Has Warren Buffett saved the jumpy Canadian housing market from a shattering collapse of a highly indebted subprime mortgage lender?
It looks like it with news Thursday night that Buffett Berkshire Hathaway will invest more than $C2 billion in bailing out Home Capital group whose financial woes have been threatening to trigger a slide in the Canadian housing market and shake the country’s financial system.
Berkshire will emerge with a big stake in Home of close to 40% at a massive discount and will provide a multi-billion dollar credit line at a very uncompetitive 9.5%, against a government bond yield of around 1.5% and a policy rate from the central bank of 0.5%.
Shares in Home Capital, Canada’s largest provider of home loans to the newly arrived and the self-employed, have fallen in the past two months as billions of dollars in deposits were withdrawn and a long-simmering fraud scandal shook confidence in the lender.
That scandal was settled last week with financial regulators in Ontario.
Home Capital had been accused of misleading investors for months about an internal probe in 2014 and 2015 that led it to cut ties with dozens of brokers who had allegedly falsified documents.
The company has since battled to stem an outflow of deposits, even after signing a high-interest credit line with an Ontario pension fund (linked to a former board member) to shore up its finances.
But late on Wednesday Toronto-based Home revealed that Berkshire Hathaway had agreed to inject up to $C400 million of equity, while providing a new $C2 billion line of credit to replace the facility arranged in April with the Healthcare of Ontario Pension Plan for Home’s key lending vehicle, Home Trust.
Provided shareholders back the two-tranche deal, Berkshire will buy shares equivalent to about 38% of the enlarged company at an average $10 a share — a 33% discount to Wednesday’s closing price. Meanwhile, the credit line carries an interest rate of 9.5% on outstanding balances, compared with 10% currently, dropping to 9% over time.
Berkshire, through its wholly-owned subsidiary Columbia Insurance Company, will make an initial investment of $C153.2 million to purchase just over 16 million common shares, which represents an equity stake of approximate 19.99% in Home Trust. Berkshire has agreed that it will only cast votes based on 25% of the shares it will hold.
In a statement, Mr Buffett, 86, said that the company’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”.
The purchase has echoes of Mr Buffett’s decision to pour $US5 billion into Bank of America six years ago, when investors were fretting that the Charlotte-based bank lacked the resources to deal with its mountain of legal troubles stemming from the crisis.
It also invested in Goldman Sachs, General Electric and Swiss Re, the big Swiss reinsurer. It also recalls moves in the mid 1990s to bail out Salomon Brothers.
The Berkshire deal came a day after Home Capital said it was selling $C1.2 billion in mortgage assets to a private equity firm which will allow Home to reduce its debt, after taking on an emergency $C2-billion line of credit on costly terms from the Healthcare of Ontario Pension Plan.
