April 26, 2017 / 1:58 PM / 2 years ago

Shares of Canada's Home Capital plunge after credit line deal

TORONTO (Reuters) - Shares in Home Capital Group (HCG.TO), 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.

A sign shows the logos of Home Capital Group's subsidiaries Home Trust and Oaken Financial in front of their headquarters in an office tower in the financial district of Toronto, Ontario, Canada April 26, 2017. REUTERS/Chris Helgren

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 million.

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 million.

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 mortgage brokers.

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

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