Home Capital draws $1B from line of credit to keep afloat

Embattled alternative mortgage lender Home Capital Group has drawn $1 billion from its new $2-billion line of credit, the company said Monday, using the money to prop up its Home Trust subsidiary after clients withdrew hundreds of millions of dollars worth of savings.

"Access to these funds is intended to mitigate the impact of a decline in Home Trust's high interest savings account (HISA) deposit balances," Home Capital said in a news release.

That balance was "expected to be approximately $391 million on Monday, May 1, after settlements of Friday's transactions," the company said. That's about $1 billion less than the balance from a week ago.

• What you need to know about Home Capital's woes
• Home Capital says another $290M pulled from accounts
• Shares in Home Capital plummet almost 65%

The news release added that the terms of its new line of credit "will have a material impact on earnings," sending a warning to investors that previous financial targets won't be met. The company is set to report its quarterly earnings on Wednesday.

Home Capital's line of credit included a "non-refundable commitment fee" of $100 million for the first $1 billion used. In conjunction with the standby interest rate charged, the effective interest rate on the loan is more than 22 per cent.

The press release also said the balance of total guaranteed investment certificates has fallen to $12.86 billion as of Friday, down from $13.01 billion as of last Monday.

Line of credit with tough terms

Shares in Home Capital closed down 13 per cent on Monday, dropping $1.08 to finish at $6.96.

Shares also tumbled last week following allegations from Ontario's securities watchdog that it misled investors, accusations Home Capital says are without merit and has promised to defend itself against. The news spurred many savers to withdraw their deposits, which Home Capital uses to fund its lending.

The Healthcare of Ontario Pension Plan gave the $2-billion credit line last week to Home Capital, but the terms of that loan have raised fears that Home Capital is in urgent need of cash.

The Ontario Securities Commission has scheduled a hearing into the allegations against Home Capital for Thursday.

While shares of Home Capital tumbled again, the stock of another alternative mortgage lender, Equitable Group, rallied almost 30 per cent on Monday after the company said it has arranged a two-year, $2-billion funding deal with  a syndicate of Canadian banks, including TD Bank, CIBC, and National Bank. Shares of Equitable gained $10.86 to close at $47.35 on the TSX.

Equitable said the credit deal includes a 0.75 per cent commitment fee and an interest rate equal to the banks' cost of funds plus 1.25 per cent. 

In a release, Equitable said that between Wednesday and Friday of last week clients pulled out an average of $75 million daily from deposits with the company. Equitable said the total amount pulled out over the three days represented 2.4 per cent of its deposit base.

Andrew Moor, the president and CEO of Equitable Group, called those withdrawals a "modest amount" in an interview Monday with Peter Armstrong, host of CBC News Network's On the Money.

Moor also expressed confidence in the quality of the company's mortgages.

"We've been through those books so deeply we know every corner of those," Moor said. "There are no problems in our mortgages. I can tell you that for sure."