Home Capital Group Inc. relieved a major headache by agreeing to settle a dispute with securities regulators, but the mortgage lender's funding woes are still a central concern as investors crave more tangible signs of a turnaround.
Toronto-based Home Capital watched its share price surge 12.7 per cent higher on Thursday after news that the troubled mortgage lender has struck a pair of deals to settle allegations of misleading disclosures about fraudulent mortgage underwriting practices dating back to 2014.
If the settlements are approved by regulators and the courts, Home Capital and three former senior executives will pay $12-million in penalties to the Ontario Securities Commission. Most of those funds will go toward a $29.5-million payment to resolve a class-action lawsuit filed earlier this year against the lender.
For subscribers: For the OSC, the Home Capital settlement is a small victory with some big lessons
In mid-April, Home Capital insisted the OSC's allegations were "without merit" and planned to "vigorously" defend itself. But days later, its stock price plunged about 65 per cent and the company soon suffered a near-death experience as its depositors fled for the exits, with the OSC's detailed allegations appearing to be one factor that helped trigger the run. In short order, the company overhauled its board, adding five new members as six others departed.
Under new governance, Home Capital abandoned its defiant tone, taking "full responsibility for failing to meet its disclosure obligations to the marketplace," according to a statement from board chair Brenda Eprile released late Wednesday. The company also agreed to say the OSC "is not to blame for the events of recent months."
Analysts hailed the settlements as a step forward for Home Capital, avoiding the prospect that the OSC's enforcement case might continue to dog the company for months to come. Yet, the most crucial questions about its future have yet to be answered: Investors want to see proof that the Home Capital can renew its executive ranks after dismissing CEO Martin Reid in March and sustain its funding base over the long-term.
"The remaining key hurdle (and the most significant) is getting sufficient funding," said Geoffrey Kwan, an analyst at Royal Bank of Canada Dominion Securities Inc., in a research note. If the lender is to bolster its mortgage book, what matters "is getting depositors to buy [Home Capital's guaranteed investment certificates] again at levels that don't just fund renewals, but also fund new originations."
Mr. Kwan estimates Home Capital needs to sell an average of $23-million in new GICs each business day to replace $5.6-billion in fixed-term deposits maturing over the next year. Although Home Capital's deposit base, which funds its mortgages, has steadied in recent weeks, it still bleeds small sums on a daily basis. As of June 14, its high-interest and Oaken Financial savings accounts held a combined $244-million, while its GIC balance inched upward to nearly $12.1-billion.
In the meantime, Home Capital's investors are keen to see the company replace a costly backstop loan at more reasonable terms. An onerous $2-billion credit line from the Healthcare of Ontario Pension Plan that carries a 10-per-cent annual interest rate, has kept Home Capital afloat for now. But finding a better deal could be "the next meaningful positive catalyst" for the company, said Brenna Phelan, an analyst at Raymond James Ltd.
Talks continue with a number of potential lenders, including Canada's largest banks, according to sources familiar with the process, and Home Capital is seeking a longer term as well as a lower interest rate.
In a statement released Thursday at the urging of the Investment Industry Regulatory Organization of Canada , Home Capital said it is "aware" of media reports about a possible refinancing, but "does not comment on speculation and rumours."
A separate process to consider selling at least some of Home Capital's assets is continuing, as private equity groups, such as Onex Corp. and Brookfield Business Partners LP, a unit of Brookfield Asset Management, circle the company.
And Home Capital is still hunting for a CEO with a plan to lead it out of the current crisis, with executive search firm Caldwell Partners in charge of the process.
Under the terms of the OSC settlement, company founder Gerald Soloway will be banned from acting as a director or officer of a public company for four years, and pay a $1-million administrative penalty. Mr. Reid, the former CEO, and ex-chief financial officer Robert Morton each face two-year bans and $500,000 penalties.
Of the three, Mr. Morton is the only one still employed at Home Capital. A spokesperson declined to comment on his status.
James Bradshaw
Andrew Willis