BUSINESS

Warren Buffett Helps Bail Out Canada's Struggling Home Capital

The billionaire investor will have a nearly 40% stake in the subprime mortgage lender.

06/22/2017 08:43 EDT | Updated 06/22/2017 08:54 EDT
Kevin Lamarque / Reuters
Warren Buffett, chairman and CEO of Berkshire Hathaway, speaks at the Fortune's Most Powerful Women Summit in Washington October 13, 2015.

TORONTO — Home Capital Group Inc. (TSX:HCG) says American investment firm Berkshire Hathaway Inc. has agreed to indirectly acquire $400 million of its common shares in a private placement and provide a new $2 billion line of credit to its subsidiary, Home Trust Company.

Berkshire, through its wholly-owned subsidiary Columbia Insurance Company, has agreed to make an initial investment of $153.2 million to purchase just over 16 million common shares, which represents an equity stake of approximate 19.99 per cent in Home Trust.

Each common share will be issued at $9.55 per common share, which equals a 15 per cent discount to the five-day volume-weighted average price of the shares on the Toronto Stock Exchange as of June 13 when Bershire Hathaway, the firm led by famous American investor Warren Buffett, made its final proposal to the company.

Chris Helgren / Reuters
A sign shows the logos of Home Capital Group's subsidiaries Home Trust and Oaken Financial in front of their headquarters in an office tower in the financial district of Toronto, April 26.

Home Capital, a Toronto-based alternative mortgage company, says while the sale of the shares requires TSX approval, it does not need the blessing of shareholders and is expected to close on June 29.

The company also says Columbia Insurance has agreed to make an additional investment of $246.7 million to acquire almost 24 million common shares through a private placement.

Together, the investments represent an almost 39 per cent equity stake in Home Capital, although Berkshire has agreed that it will only cast votes based on 25 per cent of the shares it will hold.

The additional investment will be subject to a shareholder vote expected to take place in September and approval by the federal government along with other customary closing conditions. Home Capital says its board is recommending shareholders vote in favour of it.

"Berkshire's investment in Home Capital is a strong vote of confidence in the fundamental, long-term value of our business," said Brenda Eprile, chairwoman of the Home Capital board.

"We are pleased to partner with such a renowned institution in a transaction that we believe will reward all our investors for their patience and loyalty by enhancing the value of Home Capital over time."

"Home Capital's strong assets, its ability to originate and underwrite well-performing mortgages, and its leading position in a growing market sector make this a very attractive investment," added Buffett.

Rick Wilking / Reuters
Berkshire Hathaway CEO Warren Buffett at the Berkshire Hathaway annual meeting weekend in Omaha, Nebraska, U.S. May 7.

The Berksire Hathaway agreement comes a day after Home Capital Group said it was selling $1.2 billion in mortgage assets to KingSett Capital, a private equity firm focused on real estate, as it looks to regain its footing following a flood of customer withdrawals from their savings accounts.

The KingSett 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.

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.

The securities watchdog had accused the company of misleading investors in its disclosures surrounding a scandal involving falsified loan applications.

Home Capital agreed to settle both the OSC matter and a class-action lawsuit filed by investors last week.