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Jun 22, 2017

Home Capital shares surge as lender gets $2B lifeline from Buffett's Berkshire Hathaway

A sign shows the logos of Home Capital Group's subsidiaries Home Trust and Oaken Financial.

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Home Capital Group Inc (HCG.TO) said billionaire Warren Buffett's Berkshire Hathaway Inc (BRKa.N) will provide a new $2 billion line of credit to its unit Home Trust Co, ending the Canadian lender's strategic review process.

Shares of the company surged 17 per cent shortly after the market open Thursday. 

Berkshire will also indirectly buy $400 million of Home Capital's common shares in a private placement through its unit Columbia Insurance Co, Home Capital said on Wednesday.

"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," said Warren Buffett, Berkshire chairman and CEO.Berkshire will hold an about 38.39 per cent equity stake in Home Capital after buying 40 million shares at an average price of about $10.00 per common share.

Berkshire will make an initial investment of $153.2 million to buy 16 million common shares and an additional investment of $246.8 million to purchase 24 million shares through a private placement. 

The Ministry of Finance said it was 'pleased' to see Home Capital's funding issues addressed.

“Financial stability and security are the backbone of a strong and resilient economy, and are essential in our plan to strengthen the middle class and help those working hard to join it," the Minister of Finance's Press Secretary Annie Donolo told BNN via email. "Our Government is pleased to see Home Capital’s funding issues being addressed by market participants." 

"What we’ve seen is proof the system is working as it should, where institutions facing challenges find market-based solutions. We continue to monitor developments, and today's news speaks to confidence in the Canadian economy and our financial sector.”

The additional investment is subject to shareholder approval. And Home Capital has requested to be exempted from a shareholder vote on the first tranche of the investment, but the TSX says it will be five days before they release their decision on that request. 

Canada's biggest non-bank lender also said it will continue to explore further asset sales and financing deals over the next year, but has concluded its strategic review process that began in April.

"This investment from Berkshire not only addresses Home Capital's near-term requirements for additional liquidity and a lower-cost credit agreement, but also facilitates what the Board feels is the best available path to long-term success," Home Capital's Chair Brenda Eprile said.

Berkshire will not be granted any rights to nominate directors to Home Capital board or any governance rights as an equity holder, Home Capital said.

The $2 billion loan facility, expected to be effective on June 29, will replace the existing one for a similar amount between Home Trust Company and a major institutional investor.

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On Tuesday, the company said it would sell a portfolio of commercial mortgage assets valued at $1.2 billion to bolster its liquidity and trim outstanding debt on a $2 billion emergency facility it agreed with the Healthcare of Ontario Pension Plan in April.

Last week, Home Capital reached a $30.5 million settlement with the Ontario Securities Commission, settled a class action lawsuit and accepted responsibility for misleading investors about problems with its mortgage underwriting procedures.

The settlement is expected to help secure long-term financing at sustainable interest rates, investors and analysts said.

--With files from BNN



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