Home Capital Group Inc. shares surged higher Thursday on news that the troubled mortgage lender has arranged $400-million in equity investments and other financial support from companies run by famed billionaire investor Warren Buffett.
A subsidiary of Berkshire Hathaway, Buffett's main company, will also also provide a new $2-billion line of credit on better terms than an expensive cash infusion provided to Home Capital by one of Ontario's large pension funds.
"We believe this represents a turning point for Home Capital as we look to restore investor and depositor confidence in the company," Home Capital interim chief executive Bonita Then said Thursday in a conference call with financial analysts.
- Home Capital sells $1.2B in mortgages
- Home Capital to pay $29.5M to settle OSC, class-action matters
Home Capital shares were up $4.06 or more than 27 per cent to close at $19 on the Toronto Stock Exchange.
The stock plunged below $10 a share for several weeks after customers started withdrawing their deposits from deposit accounts that Home Capital uses to fund its mortgage lending.
That followed allegations that Home Capital misled investors in its disclosures. However, Home Capital agreed last week to settle both the Ontario Securities Commission allegations and a class-action lawsuit.
While the investment from Berkshire Hathaway can be seen as a vote of confidence, it is acquiring its shares in Home Capital at a significant discount from where they are trading today and with certain approvals required.
Under the agreement, it will make an initial investment of $153.2 million for 16 million Home Capital shares at a price of $9.55, representing a 19.99 per cent stake in the company, subject to approval by the TSX.
Berkshire Hathaway has also agreed to make a second investment of $246.7 million for nearly 24 million shares at a price of $10.30, which would take its stake in Home Capital to 38.4 per cent, subject to shareholder approval.
The Berkshire credit facility will charge a slightly lower interest rate than charged by the Healthcare of Ontario Pension Plan.
The interest rate will initially drop to 9.5 per cent and then to 9.0 per cent, after the initial investment closes. HOOPP's interest rate has been 10 per cent.
The Berkshire Hathaway agreement comes a day after Home Capital Group said it was selling $1.2 billion in mortgage assets to KingSett Capital, a private equity firm focused on real estate.