By Jonathan Stempel
Warren Buffett has again ridden to the rescue of an embattled company in desperate need of a vote of confidence.Berkshire Hathaway Inc's (BRKa.N) commitment of a C$2 billion (US$1.51 billion) credit facility to Home Capital Group Inc (HCG.TO), Canada's largest nonbank lender, marks the billionaire's latest effort to shore up a company in dire need of cash."It's a traditional, opportunistic Berkshire transaction," said Cathy Seifert, a CFRA Research equity analyst, in an interview. "For Home Capital, the assumption is that Berkshire did its due diligence, and came to a conclusion that there was presumably a franchise and business model worth saving. It implies a seal of approval."Home Capital shares soared as much as 18 percent, but was still more than two-thirds below the 2014 peak.The investment in Home Capital, which has acknowledged responsibility for mortgage fraud, also lets Omaha, Nebraska-based Berkshire deploy a small piece of its recent $96.5 billion hoard of cash, equivalents and Treasury bills."Today's announcement is a modest positive," wrote Meyer Shields, a Keefe, Bruyette & Woods analyst. "But it also reflects how difficult it is for Berkshire to meaningfully use its cash."Berkshire also agreed through its Columbia Insurance unit to buy up to C$400 million (US$302 million) of Home Capital shares for a 38.4 percent stake, pending shareholder and regulatory approvals.The credit line carries an interest rate of at least 9 percent, and Berkshire could collect C$180 million if fully tapped.
Buffett came to be seen as a lender of last resort during the global financial crisis.From 2008 to 2011, Berkshire spent more than $25 billion to buy high-yielding stocks and bonds in such companies as Bank of America Corp (BAC.N), Dow Chemical Co (DOW.N), General Electric Co (GE.N), Goldman Sachs Group Inc (GS.N) and Harley-Davidson Inc (HOG.N).With those investments having passed, the 86-year-old Buffett has been struggling to generate income in a persistently low interest rate environment."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," Buffett said in a statement.
Berkshire did not respond to a request for further comment.HOUSING, REPUTATION RISKS
Home Capital has suffered a deposit exodus resembling a bank run since mid-April, when the Ontario Securities Commission accused it of deceiving investors.Last week, the company reached separate settlements with the regulator and investors over making misleading statements about its mortgage underwriting.
Berkshire's investment reflects its willingness to commit to companies whose practices have drawn criticism.These include Wells Fargo & Co (WFC.N), now embroiled in scandal for creating unauthorised customer accounts, and Coca-Cola Co (KO.N), often faulted for its sugary drinks."Reputational risk is why he's getting 9 percent interest" at Home Capital, said Seifert.The investment comes after Berkshire withdrew a U.S. regulatory application in April to boost its Wells Fargo stake above 10 percent, citing limits on its business ties to the largest U.S. mortgage lender.Berkshire has more than 90 units, including manufactured home company Clayton Homes, ice cream chain Dairy Queen and HomeServices of America, the second largest U.S. residential real estate brokerage.Its foray into Canada comes amid uncertainty about that country's housing sector. The government has levied a 15 percent tax on foreign buyers to cool a frothy Toronto-area real estate market.Buffett is "not going to stop the credit cycle up there," said Marc Cohodes, a short seller betting against Home Capital. "But it's a bailout by the most renowned investor on the planet." (Reporting by Jonathan Stempel in New York; Additional reporting by Trevor Hunnicutt; Editing by Jennifer Ablan and Jeffrey Benkoe)
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Updated Date: Jun 23, 2017 01:30 AM