Home Capital report casts doubt on its future as a going concern

Home Capital Group, Canada's biggest non-bank lender, said on Thursday that uncertainty around its future funding capabilities had cast doubt about whether it would be able to continue as a going concern.

The company made the admission alongside first quarter results that showed its adjusted earnings per share, which exclude one-off items, rose to $1.02 in the first quarter from $0.96 in the same period the year before, in line with guidance it gave last month.

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"Management believes that material uncertainty exists regarding the company's future funding capabilities as a result of reputational concerns that may cast significant doubt upon the company's ability to continue as a going concern," Home Capital said in a statement.

Depositors have withdrawn more than 90 per cent of funds from Home Capital's high-interest savings accounts since March 27, when the company terminated the employment of former chief executive Martin Reid.

The withdrawals accelerated after April 19, when Canada's biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business. The company has said the accusations were without merit.

Talks on $2B asset sale

Reuters reported on Thursday that Home Capital was in talks to divest about $2 billion in assets to help pay down a high-interest loan, according to people familiar with the situation.

The company wants to sell all or part of its commercial mortgage portfolio, its consumer finance business and a small portion of its traditional residential mortgage portfolio to raise the $2 billion, the people said.

Shares in the company rose by 23.4 per cent to $10.81, having more than doubled in value since the start of the week as investors digested moves to stem a flow of customer withdrawals. However, the stock has still fallen by more than 60 per cent since the end of March.

U.S. buyout firms Cerberus Capital Management L.P., Fortress Investment Group LLC and Apollo Global Management LLC are among those in active talks with Home Capital about buying some of its assets, the people said, declining to be named as the matter is not public.

Home Capital, Cerberus, and Apollo declined comment. Fortress did not respond to requests for comment.

'Focus is on finding more sources of funding'

Home Capital expects the proceeds of the sales to help repay a $2-billion loan from the Healthcare of Ontario Pension Plan, which provided a high-interest line of credit last month, the people said. The company has said it plans to secure a loan on more favourable terms.

"Management's focus is on finding more sources of funding in the near term so we can be more active serving our customers, and on seeking longer-term solutions that put the business back on track," interim chief executive Bonita Then said in the statement.

Caisse de dpt et placement du Qubec, as well as other pension funds and some private equity firms, are in talks with Home Capital about providing an alternative loan, the people said. Caisse declined to comment.

Home Capital's commercial mortgage business, which includes both residential and non-residential mortgages targeting higher-quality borrowers, may be worth about $2 billion, the people said. The consumer finance business includes secured and unsecured credit cards and could be worth about $400 million, the people said. Home Capital could also sell as much as $1 billion in single-family residential mortgages, the people said.

The sale of assets, if successful, is likely to delay the sale of the entire company, the people said.

Home Capital said on Tuesday it had agreed to sell mortgages or mortgage commitments worth $1.5 billion to an unnamed buyer.