TORONTO _ Home Capital Group Inc. (TSX:HCG) shares lost more than half their value in early trading on Wednesday after the mortgage lender warned it would be unable to meet its financial targets under the terms of a new credit line it is working to secure.
Home Capital sought the credit line as savers stepped up withdrawals from the high-interest savings accounts of its Home Trust subsidiary, used by the company to fund its lending.
The lender’s stock price had already taken a hit last week after staff at Ontario’s securities regulator alleged that the company, two former CEOs and the current CFO broke the law in their handling of a scandal involving falsified loan applications. The company has said the allegations are without merit and vowed to defend itself.
The company said Wednesday that Home Trust has reached a non-binding agreement in principle with a unidentified major institutional investor for a $2-billion credit line. But it warned that the terms of the proposed agreement “would have a material impact on earnings, and would leave the company unable to meet previously announced financial targets.”
A firm commitment for the credit line was expected to be agreed to later today.
Shares in Home Capital fell $10.26 to $6.83 in late-morning trading on the Toronto Stock Exchange.
Home Capital said Wednesday that high-interest savings account balances have fallen by $591 million in the period from March 28 to April 24. The total high-interest savings account balance stood at roughly $1.4 billion at April 24.
“The company anticipates that further declines will occur, and that the credit line would also mitigate the impact of those,” Home Capital said in a statement.
Home Trust’s guaranteed investment certificate deposits remained essentially unchanged over that time at roughly $13.01 billion as of April 24 compared with $13.06 billion at March 28.
Combined with Home Trust’s current available liquidity, the credit line will provide access to more than $3.5 billion in total funding, the company said.
The $2-billion loan facility will be secured against a portfolio of mortgages originated by Home Trust and mature in 364 days.
Under terms of the proposed deal, Home Trust will be required to pay a non-refundable commitment fee of $100 million and make an initial draw of $1 billion. The interest rate on outstanding balances will be 10 per cent, and the standby fee on undrawn funds will be 2.5 per cent.
On Monday, Home Capital announced that chief financial officer Robert Morton, who is one of the three men named in the OSC allegations, will be assigned new responsibilities after first-quarter results are filed next month.
It also said Home Capital founder Gerald Soloway, who was formerly the company’s chief executive and also named in the allegations, will step down from the board of directors once a replacement is found.