Home Capital / Equitable Group Discussion #2

A few news items which are salient as this saga continues:

1. Home Capital announced a HISA balance of CAD$521 on Friday, April 28 and a GIC balance of $12.97 billion. On May 1, this is $391 million and $12.86 billion, respectively (another $220 million gone in a day). Their stock is down 21% as I write this.

2. Equitable announced their quarterly earnings and are up 35%. This was a pre-announcement as they previously stated they would announce on May 11, 2017. They announced:

* A dividend increase.

Between Wednesday and Friday, we had average daily net deposit outflows of $75 million, with the total over that period representing only 2.4% of our total deposit base and with the most significant daily outflows being on the Wednesday. Even after those outflows, our portfolio of liquid assets remained at approximately $1 billion.

Obtained a letter of commitment for a two-year, $2.0 billion secured backstop funding facility from a syndicate of Canadian banks, including The Toronto-Dominion Bank, CIBC, and National Bank (“the Banks”). The terms of the facility include a 0.75% commitment fee, a 0.50% standby charge on any unused portion of the facility, and an interest rate on the drawn portion of the facility equal to the Banks’ cost of funds plus 1.25%. This interest rate is approximately 60 basis points over our GIC costs and competitive with the spreads on our most recent deposit note issuance, and as such will allow us to continue growing profitably.

So their credit facility cost $15 million to secure $2 billion (relative to $100 million for HCG), lasts two years (relative to 1 year for HCG), and also have a standby charge of 0.5% (which is 2.0% less than HCG), and a real rate of interest of approximately 3% (compared to HCG paying 10% for their outstanding amount, and I’m assuming the Bank’s “cost of funds plus 1.25%” works out to around 3%).

I haven’t had a chance to review their financial statements in detail yet. But securing two billion on relatively cheap terms like this is going to be a huge boost to their stock in the short run.

Very interesting.

Genworth MI (TSX: MIC) is also down a dollar or 3.5% today, which is more than the usual white noise of trading. It dipped even lower today.

9 thoughts on “Home Capital / Equitable Group Discussion #2”

  1. Their pref share (EQB.PR.C) are costing them 6.35%.

    Unless they are in deep trouble until then , they should redeemed them to get cheaper debt.

  2. They’d rather suspend the dividend instead of redeeming their preferreds. Raising the dividend was a bold move (trying to signal strength to the market).

    The terms of the credit facility, however, must be interpreted as favourable to them.

  3. Home Trust unsecured debt maturing May 24, 2017 (yes, less than a month) is priced at 94 cents on the dollar.

  4. From our chicken farmer HCG shorter:

    “Marc Cohodes‏ @AlderLaneeggs 22 h ago
    I am NOT Short Genworth Canada for the Guy running it knows all too well about the Underwriting at HCG.They should have limited Exposure”

  5. chicken farmer…hehehe.
    Hey Sacha, there is no link on this page to get back to the previous page (of this discussion)…unless I’m missing it. You have to navigate by going to the home page, then finding it. Not sure if that’s important or not, as the threads are usually not this long.
    Anyways, as I said earlier in the discussion, I had placed an order at 5.00 x 300….got as low as 5.06….to bad, would of been another nice little gain….oh well.

  6. Hi Marc, the first discussion was here: http://divestor.com/?p=7442#comments

    Thijs: Interesting (and smart, I might add). I also notice that short borrow rates for HCG have bottomed (you can borrow for less than 1%! Yippee!). EQB is actually more expensive now at around 6.5%-ish.

  7. Shorts won the HCG battle because of “divine intervention” rather than their prediction being proven right (house market collapse or highly questionable asset on HCG balance sheet).

    I think EQB maybe a downfall for the shorts though (just like how they never get it right with MIC), unless they dig up some real skeleton in the closet. The Finance Minister jawbone the banks into lending EQB a lifeline so there seems to be a real effort to contain this mess. On a side, EQ Bank’s saving account rate of 2.3% have gone up from 2% at the beginning of the year – I’m rather tempted to open an account there and park some money there.

  8. Speaking of parking some money in EQ Bank or Home Trust, since both are protected by CDIC insurance I do not see any risk in getting my money back but are there any other risks that I am not aware of such as when would I get my money back if either one was to default?

  9. Hi Frank, if EQ or HCG did go under, you’d probably get your $100k back from CDIC in a week. Anything more will be subject to the usual CCAA processes.

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