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Berkshire Hathaway Takes Substantial Stake in Canada’s Home Capital Group

Home Capital Group, the largest unsecured mortgage lender in Canada, has agreed to an investment by Berkshire Hathaway in an effort to put recent troubles behind it. Those troubles began in May when the Ontario Securities Commission accused the lender of not disclosing an internal probe into mortgage fraud in 2014 and 2015, sending shares of the company reeling and inciting a significant number of depositors to withdraw their funds.

Home Capital has not had sharply rising delinquencies or bad loans as many lenders do who seek a capital injection, but it badly needed a source of capital to continue funding its mortgage portfolio as deposits decline. Emergency funding had originally been obtained from the Healthcare for Ontario Teachers Pension Plan in the form of a C$2 billion line of credit at a rate of 2.5% for unused funds and 10% for borrowed funds. Berkshire’s investment includes a C$2 billion line of credit that will replace the one provided by the Pension Plan, with slightly better terms of 9% for borrowed funds and 1.75% for unused funds.

Home Capital Group’s recent financial performance.

The deal will also allow for Berkshire to take a major stake in the lender by buying 40 million shares, equal to 38% of the company, for C$10 per share. With shares rising today on the news of the investment to C$16.94, Berkshire has already made a paper profit of C$278 million on its C$400 million investment.

The price being paid by Berkshire values all of Home Capital at C$642 million, meaning the acquisition will be at about 2.6x last year’s earnings. Even with today’s rise, the current multiple of the stock is still only 4.4x. If Berkshire’s gamble that the capital injection will restore confidence in the company and eliminate funding concerns, it could stand to make much more than it already has.

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