Home Capital debt rating cut by DBRS

DBRSLtd. says it has cut its credit rating on alternative mortgage lender Home Capital Group Inc. after the company delayed the release of its quarterly results, while maintaining its rating onEquitable Group Inc.

The rating agency said it downgraded Home Capital's senior debt toCCC from BB, anddowngraded the ratings ofHomeTrust Company, HCG's primary operating subsidiary, to B from BB (high). DBRS says a CCC rating indicates "very highly speculative credit quality," while a BB is considered "speculative, non-investment grade credit quality."

DBRS said the rating changes reflect concern over recent events, including Home Capital Group's announcement Tuesday that it has postponed the release of its first-quarter earnings from May 2 to May 11.

• Home Capital delays release of quarterly earnings

"DBRS considers this delay in announcing results as a negative, especially given that the initial Ontario Securities Commission's (OSC) hearing regarding the Statement of Allegations made against three former members of [Home Capital Group's] senior management is scheduled forMay 4, 2017," the rating agency said.

"These events are likely to continue to draw unfavourable attention to the Group," DBRS added.

Earlier this week, Home Capital tapped the first $1 billion of a high-interest credit line itarranged as it faced a high volume of client withdrawals from deposit accounts. Those client deposits are used by Home Capital to finance its lending, and the big outflows led to concerns over the company's financial state.

• Home Capital uses $1B from line of credit to stem tide of savings account withdrawals
• What you need to know about Home Capital's woes

Faced with the those worries, investors have hammered the share price of Home Capital in recent weeks.

Turning to Equitable Group Inc., a competitor to Home Capital in the alternative mortgage business, DBRSsaid Equitable's first-quarter results remain solid.

"Following severe deposit outflows at its primary competitor that raised the possibility of contagion,Equitableannounced a letter of commitment for a two-year, $2.0 billion secured backstop funding facility from the six large Canadian banks at a cost that should still allow the Group to deliver sound financial results, if drawn upon," DBRS said.

"In DBRS's view, the results and liquidity backstop provide support for the ratings as they should support market confidence."

The rating agency has a BBB (low) rating on Equitable Group's senior debt.

DBRS said it is still concerned about the state of the housing markets in the Toronto and Vancouver areas, adding that about 64 per cent of Equitable's outstanding mortgage balances are in Ontario, while only eight per cent are in B.C.

"As such,Equitableis particularly sensitive to what happens in the [Greater Toronto Area]," DBRSsaid. "The authorities have taken recent steps to try to cool off the GTA market as they did in the GVA last year but, at this point, it is too early to tell if the measures will work or if they will effect a pricing correction."