Berkshire Hathaway Inc., the multinational conglomerate led by renowned investor Warren Buffett, said late Wednesday evening it has agreed to indirectly acquire $400 million of the Toronto-based company’s common shares on a private placement basis — giving it a 38.39 per cent equity stake — and provide a new $2-billion line of credit to its subsidiary, Home Trust.
The deal with Berkshire, through its wholly-owned subsidiary Columbia Insurance Company, gives the alternative mortgage lender a much-needed cheaper funding arrangement. It also serves a major endorsement as Home Capital recently faced a crisis of confidence from investors and depositors amid allegations of misleading disclosure.
“Home Capital’s strong assets, its ability to originate and underwrite well-performing mortgages, and its leading position in a growing market sector make this a very attractive investment,” said Buffett, Berkshire’s chairman and chief executive officer in a statement.
Berkshire’s proposal was chosen by Home Capital’s board after “considering numerous alternative proposals,” the company said, including those that “would provide the potential for a sale of all of the shares.”
The deal with Berkshire will provide Home Capital’s shareholders with “the best available combination of transaction certainty and the potential for enhanced shareholder value,” it added.
“Berkshire’s investment in Home Capital is a strong vote of confidence in the fundamental, long-term value of our business,” said Brenda Eprile, chair of the Home Capital board of directors, in a statement.
Eprile added that the board had been exploring solutions to “restore the confidence of depositors and shareholders and to create stability.”
“This is a very important step on that road,” she said. “This investment from Berkshire not only addresses Home Capital’s near-term requirements for additional liquidity and a lower-cost credit agreement, but also facilitates what the Board feels is the best available path to long-term success.”
Berkshire agreed to make an initial investment of more than $153.2 million to acquire more than 16 million common shares of Home Capital, followed by an additional investment of more than $246.8 million to acquire nearly 24 million shares.
Upon closing, Berkshire will own 40 million common shares at an average price of approximately $10 per share, or roughly a 38.39 per cent equity stake in Home Capital, both companies said in a statement.
Shares of Home Capital in Toronto closed at $14.94 on Wednesday.
However, Berkshire agreed that for as long as it owns more than 25 per cent of Home Capital’s outstanding common shares, it will only be entitled to vote a maximum of 25 per cent of the company’s equity, unless it obtains the required regulatory approvals.
The new $2 billion credit facility will be secured against a portfolio of mortgages originated by Home Trust.
This new loan will replace the costly emergency credit line Home Capital secured from a syndicate of lenders led by the Healthcare of Ontario Pension Plan (HOOPP) as a backstop after its deposit balances — which help fund its lending — began plummeting at the end of March amid allegations of misleading disclosure and executive departures.
Home Capital has said that the terms of the HOOPP loan would make it hard to meet its previously announced financial targets.
On Tuesday, Home Capital announced its subsidiary had entered into a definitive agreement with KingSett Capital to sell a portfolio of commercial mortgage assets valued at approximately $1.2 billion, giving the company some much needed liquidity to pay down the credit line.
Home Capital said Wednesday it will draw on this new loan facility to repay all outstanding amounts on the existing loan.
The new loan facility, which expected to be effective on June 29, has similar terms to the HOOPP loan, with some exceptions. The new loan will have an interest rate on outstanding balances of 9.5 per cent, down from 10 per cent. After Berkshire completes its initial investment, that will drop further to 9 per cent. Other differences include a lower standby fee of 1.75 per cent, reduced from the current 2.5 per cent, which will drop further to 1 per cent after Berkshire’s initial investment.
This announcement comes one week after it said the company and three of its former executives agreed to pay a total of $30.5 million to settle allegations of misleading disclosure by the Ontario Securities Commission and a class-action lawsuit. Canada’s biggest securities regulator had accused Home Capital and the former executives of misleading investors for months about an internal probe in 2014 and 2015 that led the company to cut ties with 45 brokers over falsified income documentation submitted for some loans.