Home Capital bond investors poised for Buffett-powered gains

Home Capital has 'ample liquidity' to redeem debt, CFO says

Home Capital bond investors poised for Buffett-powered gains
Home Capital Group Inc. debt investors who took a bet on the Canadian mortgage lender when its survival was in doubt are poised to reap the rewards of their gamble.

Bonds of the beleaguered lender fell below 90 Canadian cents on the dollar last year and some yields hovered near 16% as the Toronto-based company was engulfed by accusations that its portfolio was tainted by falsified home-loan applications.

Less than 12 months later, the notes are trading close to their original value, thanks in part to a bailout and a $2 billion loan from Warren Buffett’s Berkshire Hathaway Inc.

Home Capital is likely to fully repay its $475 million of institutional deposit notes that come due starting in March by tapping into $4.7 billion of liquidity, according to an RBC Capital Markets report.

Read more: Industry wades into latest Home Capital litigation

“We’re comfortable they can address their short-term debt with existing sources of liquidity,” said Darren Arrowsmith, a portfolio manager at CI Investments’ Signature Global Asset Management in Toronto, which bought Home Capital bonds as they sold off. “I’m not sure exactly when they return to the debt market for funding, but they have made great headway in repairing their credibility, are undoubtedly working with banks to replace the existing credit line.”

Home Capital, a lender that underwrites mortgages for people who have trouble qualifying to borrow at Canada’s big banks, saw retail investors rush to pull their deposits last year after a regulator said former executives failed to properly disclose that brokers had been falsifying mortgage applications. After initially saying the allegations were without merit, the company later took full responsibility.

Home Capital worked to improve its disclosure, the key issue that caused the crisis, by providing daily liquidity updates throughout the summer, which helped shore up investor confidence, Arrowsmith said. Bonds issued by Home Capital’s bank subsidiary maturing in March and December are trading around their issue price, according to data compiled by Bloomberg.

“We have ample liquidity to redeem the notes if we determine that is the best path for the business,” Brad Kotush, chief financial officer of Home Capital, said in emailed statement. “We will announce our intentions in due course.”

The company is facing additional legal claims related to its disclosures after it settled a class-action lawsuit and an action brought by the Ontario Securities Commission.

Related stories:
Laurentian’s flawed mortgages echo Home Capital troubles