OSC Killing Home Capital Group

Terence Corcoran: The Kool-Aid man out to kill Home Capital raises a glass to the OSC

An investment banker with one of Canada’s major banks, surveying the devastated state of Home Capital Group, has a question: “I want to know why the OSC (Ontario Securities Commission) perpetrated this thing.” Did Home Capital, whose shares have lost 70 per cent of their value since April 19, “perpetrate a fraud on the market?

Home Capital Buyout Rumours

So who’d want to buy Home Capital Group and why? Before considering who, let’s first consider why. What would the buyer of Home Capital get and how might this transaction be structured?  First, could a big bank wring value from HCG?  Probably not, the big banks such as BNS, RY, CM, TD, BMO can source better quality mortgages on their own terms without needing a portfolio of mortgages from HCG. What about competitors such as EQB and FN? They have a similar business model, and they could probably clean up HCG’s mortgage book and further leverage relationships in the mortgage channel?  The problem with this logic is EQB and FN are about the same size as HCG, and if the quality of HCG’s mortgage portfolio is less than expected, it would drag down the buyer, possibly also causing a larger bankruptcy. Its pretty risky for EQB and FN to buy HCG, and there is limited upside. A better strategy for EQB and FN, and its the one that EQB has taken, is to play defense and arrange for liquidity to get by the near term GIC redemptions.

What about a larger firm such as Brookfield?  I guess its possible, but not likely. This would be a departure for Brookfield, but it does have some logic. If Brookfield could fund $10 to $15 billion in the short term, it could satisfy GIC redemptions and put the mortgages into a MIC, even offering this MIC to the secondary market (as a private equity or public listing). It would take some time to do the re-organization, but Brookfield has the capacity for this and could certainly find financial partners. Once the MIC was setup, it could be re-capitalized further diversified. This type of strategy would preserve the HCG mortgage and deposit brokerage relationships.

All of this is armchair speculation. I think the most likely next step now is to find further information from the OSC on their claims and settlement process.  Also, I think investors need to know more details on the quality of the HCG mortgage book, is it indeed full of holes or could it stand up on its own?

 

OSC should be blamed for Home Capital destruction

Terence Corcoran: Home Capital Group didn’t just fall from the edge of a cliff – it was pushed

By now most Canadians have likely seen the Home Capital Group Inc. stock graph, a Rocky Mountain plunge that began April 19 at $22 before hitting bottom a few days later at $6, wiping more than $1 billion off the value of one of Canada’s most successful non-bank mortgage lending enterprises.