Mortgage lender Home Capital Group Inc. is fielding preliminary takeover offers and is in negotiations to settle regulatory allegations as Canada's largest alternative mortgage lender bounces back from a financial crisis.
Home Capital recently received proposals from groups led by Toronto-based private equity firms Onex Corp. and Brookfield Business Partners LP, a unit of Brookfield Asset Management Inc., according to sources familiar with the situation. Spokespeople for Brookfield, Onex and Home Capital declined to comment.
A number of U.S. private equity funds are also in talks with Home Capital and its financial advisers, sources say.
The offers received to date are "speculative, conditional and not that attractive," said a source close to the process playing out at Home Capital, which experienced a run on the bank in April in the wake of Ontario Securities Commission allegations that the company failed to disclose problems in its mortgage business. The company was close to collapse in early May, before securing an emergency $2-billion line of credit.
Home Capital hired investment banks RBC Capital Markets and BMO Capital Markets in April for advice on its "financing and strategic options," which started the process that led to the takeover proposals.
However, Home Capital's board and its advisers are also moving forward with plans to restore the company's financial health and remaining independence through steps that include raising capital by selling smaller lines of business and hiring a new CEO. One source close to the company said the decision in April to entertain takeover offers was made in haste when the company's survival was at stake, and with Home Capital now stabilized, "a takeover may not be the best outcome for shareholders."
Private equity firms are targeting Home Capital, which currently has a market capitalization of $707-million, because it is the market leader in loans to home buyers who cannot get mortgages from the big banks, a large pool of clients that includes the self-employed, recent immigrants and individuals with poor credit history.
Alternative lenders hold an estimated 13 per cent of the $1.3-trillion Canadian residential mortgage market.
Home Capital has an $18.5-billion mortgage portfolio, focused on homeowners in Ontario and British Columbia.
The run on the bank at Home Capital came as clients pulled their money out of high-interest savings accounts and guaranteed investment certificates (GICs) that fund the company's mortgages. A deep-pocketed private equity fund could line up additional sources of low-cost funding for the mortgage lender, which could dramatically increase the company's profitability.
Home Capital, as with all lenders, needs to keep renewing deposits or find other sources of funding to stay in business, and the company has more than $6-billion of GICs maturing in the next 12 months. Home Capital recently hiked the interest rates it pays on these deposits in an attempt to win market share.
Since April, Home Capital has been backstopped by a $2-billion credit facility from the Healthcare of Ontario Pension Plan that comes with an onerous 10-per-cent interest rate, and a 2.5-per-cent standby fee on undrawn funds. Replacing that debt with lower-cost financing, something that private equity owners could easily undertake, would also improve the company's results.
Home Capital's stock price rose more than 10 per cent on Thursday to $10.65. Home Capital shares peaked at above $50 three years ago and plunged below $6 in April.
Andrew Willis