Bloomberg – Home Capital Group Inc. plunged the most on record after disclosing that it struck a deal for a C$2 billion ($1.5 billion) credit line to counter dwindling deposits, at terms that will leave the alternative mortgage lender unable to meet financial targets.
The non-binding agreement with an unnamed counterparty will be secured by a portfolio of mortgage loans originated by Home Trust, the Toronto-based firm said in a statement Wednesday. Home Capital shares dropped 59 percent as of 10:24 a.m. in Toronto to the lowest since 2003, dragging down other home lenders. Equitable Group Inc. fell 17 percent, Street Capital Group Inc. fell 13 percent, while First National Financial Corp. declined 7.6 percent.
Home Capital will pay 10 percent interest on outstanding balances and a non-refundable commitment fee of C$100 million, while standby fee on undrawn funds is 2.5 percent. The initial draw must be C$1 billion. The loan has an effective interest rate of 22.5 percent on the first C$1 billion, declining to 15 percent if fully utilized.
22.5% effective interest rate? That is surprising given that Canada’s Central Bank has an Overnight Lending Rate 0f only 0.5% (lower than The Fed’s 1% Fed Funds Target Rate).
The reaction in Home Capital’s stock?
With Home Capital’s earnings per share looking like American retailers’ EPS (that is, falling like a rock), this is not surprising.
Like the US, Bank of Canada has suppressed their target to far below what the Taylor Rules calls for.
I could say that the correction came after the Toronto Maple Leafs lost their playoff series in ice hockey to the Washington Capitals, but that would be incorrect. But Canada’s home lenders are choking like the Leafs did.