Business

Home Capital debt rating cut by DBRS

DBRS Ltd. says it has cut its credit rating on alternative mortgage lender Home Capital Group Inc. after the company delayed the release of its quarterly results, while maintaining its rating on Equitable Group Inc.

OSC hearing into Home Capital's current and former executives to be held Thursday

Home Capital Group's subsidiaries include Home Trust and Oaken Financial. DBRS has cut its rating on Home Capital Group. (Chris Helgren/Reuters)

DBRS Ltd. says it has cut its credit rating on alternative mortgage lender Home Capital Group Inc. after the company delayed the release of its quarterly results, while maintaining its rating on Equitable Group Inc.

The rating agency said it downgraded Home Capital's senior debt to CCC from BB, and downgraded the ratings of HomeTrust Company, HCG's primary operating subsidiary, to B from BB (high). DBRS says a CCC rating indicates "very highly speculative credit quality," while a BB is considered "speculative, non-investment grade credit quality."

DBRS said the rating changes reflect concern over recent events, including Home Capital Group's announcement Tuesday that it has postponed the release of its first-quarter earnings from May 2 to May 11.

"DBRS considers this delay in announcing results as a negative, especially given that the initial Ontario Securities Commission's (OSC) hearing regarding the Statement of Allegations made against three former members of [Home Capital Group's] senior management is scheduled for May 4, 2017," the rating agency said. 

"These events are likely to continue to draw unfavourable attention to the Group," DBRS added.

Earlier this week, Home Capital tapped the first $1 billion of a high-interest credit line it arranged as it faced a high volume of client withdrawals from deposit accounts. Those client deposits are used by Home Capital to finance its lending, and the big outflows led to concerns over the company's financial state.

Faced with the those worries, investors have hammered the share price of Home Capital in recent weeks.

Turning to Equitable Group Inc., a competitor to Home Capital in the alternative mortgage business, DBRS said Equitable's first-quarter results remain solid.

"Following severe deposit outflows at its primary competitor that raised the possibility of contagion, Equitable announced a letter of commitment for a two-year, $2.0 billion secured backstop funding facility from the six large Canadian banks at a cost that should still allow the Group to deliver sound financial results, if drawn upon," DBRS said.

 "In DBRS's view, the results and liquidity backstop provide support for the ratings as they should support market confidence."

The rating agency has a BBB (low) rating on Equitable Group's senior debt.

DBRS said it is still concerned about the state of the housing markets in the Toronto and Vancouver areas, adding that about 64 per cent of Equitable's outstanding mortgage balances are in Ontario, while only eight per cent are in B.C.

"As such, Equitable is particularly sensitive to what happens in the [Greater Toronto Area]," DBRS said. "The authorities have taken recent steps to try to cool off the GTA market as they did in the GVA last year but, at this point, it is too early to tell if the measures will work or if they will effect a pricing correction."

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