HCG.to - Home Capital Group

[Liberty]

http://www.theglobeandmail.com/report-on-business/chair-of-embattled-home-capital-confident-about-company-future/article34771194/

 

Uh oh.  It's official Scotia not offering HCG GIC's on their platform.  Too much reputational risk for these banks to offer their GIC's last bank offering will look terrible to their clients.  If other banks follow Scotia this company is done.

 

I'm reading that CIBC has also stopped offering their GICs, but haven't confirmed yet.

[TBW]

If true, they are done as it will be just a matter of time till all 5 do the same.  No bank wants to be the last to allow people to buy their GIC's.

 

I wonder what the spillover effects will be.  Certainly EQB could see an effect.  Not sure who else.  Any ideas?

[Liberty]

Cranking GICs rates sign of financing crunch?

 

https://twitter.com/Keubiko/status/856244698075234304

[Uccmal]

If true, they are done as it will be just a matter of time till all 5 do the same.  No bank wants to be the last to allow people to buy their GIC's.

 

I wonder what the spillover effects will be.  Certainly EQB could see an effect.  Not sure who else.  Any ideas?

 

This looks like it is starting to cascade.  I will be surprised if they aren't bankrupt pretty quickly.  If they cant securitize their mortgages, they cant keep the money flowing, and then cant pay their labour and/or broker channels.  Bad scene.  The collateral damage will be anyone who bought bonds that contain bad mortgages.  Small slice of what happened in the US.  Even if nearly all the mortgages perform HCG could still be toast just from a cash crunch.  Reputation is everything in the securitization business.  I have never shorted a stock, yet....

[clutch]

So could HCG going under trigger bursting the bubble?

[bskptkl]

  I have never shorted a stock, yet....

Just tried to short on IB - none available to short...

[Liberty]

Home Capital Founder Soloway to Step Down After OSC Allegations

 

https://www.bloomberg.com/news/articles/2017-04-24/home-capital-founder-soloway-to-step-down-after-osc-allegations

 

Soloway will depart when a replacement with "recognized financial expertise" is named, the Toronto-based company said in a statement on Monday. Director Robert Blowes will be interim chief financial officer after first-quarter results are filed -- expected May 3 -- and former CFO Robert Morton will take on responsibility for special projects outside the financial reporting group.

[KCLarkin]

If they cant securitize their mortgages, they cant keep the money flowing, and then cant pay their labour and/or broker channels.  Bad scene.  The collateral damage will be anyone who bought bonds that contain bad mortgages.  Small slice of what happened in the US.  Even if nearly all the mortgages perform HCG could still be toast just from a cash crunch.  Reputation is everything in the securitization business.  I have never shorted a stock, yet....

 

To be clear, the issue isn't securitized loans. That business model is pretty much extinct for uninsured loans in Canada. The core loan portfolio is funded by brokered deposits (typically CDIC-eligible GICs). So the collateral damage would be the CDIC or anyone with deposits that aren't CDIC-eligible.

 

Also, note that Scotia has added HCG back on their list of eligible GICs, with a cap of $100,000 per account (which would be CDIC-eligible). So it is seems like the run on the bank might be deferred. As long as HCG has the CDIC backstop, it might survive. But funding costs are definitely going up.

[Uccmal]

So could HCG going under trigger bursting the bubble?

 

So far its unanswerable. 

 

An aside:  One of my largest holdings is First National.  I am also a customer and am well acquainted with how strict First National's lending process is.  When I remortgaged 2.5 yrs. ago, First National had me close my Heloc with TD, sent a person out to verify the residence and assign a value, which was below market, and verified our incomes.  It was rigourous.  We went back to TD to arrange a new Heloc, and went through a similar rigourous process. 

 

I dont think the conventional lenders like TD, BMO, and FN are fueling the bubble. 

 

I dont know about HCG.  I took a pass on ot a few times over the years due to their subprime exposure and the high prices that have persisted for years. 

[Uccmal]

If they cant securitize their mortgages, they cant keep the money flowing, and then cant pay their labour and/or broker channels.  Bad scene.  The collateral damage will be anyone who bought bonds that contain bad mortgages.  Small slice of what happened in the US.  Even if nearly all the mortgages perform HCG could still be toast just from a cash crunch.  Reputation is everything in the securitization business.  I have never shorted a stock, yet....

 

To be clear, the issue isn't securitized loans. That business model is pretty much extinct for uninsured loans in Canada. The core loan portfolio is funded by brokered deposits (typically CDIC-eligible GICs). So the collateral damage would be the CDIC or anyone with deposits that aren't CDIC-eligible.

 

Also, note that Scotia has added HCG back on their list of eligible GICs, with a cap of $100,000 per account (which would be CDIC-eligible). So it is seems like the run on the bank might be deferred. As long as HCG has the CDIC backstop, it might survive. But funding costs are definitely going up.

