Buffett Stuns Market After Berkshire Acquires 38.4% Of Home Capital Group, Provides C$2 Billion Loan

Tyler Durden's picture

In a stunning development involving Canada's largest alternative lender which as recently as a month ago was facing virtually certain insolvency after a furious depositor run drained it of liquidity, overnight Home Capital Group announced that billionaire Warren Buffett's Berkshire Hathaway will indirectly acquire C$400 million ($300 million) of the firm’s shares in a private placement through its Columbia Insurance unit, for about a 38.4% stake, and will aso provide a new C$2 billion ($1.50 billion) line of credit to its unit Home Trust Co, ending the Canadian lender's strategic review process.

"Home Capital's strong assets, its ability to originate and underwrite well-performing mortgages, and its leading position in a growing market sector make this a very attractive investment," said Warren Buffett, Berkshire chairman and CEO, failing to comment on the lender's numerous regulatory problems.

Aside from the rescue loan, Berkshire will make an initial investment of C$153.2 million to buy 16 million common shares and an additional investment of C$246.8 million to purchase 24 million shares through a private placement.  In total, Berkshire will hold an about 38.39% equity stake in Home Capital after buying 40 million shares at an average price of about C$10.00 per common share, a 33% discount compared with yesterday’s closing price of C$14.94.

"Berkshire's investment is a strong vote of confidence,” in the long-term value of the business, Brenda Eprile, Home Capital’s chairwoman. Canada's biggest non-bank lender also said it will continue to explore further asset sales and financing deals over the next year, but has concluded its strategic review process that began in April.

Many market watchers were stunned by this news, and were scratching their heads at why Berkshire would take the reputation risk of having exposure to a company which as recently as a month ago was in the regulator's crosshairs for peddling "liar loans." As a reminder, last week, Home Capital reached a C$30.5 million settlement with the Ontario Securities Commission, settled a class action lawsuit and accepted responsibility for misleading investors about problems with its mortgage underwriting procedures.

Once upon a time, Buffett would run from companies such as this; now he is actively drawn to them.

In any case, the move will likely assure an interim turnaround in the 30-year-old lender after a regulator in April accused it of misleading shareholders on mortgage fraud, which sent its shares tumbling, sparked withdrawals and threatened to disrupt Canada’s real estate sector. Earlier this week, Home Capital agreed to sell a clutch of commercial mortgages to affiliates of KingSett Capital Inc. for C$1.16 billion in cash.

"This investment from Berkshire not only addresses Home Capital's near-term requirements for additional liquidity and a lower-cost credit agreement, but also facilitates what the Board feels is the best available path to long-term success," Home Capital's Chair Brenda Eprile said.

According to Bloomberg, the deal replaces an existing emergency credit facility on better terms, Home Capital said. The share purchase will be done in two parts: an initial investment of C$153 million for about a 20 percent equity stake, then an additional investment of C$247 million taking the stake to about 38 percent. The second phase requires extra approvals. Berkshire will not be granted any rights to nominate directors and has agreed to only vote shares representing 25 percent of the company’s stock, Home Capital said.

Home Capital shares have more than doubled since bottoming in April when its troubles began to accelerate but remain about 73 percent down from their peak in 2014. The company last week took full responsibility over allegations the lender misled shareholders about mortgage fraud and agreed with three former executives to pay more than C$30 million to reach settlements with regulators and investors.

So why is the octogenarian taking on the credibility risk through this particular investment? For the same reason as explained two months ago in "Warren Buffett Now Selling US Houses To Chinese Oligarchs" - Berkshire is seeking offshore housing markets, and after seeking access to the "desirable" Chinese homebuyer universe  with its HomeServices unit, it now is hoping to access Canada.

He may find a cool reception: Buffett’s Berkshire Hathaway is wading into a tense Canadian housing market, with Toronto house prices cooling after being hit with a 15 percent tax on foreign buyers and tighter mortgage regulations, and confidence shake by the Home Capital drama. Meanwhile, prices are surging in Vancouver again after being sideswiped by similar policy moves.

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DennisR's picture

Canadian government bailout coming in 3... 2... 1?

jcaz's picture

Little tip, Canada?   You don't want "Uncle Warren" owning your debt-  he'll pick your bones clean.......

Rubicon's picture

He received instruction.

blue51's picture

Are Buffet & Soros just shell companie / banks for the shadow players?

doctor10's picture

holding up the collateral for the derivative house of cards

mtl4's picture

Buffet never gives loans without back door guarantees, this smells dirty as hell and something wicked this way comes.

