Home Capital shares surge after funding deal with Berkshire Hathaway

Shares of Home Capital, which almost collapsed in April, soared 23 percent to C$18.38 after it said billionaire Warren Buffett's Berkshire would provide a C$2 billion ($1.51 billion) loan to its Home Trust Co unit.

Berkshire said it would acquire a minority stake in Home Capital for about C$400 million through two private placements at an average price of C$10 a share, 33% less than the company's C$14.94 closing share price on Wednesday.

Cohodes said betting against Home Capital "has been great", with the stock down 47 percent from C$31.34 at the start of the year to C$16.54 price on Thursday.

When the purchases are complete, Berkshire said it would only vote 25% of its Home Capital stock, to comply with Canadian regulations that restrict investors from voting more than 25% of bank shares.

"Home Capital's strong assets, its ability to originate and underwrite well-performing mortgages, and its leading position in a growing market sector make this a very attractive investment", said Buffett, Berkshire chairman and CEO.

Together, the investments represent an nearly 39 per cent equity stake in Home Capital, although Berkshire has agreed that it will only cast votes based on 25 per cent of the shares it will hold.

OTTAWA, June 22 Canada's main stock index rose on Thursday as the financial and resource sectors advanced, while non-bank lender Home Capital Group jumped after it said it would get a line of credit from Berkshire Hathaway Inc.

This kind of bet is in keeping with Mr. Buffett's history of investing in distressed financial institutions on favourable terms, most famously in the United States during the 2008 financial crisis, when he invested billions in Goldman Sachs Group Inc. and other firms.

Berkshire did not respond to requests for further comment.

"The board decided it would be nice for a sponsor to give us a view where somebody could say "wow, if that smart person thinks the Home Capital business model and portfolios are good, I'm going to think that", he said.

It reached a settlement with the commission last week and accepted responsibility for misleading investors about mortgage underwriting problems. Zacks Investment Research cut Berkshire Hathaway from a "hold" rating to a "sell" rating in a research report on Friday, April 28th.

Warren Buffett's rescue of struggling Canadian mortgage lender Home Capital Group Inc.is his latest move to secure generous returns in exchange for backing businesses that other investors are fleeing.

Berkshire has more than 90 units, including manufactured home company Clayton Homes, ice cream chain Dairy Queen and HomeServices of America, the second largest USA residential real estate brokerage. In general, a company with a score closer to 0 would be seen as undervalued, and a score closer to 100 would indicate an overvalued company. The government has levied a 15 percent tax on foreign buyers to cool a frothy Toronto-area real estate market.

Read: Can Home Capital "plug the gap" with $2B from HOOPP?

Johnson's connection to Buffett began more than two decades ago, when he was working on a potential Canadian deal and crossed paths with the investor.

  • Zachary Reyes