Home Capital draws $1B from line of credit to keep afloat

Embattled alternative mortgage lender Home Capital Group has drawn $1 billion from its brand new $2 billion line of credit, the company said Monday, using the money to prop up its Home Trust subsidiary after clients withdrew hundreds of millions of dollars worth of savings.

“Access to these funds is intended to mitigate the impact of a decline in Home Trust’s High Interest Savings Account (HISA) deposit balances,” Home Capital said in a press release.

That balance was “expected to be approximately $391 million on Monday, May 1 after settlements of Friday’s transactions,” the company said. That’s about $1 billion less than the balance from a week ago.

The press release added that the terms of its new line of credit “will have a material impact on earnings,” sending a warning to investors that previous financial targets won’t be met. The company is set to report its quarterly earnings on Tuesday.

Home Capital’s line of credit included a “non-refundable commitment fee” of $100 million for the first $1 billion used. In conjunction with the standby interest rate charged, the effective interest rate on the loan is more than 22 per cent.

The press release also said the balance of total guaranteed investment certificates has fallen to $12.86 billion as of Friday, down from $13.01 billion as of last Monday.

Line of credit with tough terms

Shares in Home Capital were down about 22 per cent on Monday morning.

Shares also tumbled last week following allegations from Ontario’s securities watchdog that it misled investors, accusations it says are without merit and has promised to defend itself against. The news spurred many savers to withdraw their deposits, which Home Capital uses to fund its lending.

The Healthcare of Ontario Pension Plan gave the $2 billion credit line last week to Home Capital, but the terms of that loan have raised fears that Home Capital is in urgent need of cash.

The Ontario Securities Commission has scheduled a hearing into the allegations against Home Capital on Thursday.