Home Capital shares plunge after signing deal for $2-billion credit line

Cornelia Mascio
Aprile 27, 2017

Home Trust is a federally regulated trust company offering residential and non-residential mortgage lending, securitization of insured residential mortgage products, consumer lending and credit card services.

Shares in alternative lender Home Capital traded down than 57 per cent on Wednesday after the company said the terms of a new $2-billion line of credit it is arranging will leave it unable to achieve its financial targets.

Home Capital said the company will pay 10 percent interest on outstanding balances, with the standby fee on undrawn funds set at 2.5 percent.

Home Capital's stock had already fallen sharply last week after staff at Ontario's securities regulator alleged the company, two former CEOs and the current CFO broke the law in their handling of a scandal involving falsified loan applications. "It's a show of a lack of confidence in Home Capital's liquidity, and that's forced them to go get a big line of credit".

Access to these funds is meant to mitigate the impact of a decline in Home Trust's HISA deposit balances that has occurred over the past four weeks and that has accelerated since April 20.

Prior to the start of trading Wednesday, Home Capital told the market it had reached a deal in principle with an unnamed major institutional investor for the line of credit, which will secured against a portfolio of mortgages its Home Trust division has originated.

"The terms of the agreement and that it seemingly needed this agreement to fund the significant decline in demand deposits‎ points to the potential funding risks for HCG and will likely have a material negative impact on future earnings", RBC analyst Geoffrey Kwan wrote in a note.

"The company anticipates that further declines will occur, and that the credit line would also mitigate the impact of those", Home Capital said in a statement. The total high-interest savings account balance stood at roughly $1.4 billion at April 24.

Home Trust and Home Bank deposits of up to $100,000 are protected by the Canadian government's Canada Deposit Insurance Corp.

Home Trust's Guaranteed Investment Certificate (GIC) deposits remained essentially unchanged over that time.

It also said Home Capital founder Gerald Soloway, who was formerly the company's chief executive and also named in the allegations, will step down from the board of directors once a replacement is found. In addition, chief financial officer Robert Morton will shift out of that role after the company files its first-quarter results.

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