One industry veteran breaks down Berkshire Hathaway’s investment in the alternative lender, and identifies one clear winner in the transaction.
The investment from Warren Buffett’s company is a good sign for the stability of Home Capital, according to Ron Butler
, a broker with Butler Mortgage; but there is still much to be done.
“It’s absolutely a step in the right direction. Is the whole thing over and done?” Butler said. “You know it isn’t.”
Home Capital announced the successful completion of Berkshire Hathaway’s investment Thursday.
“This investment from Berkshire Hathaway validates the underlying strength of our business and marks another major step in the rebuilding of confidence in the company,” Brenda Eprile, Chair of the Board of Home Capital, said. “Through this transaction and the other significant actions we have undertaken, we are positioning Home Capital to succeed.”
The terms of the deal include a $153,225,739 investment to acquire 16,044,580 common shares on a private placement basis, representing an approximate 19.99% equity stake.
Berkshire has also agreed to make an additional investment of $246,774,261 to acquire 23,955,420 common shares; which, together with its initial investment, would represent an approximate 38.39% equity stake in the Home Capital.
In addition to the purchase, Berkshire has also agreed to a credit agreement at an initial rate of 9.5% for an outstanding loan initially taken out in May.
“The big winner is always Warren Buffett. Warren Buffett is always the big winner,” Butler said. “Not too many people can put money that is 100% secured against tangible assets that can get 9%.
“They also bought some shares below market price, which is good for Buffett. Obviously he understands that market very well.”
For Home Capital’s part, the investment represents the beginning of a potential turnaround for the embattled lender.
But there is still work to be done.
“There’s a lot to do. You need to retire the 9% money and turn it into deposit money. In other words, you have to stop deposit erosion and start getting deposits back. Because deposits are at 2.9% not 9%,” Butler said. “Until that happens, it’s very difficult for Home Trust
to act normally. But obviously it’s a very positive step.”
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