Warren Buffet Comes To the Aid of Embattled Home Capital

• August 7, 2017

Canadian alternative lender, Home Capital Group Inc. was at the brink of collapse due to the intense fraught housing market being witnessed across the country, but now they have a lifeline, thanks to Warren Buffet’s Berkshire Hathaway Inc.

Berkshire has agreed to acquire a 38.4% stake of the company’s shares. This translates to about C$400 million, in addition to providing a C$2 billion credit line to Home Trust Co. When making the acquisition, Buffet stated that he believed it was an attractive investment, owing to Home Capital’s strong assets, its position as a leader in the growing market, and its ability to originate and underwrite good performing mortgages.

Buffet’s move is the latest indication of the company’s desire to turn things around, after it was accused of misleading its shareholders regarding mortgage fraud, by a regulator early this year. The accusations consequently caused the shares to tumble, which resulted in panic withdrawals, and in turn, ended up threatening the country’s real estate sector. Berkshire’s decision to invest in the lender is thus considered to be a strong vote of confidence, which, hopefully, will translate into long-term value for the business and its shareholders.

More favorable terms

According to Home Capital, the deal with Buffet will be replacing an existing credit facility with more favorable terms. The purchasing of the share will occur in two parts, with the first part featuring an initial investment of about C$153 million to account for a 20% equity stake, and the second part will be C$247 million to make the equity stakes about 38%.

With the new agreements, the rates on outstanding balances will be reduced to 9.5% from 10% until the end of the initial investment, after which, they will drop further to 9.0%. The standby fees will also be reduced to 1.75% from the current rate of 2.5%.

Buffet’s company will, however, not have any rights to nominate directors for Home Capital, but will have voting shares of about 25% of the company’s stocks.

Berkshires Hathaway is entering into the Canadian housing market at a tense moment, as the Toronto market is just cooling off from a 15% tax increase for foreign buyers, in addition to tougher mortgage regulations. This is in addition to confidence being shaken up by the drama, caused by Home Capital.