Smith Financial to buy Home Capital Group in $1.7B deal as mortgage industry under strain

TORONTO – Mortgage lender Home Capital Group Inc. has agreed to be bought by SmithFinancial Corp. in a deal that values the company at $1.7 billion as the sector feels the strain from rising interest rates and economic uncertainty.

Under the agreement, SmithFinancial said Monday it will pay $44 in cash per share for the shares in Home Capital it does not already own, a 63 per cent premium from its $27.05 closing price Friday on the Toronto Stock Exchange.

Home Capital board chair Alan Hibben said the all-cash offer provides certainty for shareholders.

“The transaction is in the best interests of the company and fair, from a financial point of view, to shareholders,” he said in a statement.

The mortgage industry has been under pressure as interest rates rise and the real estate market slows from the heightened activity seen during the pandemic, with alternative lenders open to potentially higher risk as they often provide mortgages to borrowers who don’t qualify for a loan from the big banks.

Home Capital reported earlier this month that its third-quarter earnings fell 29 per cent from a year earlier as interest margins worsened and mortgage originations dropped about 23 per cent.

National Bank analyst Jaeme Gloyn estimated last month that Home Capital borrowers could face up to a $1,190 increase in their monthly mortgage payments over the next year, with about two-thirds of borrowers needing to renew their mortgage in the time frame.

Much higher debt service burdens, combined with eroding home prices, could lead to increased losses at lenders, and push regulators to take action, Gloyn said.

Another mortgage lender, Romspen Investment Corp., said on Nov. 9 that it was halting investor redemptions as “loan payoff activity remains suppressed.”

“The current volatile economic conditions have created dislocations in North American real estate markets,” the Romspen trustees said in their notice, while noting they are confident they will manage through this “challenging phase.”

SmithFinancial, which already owns 9.1 per cent of Home Capital, is the family holding company of Stephen Smith, who is active in the Canadian financial space as executive chairman and co-founder of First National Finance Corp., chairman of Canada Guaranty Mortgage Insurance Co., and co-owner of Duo Bank of Canada.

Smith said in a statement that Home Capital is a strategic asset with more than three decades of experience building up a diversified presence across Canada and a trusted position as a lender and deposit-taker.

“I look forward to owning another business with a bright future,” Smith said.

Gloyn wrote in a note Monday that SmithFinancial‘s proposed deal is “good value” since it represents a valuation higher than Home Capital has seen in recent years.

Home Capital’s share price has seen significant swings in recent years, topping $54 in 2015, then plunging to around $8 in 2017 amid issues of mortgage fraud.

The company settled with the Ontario Securities Commission on the fraud allegations and brought on Warren Buffett’s Berkshire Hathaway as a temporary investor to help it through a liquidity crunch at the time.

In August, Home Capital rejected an unsolicited, non-binding and conditional takeover offer from what it said was an arm’s-length third party.

The company did not release specific details of the earlier proposal, but said it was an all-cash offer and topped the maximum purchase price of $28.60 per share offered under its substantial issuer bid. Home Capital said at the time that the offer undervalued its shares and fell short of reflecting the company’s intrinsic value and its future growth potential.

The deal, which is expected to close in the middle of 2023, requires approval by a two-thirds majority vote of Home Capital shareholders as well as court and regulatory approvals and other customary closing conditions.

This report by The Canadian Press was first published Nov. 21, 2022.

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