Coverage: Buffett pumps $1.8 billion into Canadian lender

Billionaire investor Warren Buffett has pumped $1.8 billion into Home Capital Group, a Canadian mortgage lender that spent the last month shoring itself up after depositors abandoned it in droves after accusations of fraud.

Michael de la Merced of the New York Times had the news:

Late on Wednesday, Home Capital disclosed that it had sold a 38 percent stake in itself to an insurance unit of Mr. Buffett’s Berkshire Hathaway, at a deeply discounted price of 400 million Canadian dollars, or about $300 million. Moreover, it accepted a 2 billion Canadian dollar loan from Mr. Buffett’s group, carrying a 9 percent interest rate, to replace an existing and slightly more expensive credit line.

It is the latest instance of Mr. Buffett entering into a financially fraught deal that most other lenders would avoid.

Mr. Buffett operates with advantages envied throughout the business world. His empire, and in particular its vast insurance operation, which includes Geico, generates enormous sums of cash, with $84 billion on its books as of March 31. Berkshire carries one of corporate America’s highest credit ratings. And Mr. Buffett favors moving quickly and decisively.

“Berkshire is the 800 number when there is really some panic in the markets and people really need significant capital,” Mr. Buffett declared at the 2013 annual shareholder meeting.

But in spite of his image as the world’s cuddliest capitalist, those in distress often learn firsthand just how ruthless a businessman Mr. Buffett can be. He prefers quick discussions and tends not to negotiate on price.

Nathan Vardi of Forbes reported that Buffett has invested in other troubled companies:

Buffett’s $5 billion investment in Goldman Sachs after the collapse of Lehman Brothers helped restore confidence in the U.S. financial system and turned into a home run bet for him. The long boom in Canadian housing, particularly in key markets like Toronto and Vancouver, has seen signs of reversing amid new regulations and taxes on foreign buyers brought on to keep the housing sector from overheating.  At the same time, Home Capital’s troubles have reminded some of the issues U.S. subprime lenders faced as the U.S. housing sector collapsed, an idea that has been promoted by short sellers betting against Home Capital’s stock.

Shares of Home Capital are down by more than 70% since their 2014 peak. Securities regulators in Ontario accused the company and three of its former top executives in April of hiding mortgage underwriting problems, helping spark some depositors to cash out their funds in Home Capital savings products. The company’s stock has rebounded from its May lows when it looked like the company could maybe collapse and Home Capital most recently struck a deal to sell half its mortgages for $870 million. Last week Home Capital and its three former executives settled their case with Ontario securities regulators, agreeing to pay $23 million.

As is always the case, Buffett’s financial and confidence-building lifeline does not come cheap. Buffett’s initial private placement share purchase allows Berkshire’s Columbia Insurance unit to become a 20% owner of Home Capital at a 20% discount to its recent stock price. The deal calls for Columbia to eventually own 38% of the company. Buffett’s one-year line of credit to Home Capital carries interest rates of 9% to 9.5%.

Kristine Owram of Bloomberg News reported that other Canadian lenders saw their stock price rise on Thursday:

The S&P/TSX financials index gained as much as 0.9 percent in Toronto on Thursday, with some lenders hitting their highest levels since before the Home Capital downturn intensified April 19. Buffett’s Berkshire Hathaway Inc. on Wednesday agreed to buy a 38 percent stake and provide a C$2 billion ($1.5 billion) credit line to backstop the embattled Toronto-based lender.

Mortgage insurer Genworth MI Canada Inc. added as much as 14.4 percent, its biggest intraday gain ever, and touched C$38.07, the highest since March 16. First National Financial Corp. rose as much as 4.7 percent to C$27.46, the highest since March 3. Street Capital Group Inc. and Equitable Group Inc. rose as much as 12 percent.

Rising financial shares, which account for some 34 percent of the S&P/TSX Composite Index, pushed the benchmark gauge up 0.8 percent.

“By injecting confidence in Home Capital, you’re effectively spreading around confidence virtually everywhere,” said Ross Healy, a Home Capital shareholder and chairman of Toronto-based Strategic Analysis Corp. “It’s in Buffett’s best interest to make sure the earnings bounce back and bounce back quickly.”