Shares in alternative lender Home Capital plummet almost 65%

Home Capital shares tumble after the company said the terms of a new $2-billion line of credit it is arranging will leave it unable to achieve its financial targets.

Company says balance of its high-interest savings accounts down by $591M, more declines expected

Gerald Soloway, founder and former CEO of Home Capital Group, is among those named in an OSC action. Home Capital says Soloway plans to step down from the company's board of directors. (Aaron Vincent Elkaim/Canadian Press)

Shares in alternative lender Home Capital fell almost 65 per cent on Wednesday after the company said the terms of a new $2-billion line of credit it is arranging will leave it unable to achieve its financial targets.

On the TSX, shares of the company tumbled $11.10 to close at $5.99. 

The drop is the latest step down for the stock after the Ontario Securities Commission revealed it had launched action against the company and several current and former executives. The OSC alleges the company mishandled a scandal involving falsified loan applications. Home Capital denies those allegations and says it will defend itself.

Prior to the start of trading Wednesday, Home Capital told the market it had reached a deal in principle with an unnamed major institutional investor for the line of credit, which will secured against a portfolio of mortgages its Home Trust division has originated.

Under the terms of the credit line, Home Trust would be required to pay a non-refundable fee of $100 million and make an initial draw of $1 billion. The interest rate on outstanding balances would be 10 per cent, and the standby fee on undrawn funds would be 2.5 per cent. 

That would give the deal an effective interest rate of 22.5 per cent on the first $1 billion, if it's used, Laurentian Bank analyst Marc Charbin said in a note after the news emerged.

In announcing the new line of credit, Home Capital also revealed its balance for its high-interest savings accounts (HISA) dropped by $591 million between March 28 to April 24 to approximately $1.4 billion. March 28 is notable because that is the day after Home Capital said it had terminated ​CEO Martin K. Reid.

"The company anticipates that further declines will occur, and that the credit line would also mitigate the impact of those," Home Capital said in a release on Wednesday.

The company said the credit line, when combined with its current available liquidity, would give Home Trust access to more than $3.5 billion in funding, more than twice the outstanding high-interest savings account balances.

'"Access to these funds is intended to mitigate the impact of a decline in Home Trust's HISA deposit balances that has occurred over the past four weeks and that has accelerated since April 20," the company said. April 20 was the day the OSC launched its action against Home Capital.

The company's deposit products, such as guaranteed investment certificates, help fund its mortgages, although recent media reports indicate some banks have put a $100,000 per-client limit on sales of Home Capital's GICs.

The company said Home Trust's GICs deposits remained essentially unchanged between March 28 and April 24, at more than $13 billion.

Charbin said not only is the interest rate on the credit facility five times the rate on deposits, "but this announcement also suggests deposit brokers are losing faith in [the company] and, worst case, this could cause a 'run on the bank.'"

"The  greater concern for [Home Capital] with this press release is whether deposit brokers and other deposit holders will lose faith in Home Capital due to management credibility, primarily, and the housing market, secondarily," Charbin wrote in a note to clients.

Earlier this week, Home Capital said founder and former CEO Gerald Soloway, who was named in the OSC action, plans to step down from the company's board of directors. In addition, chief financial officer Robert Morton will shift out of that role after the company files its first-quarter results. Morton was also named in the OSC proceedings.