Home Capital Group Inc. has struck an agreement to sell a portfolio of commercial mortgages worth about $1.2-billion as it seeks to shore up its finances.
Through its Home Trust subsidiary, Home Capital will sell the commercial mortgage assets to KingSett Capital, a private-equity firm focused on real estate, injecting the troubled mortgage lender with a shot of much-needed liquidity.
Under the terms of the deal, KingSett will buy the portfolio for 99.61 per cent of its outstanding principal value, "less a share of future credit losses," according to a news release. Initially, Home Trust will receive 97 per cent of the remaining principal value of the mortgages in proceeds, with the remainder subject to credit losses on the mortgages.
Home Capital expects to lose about $15-million on the transaction, based on its expectations about the health of the portfolio, and plans to close the agreement in two tranches during the third quarter of 2017.
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"This transaction will help the company further stabilize its liquidity position and highlights the flexibility and options created by the quality of our assets," said Bonita Then, Home Capital's interim president and chief executive officer, in a statement. "Proceeds from the transaction are expected to have an immediate impact by enabling us to enhance our liquidity and reduce the outstanding debt under the Company's $2-billion credit facility."
After suffering a crisis of confidence and a run on deposits in recent months, Home Capital has been kept afloat by a $2-billion credit line from the Healthcare of Ontario Pension Plan, which carries an onerous 10-per-cent annual interest rate. The company has drawn all but $350-million of the credit.
Last week, Home Capital and three former senior executives agreed to settle an enforcement case with the Ontario Securities Commission, as well as a class-action lawsuit with investors. Markets reacted positively, and Home Capital's share price climbed 12.7 per cent in a single day last week. But Home Capital's total deposits, which it uses to fund its mortgage book, are slowly dwindling.
Investment bankers at Bank of Montreal and Royal Bank of Canada, who have been leading a process to explore asset sales on Home Capital's behalf, advised on the deal with KingSett.
Home Capital's share price was up more than 5 per cent in early trading on the Toronto Stock Exchange.