Categorized | Business

Home Capital buys time during ‘crisis of confidence’

Posted on 18 May 2017 by admin

The struggling alternate lender warned on a conference call with analysts, however, that charges will reduce operating strength going forward.

 Home Capital Group Inc. says an emergency credit line has bought time to secure new financing at better terms, even after the alternate lender a day earlier warned that a run on deposits cast its future as a going concern in doubt.

“The last few weeks have not been easy for any of us,” said interim chief executive Bonita J. Then, who assumed the role after the March 27 dismissal of former CEO Martin Reid.

The sudden termination came days before the Ontario Securities Commission (OSC) accused Home Capital of making misleading statements to investors about its subprime mortgage underwriting operations. Home Capital says the allegations are without merit.

“I believe in the fundamental business premise of Home Capital,” Then told analysts on a conference call Friday. “This company matters to a great number of people.”

Home Capital late Thursday said it earned $58 million or 90 cents a share in its first quarter ended March 31, just below the $64.2 million or 92 cents in the 2016 period.

The company warned on a conference call with analysts, however, that charges will reduce operating strength going forward, while costs generated by $2 billion credit line will also hurt future results.

Depositors have withdrawn nearly 94 per cent of funds from Home Capital’s high-interest savings accounts since the company terminated Reid, though data it released Friday showed the rate of withdrawals has slowed. Events since the dismissal have also halved the value of the company’s stock.

Home Capital said its high-interest savings deposits were expected to have fallen to about $125 million following the completion of Thursday’s settlements, down slightly from a balance of $128 million the day before. That’s still a huge drop from $1.4 billion just over two weeks ago.

It also announced deposits with its guaranteed investment certificates stood at $12.52 billion, down $20 million from Wednesday.

The company says liquid assets stood at approximately $962 million as of the end of day Thursday. Combined with the undrawn amount of $600 million under the credit facility, aggregate available liquidity and credit capacity totaled approximately $1.56 billion.

Home Capital relies on deposits from savers to fund its lending to borrowers, such as self-employed workers or newcomers to Canada, who may not meet the stricter criteria of the country’s biggest banks.

The company agreed last month to receive $2 billion in emergency funding from the Healthcare of Ontario Pension Plan, a deal which requires it to pay a non-refundable commitment fee of $100 million and a 10 per cent interest rate on outstanding balances.

Home Capital has also taken steps to repair its image with the appointment of high-profile business leaders to its board including Claude Lamoureux, former chief executive of the Ontario Teachers’ Pension Plan and a founder of the Canadian Coalition for Good Governance.

Alan Hibben, a former RBC director and one of the new directors, told analysts that Home Capital is exploring strategic options and said a number of people are interested in either providing financial support or pursuing a strategic acquisition.

He said while the business is deeply undervalued and could ultimately be attractive to another lender, “when a crisis in confidence happens all bets are off.”

Hibben said trust can only be restored gradually, with the company adding that it is in talks aimed at expanding available funding as it faces charges and debt obligations in the short term.

Home Capital said while it continues to take in deposits, outflows on obligations including maturing mortgages are far more significant.

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