DBRS Maintains Home Capital Group Inc. and Home Trust Company Ratings Under Review – Negative following Investment Announcement

DBRS Limited (DBRS) has today maintained the ratings of Home Capital Group Inc. (HCG or the Group) and of its primary operating subsidiary, Home Trust Company (HTC or the Trust Company), Under Review with Negative Implications where they were placed on May 3, 2017.

This action follows HCG’s announcement that Berkshire Hathaway Inc. (Berkshire) has agreed to indirectly acquire $400 million of the Group’s common shares on a private-placement basis and to provide a new $2.0 billion line of credit through a wholly owned subsidiary of Berkshire. The initial investment of approximately $153 million is subject to the Toronto Stock Exchange (TSX) accepting the notice of investment with an exemption from the requirement to obtain shareholder approval pursuant to the “financial hardship” provisions of the TSX Company Manual. This process is expected to be completed by June 29, 2017. An additional investment of approximately $247 million would be subject to shareholder approval at a special meeting expected to take place in September 2017. Together, the two investments would result in Berkshire indirectly owning approximately 38.39% of HCG.

In addition, the Group will draw on the proposed new line of credit to repay all outstanding amounts on the Healthcare of Ontario Pension Plan facility that currently stand at $1.65 billion. The new credit facility has substantially the same terms as the existing facility, but with slightly lower interest rates.

DBRS views today’s developments as positive for HCG, given the reputational backing of an investor such as Berkshire; however, DBRS notes that the capital injection that the investment would provide is not significant relative to the Group’s liquidity and funding needs. Furthermore, the new credit facility replaces the existing facility with only somewhat better terms. As such, DBRS continues to review the Group’s ongoing viability in light of uncertainty regarding deposit outflows and will evaluate any further steps that HCG takes to stabilize its liquidity and funding profile at a reasonable cost, including the potential sale or securitization of assets. Another consideration is the Group’s ability to finalize the hiring of key senior management and repair any adverse impacts on its franchise caused by developments since April 2017.

RATING DRIVERS
Ratings could be lowered if HCG is unable to stem deposit outflows and obtain funding at a reasonable cost.

Conversely, the trend on the ratings could revert to Stable if the Group is able to stabilize its funding and liquidity profile while demonstrating a clear path to sustainable profitability.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (May 2017), which can be found on dbrs.com under Methodologies.

Lead Analyst: Maria-Gabriella Khoury, Vice President – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG & Sovereign Ratings

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com.