Home Capital Group Inc. will end its $2-billion credit agreement with the Healthcare of Ontario Pension Plan just months after it entered into the deal in late April.
The troubled mortgage lender announced Thursday it has received a $2-billion credit line and a $400-million investment from Columbia Insurance Co., a wholly-owned subsidiary of Berkshire Hathaway Inc., the multinational conglomerate led by Warren Buffett.
Berkshire Hathaway will acquire more than 16 million common shares of Home Capital for $153.2 million and make an additional investment of more than $246.8 million to acquire nearly 24 million shares. The second investment is subject to shareholder approval, but once the transactions are complete, Berkshire Hathaway will have a 38.4 per cent stake in the Toronto-based company. Under the deal, Berkshire Hathaway will receive a significant discount on the shares it’s purchasing, according to The Canadian Press.
Read: Can Home Capital ‘plug the gap’ with $2B from HOOPP?
As a result of the new agreement, Home Capital plans to terminate its agreement with HOOPP and will draw on the new loan to pay the $1.65 billion it owes the pension fund.
Home Capital’s board of directors has been trying to restore confidence in the company since April, said Brenda Eprile, chair of its board of directors, in a news release. “This is a very important step on that road. This investment from Berkshire not only addresses Home Capital’s near-term requirements for additional liquidity and a lower-cost credit agreement, but also facilitates what the board feels is the best available path to long-term success.”
The new loan provides Home Capital with a lower interest rate of 9.5 per cent in comparison to HOOPP’s 10 per cent. Berkshire Hathaway also plans to lower the rate to nine per cent after it completes its initial investment.
Read: HOOPP’s chief executive quits Home Capital board, citing potential conflict
The new credit agreement offers better conditions, including a lower standby fee of 1.75 per cent, compared to HOOPP’s 2.5 per cent, that will decrease to one per cent after Berkshire Hathaway’s initial investment; no upfront commitment fee; the ability to prepay funds drawn on the loan facility at any time; and a guarantee against terminating the loan for a year.
Home Capital noted that apart from those conditions, the new credit agreement’s terms are almost identical to those of the old one.
The mortgage lender has been trying to reduce its debt for months as it deals with large withdrawals from deposit accounts that followed disclosure allegations by the Ontario Securities Commission. Earlier this month, the company agreed to sell a group of commercial mortgages valued at $1.2 billion to investment firm KingSett Capital Inc. It has also agreed to settle the OSC allegations and a class action lawsuit.
Editor’s note: Home Capital’s debt to HOOPP added June 23 at 8:43 a.m.