(Adds portfolio manager comment, analyst note; updates share
By Alastair Sharp
TORONTO, April 26 Shares in Home Capital Group
, Canada's biggest non-bank mortgage lender, plunged
more than 60 percent on Wednesday, wiping out nearly $500
million in market value, after the company agreed to tap a
high-interest credit line to shore up finances.
The move caps a challenging few days for the alternative
lender, as its founder joined the ranks of recent executive
exits tied to a securities regulator probe.
Its Home Trust unit had suffered a 30 percent slump in its
High Interest Savings Account (HISA) balances since March 28,
falling to about C$1.4 billion by April 24, the company said,
adding it expects more withdrawals from savers.
"It's a pretty big hit," said Bryden Teich, a portfolio
manager at Avenue Investment Management. "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."
Home Capital said it would tap a C$2 billion ($1.5 billion)
credit line with an unnamed institutional investor requiring
Home Trust to draw C$1 billion initially and pay a fee of C$100
Home Trust is one of Canada's biggest subprime lenders,
which participates in so-called bundled lending. Canada's
financial watchdog has vowed to stamp out bundled mortgages, in
which some mortgage lenders team up with unregulated rivals to
side-step rules designed to clamp down on risky lending.
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. The facility would mature in 364 days.
"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.
Home Capital said the terms of the deal meant it would be
unable to meet its current financial targets.
Analysts have flagged concerns about the stability of the
company's primary funding source, its guaranteed investment
certificates, from which customers are not able to withdraw
funds as quickly as they can from savings accounts.
Home Capital's shares slumped 60.2 percent to C$6.83 in very
high volume trade, hitting levels last seen in 2003 and cutting
its market capitalization by some C$659 million to C$438
The Ontario Securities Commission (OSC) earlier this month
issued allegations that the company and several of its current
and former executives withheld information about fraud by
The OSC has set a hearing on the matter for May 4.
($1 = 1.3584 Canadian dollars)
(Additional reporting by Fergal Smith; Editing by Bernard Orr
and Chris Reese)