate that it just really eroded their earnings power,” Rizvanovic said.
But the deposit issues continue to plague the company, Rizvanovic added. The company offers triple the interest rates on one-year GICs compared to some of the banks, but it still hasn’t been able to regain full access to that source of funding, he said.
Rizvanovic said he’d like to see several days or weeks in a row where the company has inflows rather than outflows to its deposit base.
“That to me would be the beginning of greener pastures for this company,” he said.
“It’s probably just going to take time for people to stop associating Home Capital with all that negativity.”
Home Capital has been in a cash crunch since April when customers started withdrawing their savings, which the company uses to fund its mortgage lending, following allegations by the Ontario Securities Commission (OSC).
The securities watchdog had accused the company of misleading investors in its disclosures surrounding a scandal involving falsified loan applications.
Last week, Home Capital agreed to settle both the OSC matter and a class-action lawsuit filed by investors.
The agreements are subject to OSC and court approval and conditional upon the approval of the other.
Read: Home Capital to pay $30.5 million to settle OSC and class-action matters
Today’s deal represents another positive step by the troubled mortgage lender says Toronto-based rating agency DBRS Ltd.
The sale “will improve the group’s liquidity and funding profile, albeit at the cost of future recurring revenues related to holding the loans on its balance sheet,” DBRS says in a statement.
Additionally, DBRS says that the price for the deal indicates that the credit performance of Home Capital’s assets remains sound.
With files from James Langton