Canadian lender Home Capital Group’s shares soared as much as 18% to its highest since April on Thursday after billionaire Warren Buffett‘s Berkshire Hathaway agreed to provide a new C$2 billion loan facility.
Berkshire Hathaway will also take a 38.4% stake in the company after buying $400 million worth of Home Capital stock.
Home Capital had sought new funding to replace a costly emergency credit line it received on April 26 from the Healthcare of Ontario Pension Plan (HOOPP) after depositors rushed to withdraw funds from its high-interest savings accounts.
Depositors have pulled 95 percent of funds from Home Capital’s high-interest savings accounts since March 27, when the company terminated the employment of former Chief Executive Officer Martin Reid.
The withdrawals accelerated after April 19, when Canada’s biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business.
Home Capital last week reached a settlement with the commission and accepted responsibility for misleading investors about mortgage underwriting problems.
The HOOPP funding came with an effective interest rate of 22.5 percent on the first C$1 billion drawn down, including a non-refundable commitment fee.
The new credit agreement with Berkshire comes with an interest rate of 9 percent, with a standby fee on funds not drawn down of 1.75 percent, compared with 2.5 percent previously. It has no additional fees attached.
Berkshire will buy C$400 million in new Home Capital shares, issued at C$9.55 per share, a 15 percent discount to the average share price prior to Berkshire Hathaway’s final proposal on June 13 and a 33 percent discount to Wednesday’s closing price.
Home Capital Director Alan Hibben said the lender had interest from over 70 parties prior to the investment from Berkshire Hathaway.
“We had over 70 people under NDA (non-disclosure agreement) within the data (room). They were not just Canadians, there were global players involved with that,” Hibben told analysts on a conference call.
“Other proposals that we received were not as attractive to us with respect to the cost of the backstop,” he added.
The stock rose as high as $18.94 before easing to $16.65, up 11.4 percent.