 

I was using the term loosely.  FN issues the mortgages, packages them, and sells the majority to institutions looking for income at rates somewhat better than they would get from treasuries.  Then FN, collects fees to administer the mortgages.  And they keep some on board for their own book. 

 

Thanks for the details KC. 

[Liberty]

It's looking like they're having to pretty rapidly increase their GIC rates to attract capital, which has to compress their net interest margin:

 

 

Via:

[Liberty]

Also looks like Ratehub.ca had stopped listing Oaken (HCG) GICs.

[KCLarkin]

Also looks like Ratehub.ca had stopped listing Oaken (HCG) GICs.

 

Best not to over-react. Oaken has been raising rates during this crisis. Most likely explanation is that Ratehub was simply updating with the rates. Oaken is back on Ratehub now.

[Liberty]

Also looks like Ratehub.ca had stopped listing Oaken (HCG) GICs.

 

Best not to over-react. Oaken has been raising rates during this crisis. Most likely explanation is that Ratehub was simply updating with the rates. Oaken is back on Ratehub now.

 

In the current fluid environment, I thought it was material that they were gone. Obviously it's also material that they are back, so thanks for posting.

 

I think it probably says something that they have to offer much higher rates than others. Time will tell, I suppose.

 

http://i.imgur.com/zv0Ws7I.png

[Liberty]

This is probably not a good sign:

 

http://www.newswire.ca/news-releases/home-capital-announces-non-binding-agreement-in-principle-with-major-institutional-investor-for-credit-line-of-2-billion-620463103.html

 

Home Capital Group Inc. ("The Company" TSX: HCG) announces that its subsidiary, Home Trust, has reached a non-binding agreement in principle with a major institutional investor for a credit line in the amount of $2 billion. It is expected that a firm commitment will be agreed to later today.

 

The $2 billion loan facility would be secured against a portfolio of mortgages originated by Home Trust.

 

Home Trust would be required to pay a non-refundable commitment fee of $100 million and make an initial draw of $1 billion. The interest rate on outstanding balances would be 10 per cent, and the standby fee on undrawn funds would be 2.5 per cent. The facility would mature in 364 days.

 

Chaser:

 

Home Capital also advises that the terms of the proposed agreement would have a material impact on earnings, and would leave the Company unable to meet previously announced financial targets.

 

Also:

 

HISA balances have fallen by $591 million in the period from March 28 to April 24. The total HISA balance stood at approximately $1.4 billion as at April 24. The Company anticipates that further declines will occur, and that the credit line would also mitigate the impact of those.

[petec]

Wow.  2.5% on undrawn amounts?  How normal is that?

[Liberty]

Wow.  2.5% on undrawn amounts?  How normal is that?

 

It's probably normal if you're lending to someone desperate enough... The mafia probably does that kind of stuff.

 

The math is even worse than it looks at first glance:

 

 

[TBW]

They were done without this life preserver, so cheap money from that pov.

 

Feels, to me, that this was probably coordinated by regulators.  Otherwise why not disclose who the lender is.

 

I still think this company fails, although this does extend their life a bit.

[Liberty]

They were done without this life preserver, so cheap money from that pov.

 

Feels, to me, that this was probably coordinated by regulators.  Otherwise why not disclose who the lender is.

 

I still think this company fails, although this does extend their life a bit.

 

When secured short term borrowing is costing you between 15% and 22.5% a year and your business is about confidence and making a spread between what you borrow and what you lend, you're done.

[Liberty]

Stock down 42% at the open. Ouch.

[petec]

That's a fat fee.  Institutional investor sounds like it's not a bank.

[KCLarkin]

Pretax earnings in 2016 were just over $300M. Assuming they use the full credit line, this alone will wipe out all earnings this year. AND this is a secured loan. All those unsecured (but insured) GICs are only earning 2%. I don't see how this does anything other than accelerate the bank run. Stunning.

[TBW]

EQB is next.  Same issues, broker sourced mortgages, no reserves, shaky funding model (mostly GICs), and on a dangerous housing mkt.

 

I wrote about them and HCG in my last newsletter for clients

[KCLarkin]

EQB is next.  Same issues, broker sourced mortgages, no reserves, shaky funding model (mostly GICs), and on a dangerous housing mkt.

 

When HCG tightened their underwriting, EQB started taking market share. The brokers found a new lender who was willing to overlook a little fraud.

[rb]

Pretax earnings in 2016 were just over $300M. Assuming they use the full credit line, this alone will wipe out all earnings this year. AND this is a secured loan. All those unsecured (but insured) GICs are only earning 2%. I don't see how this does anything other than accelerate the bank run. Stunning.

I agree with this and what TBW said. They're done! Has anyone seen a bank surviving a run without gov't intervention? Not even central banks with unlimited resources like to lend in a run.

 

They've lost more than a quarter of their deposits in a month. Likely to accelerate after the recent developments. 100m fee + interest will chew through the net income as an appetizer and then enjoy a big helping of their capital as the main course. The end.