How Home Capital’s perilous turnaround is about to get harder

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Home Capital Group Inc. is fighting to find the funds it needs to survive as deposits rush out the door. Then comes the hard part.

The Toronto-based bank has lost more than $3.5 billion of deposits since the end of March, hurt by Ontario’s securities regulator saying last month that Home Capital had failed to promptly disclose possible fraud among some mortgage applications around two years ago. That blew a hole in the mortgage lender’s balance sheet that can be filled only with new funding. It has started the process with an expensive $2 billion loan that it already wants to refinance, and a sale of up to $1.5 billion of assets.

Once the bank has properly replaced the funding lost from fleeing depositors, it faces its next big hurdle: figuring out how to finance new loans so it can stay in business. Home Capital used to hold onto just about every mortgage it makes, but the bank will probably now have to sell them to investors at least for the near term, executives said on a conference call last week. The problem is, Canadian money managers don’t tend to buy the kind of mortgages that Home Capital offers, said Colin Kilgour, a partner at Toronto-based investment bank Kilgour Williams Capital.

Urgency, Weakness

Home Capital’s loans are usually made to borrowers that big banks shy away from, such as people who are self-employed and have irregular income. These loans tend not to be insured by the government, and there really isn’t a market for them in Canada now whether they are sold outright or packaged into bonds, said Kilgour, who focuses on advising companies and investors about securitization.

“They want to create a market for these mortgages, and they’re coming at it from a position of urgency and weakness,” Kilgour said. “It’s going to be tough.” The company does make mortgages that are securitized through government insurance programs but this a small portion of their business.

Home Capital’s funding and its long-term strategy are big enough obstacles that it isn’t clear if Home Capital can stay in business. It disclosed in its latest quarterly filing that there is enough uncertainty to cast significant doubt on its ability to continue as a going concern. Home Capital may have to offload assets en masse or sell itself outright, wrote Jaeme Gloyn, a financial stock analyst at National Bank of Canada, in a note.

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