Signs for Home Trust Co., a subsidiary of Home Capital Group Inc., are seen outside the company's headquarters in Toronto.Cole Burston/Bloomberg
Warren Buffett doesn't come cheap. Just ask Home Capital Group Inc.
His Berkshire Hathaway Inc. has agreed to indirectly buy $400-million of Home Capital's shares – at a steep discount to the current trading price – and provide a new $2-billion line of credit on slightly better terms than the emergency loan the Toronto-based mortgage lender received in April.
Here's how the financing will work.
The equity portion of the deal is broken up into two chunks.
Berkshire, through subsidiary Columbia Insurance Co., will make an initial investment of $153.2-million to acquire more than 16 million shares of Home Capital, which represents a stake of nearly 20 per cent in the company. Each share will be issued at $9.55, which is about half of Thursday's closing price of $19.
Home Capital says the discount is not as large as it seems, because Berkshire actually made its final offer on June 13. The shares closed at $11.30 that day. Since then, the company announced a major asset sale to raise cash and stabilize its financial position and reached a settlement in a regulatory case with the Ontario Securities Commission. Both moves caused the share price to rise.
While such a stock sale would normally be subject to a shareholder vote, Home Capital is trying to bypass this and speed things up by relying on an infrequently-used clause in the Toronto Stock Exchange's company manual called the "financial hardship exemption."
Home Capital expects the TSX will approve its proposed use of the exemption after five business days, in which case it will close on June 29.
Berkshire has agreed to make another investment – also through Columbia – of $246.8-million to buy another 24 million shares of Home Capital at $10.30 a share. This deal, however, requires a green light from investors, which will be sought at a special meeting in September.
If both transactions are completed, Berkshire will own a stake of almost 39 per cent in Home Capital at an average price of $10 a share. Private placements such as these have to be held for at least four months.
Berkshire is also lending Home Capital $2-billion to repay its existing credit facility, which was given in April by the Healthcare of Ontario Pension Plan (HOOPP).
It is slightly cheaper than the HOOPP loan: There is no upfront commitment fee. The interest rate on outstanding balances will decline to 9.5 per cent from the current 10 per cent, while the standby fee on undrawn funds will decrease to 1.75 per cent from the current 2.5 per cent.
Once Berkshire makes its initial investment in Home Capital, these amounts will drop to 9 per cent and 1 per cent, respectively.