Home Capital to sell C$1.2 billion commercial mortgage book

(Reuters) - Canadian lender Home Capital Group Inc HCG.TO said on Tuesday it would sell a portfolio of commercial mortgage assets valued at C$1.2 billion ($904 million) to private equity firm KingSett Capital.

The entry to the Home Capital Group's headquarters are seen in an office tower in the financial district of Toronto, Ontario, Canada, April 26, 2017. REUTERS/Chris Helgren

Proceeds from the sale will bolster its liquidity and trim outstanding debt on a C$2 billion emergency facility it agreed with the Healthcare of Ontario Pension Plan (HOOPP) in April.

The expensive bridge financing of C$2 billion provided by HOOPP came with an effective interest rate of 22.5 percent on the first C$1 billion drawn down. That affected the company’s ability to originate new mortgages since it could not afford to lend money at lower rates than its cost of borrowing.

“Proceeds from the transaction are expected to have an immediate impact by enabling us to enhance our liquidity and reduce the outstanding debt under the company’s $2 billion credit facility,” said Interim Chief Executive Bonita Then.

Home Capital said KingSett had agreed to purchase the portfolio for 99.61 percent of its outstanding value, less a share of future losses on the loans.

It expects to receive an initial cash payment of C$1.16 billion in the third quarter, equivalent to 97 percent of the value the mortgages. The balance of the payment will depend upon the level of any future losses.

Shares of Home Capital rose as much as 6.8 percent on Tuesday and were trading up 4.2 percent at 1325 EST.

“We view the terms of this sale favorably and supportive of the high quality of Home Capital’s mortgage book,” said Raymond James analyst Brenna Phelan.

Home Capital said in April it was pursuing new financing and strategic options, including the possible sale of some assets.

Depositors have withdrawn 95 percent of funds from Home Capital’s high interest savings accounts since March 27, when the company terminated the employment of former Chief Executive Martin Reid.

The withdrawals accelerated after April 19, when the Ontario Securities Commission (OSC), Canada’s biggest securities regulator, accused Home Capital of making misleading statements to investors about its mortgage underwriting business.

Home Capital said last week it agreed a settlement with the OSC and accepted responsibility for misleading investors about problems with its mortgage underwriting procedures.

The company still faces significant hurdles, including securing new long-term funding, finding a permanent chief executive, rebuilding relationships with brokers, and winning back the support of depositors and borrowers.

Additional reporting by Yashaswini Swamynathan in Bengaluru; Editing by Bernadette Baum and Cynthia Osterman