Creative_Destruct's picture

Warren is apparently convinced the flood of Chinese money desperate to find a parking place outside of the extremely shaky Chinese financial system and away from Yuan risk will not soon be detered by Canadian bubble conditions. He may be right. Then again, similar  backroom deals and connections that got him a windfall in 2008 may be at work here to make him overly confident and this time such a move may not be such a slam dunk.

Would love to see this ass-hat get his his head handed to him. But even a 2-Billlion hit ain't much against a 416.8 Billion market cap.

el buitre's picture

The Fed and the ESF have Buffet's back.  This bankrupt Cannuck subprime mortgage lender could be the pin before our masters decide that it is the proper time.  I vaguely recall the Buffet lent the Vampire Squid a huge amount of cash around Sept 2008 at a very high rate of interest before the Fed bailed them out through paying off AIG's CDS's 100% on the dollar.

nope-1004's picture

This was another bailout of an insolvent institution.  Buffett didn't "invest", he baliled them out from certain bankruptcy.

This action by Buffett was clearly nothing more than to keep the financial system from facing reality.

Endgame Napoleon's picture

Question: Why is China in such of frenzy of middle-class home buying?

Answer: That is where American Elites invested their money, creating a market of middle-class workers there, while the middle class in their own country sank into the quicksand.

targayren hous's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.jobproplan.com

ceilidh_trail's picture

Yeah, but not everyone wants to be an online dildo tester.

Luckhasit's picture

Best comment, right on target.

Rip van Wrinkle's picture

It's simply so fucking obvious.

SoDamnMad's picture

No, US cross-awap gobbly gook taxpayer bailout.

Endgame Napoleon's picture

True, he probably thinks Bailout II is politically and fiscally impossible in this country, or, like y'all are saying, he is trying to prop up the industry in other countries because of the interconnections with US banking, hoping to bolster enough support beams to keep the global house of cards standing.

Rothbardian in Cleveland's picture

Pretty sure the "Oracle of Omaha" only invests in taxpayer backed opportunities.  Whoever said risk and return are correlated hasn't met Warren.

 

Y'all notice the landscape is peppered with creepy, old, corrupt fuckers that are long overdue for their dirtnaps?

Bay of Pigs's picture

Indeed. His purchase of Goldman Sachs shares comes to mind. In other words, he knows he can't lose. The Canadian taxpayer has his back.

GunnerySgtHartman's picture

Eh, between this and Berkshire Hathaway Home Services, Buffett's trying to lock up the Ontario real estate market.  Any rapid Canadian government bailout is just a bonus.  /s

Scuba Steve's picture

Yep, but it will be announced as something else.

 

Putrid_Scum's picture

Reminds me of the Great Financial Crisis, when Buffet bought Goldman Sachs shares. He's an establishment man. It's all about confidence now, keeping the shell game going.

Putrid
www.beforethecollapse.com

There's even a date they think they can't get past. The real trigger is the Chinese cutting off money flows to the Property Ponzis in the West. How to solve that? There is no large scale solution. Buffett is putting a band aid on a dead patient.

Endgame Napoleon's picture

Did you read the part about Vancouver prices rising? The prices are inflated, but some areas are just nicer to live in, not just there but in this country, too. I am not sure that cool math is what motivates most buyers. Some of these "ponzis" are likely to stay afloat because of the inherent value in living in these places.

The problem with housing is two-fold: l1) the lack of high-paying and stable jobs and 2) the mass abandonment of marriage. Marriage just put people on a more stable path, leading to higher numbers of people able to pay off a mortgage over time, and before women stopped raising their own children, the job pool was not so diluted with workers. So, the man's wages were high enough to cover a middle-class lifestyle. The single, childless women who had to work had wages high enough to rent an apartment as well.

People who are not married and have no children often (mostly) prefer apartments and have less reason to sustain that mortgage for obvious reasons. We have fewer people in our households. Many of us cannot afford even the dignity of an apartment, but there are more of us all the time. Even though politicians ignore us and, in fact, bash us in the head with tax, welfare and family-centric workplace policies that favor working moms, we are one third of the US population, not even counting those under 40.

The majority of us won't be your home buyers, and that might have something to do with these trends, especially if you count the single women whose children are grown and the single men who were never custodial parents. This is a huge group. This -- like other groups -- is an increasingly single group with one source of earned-only income that must live on the mostly low wages from unreliable temp and part-time, churn jobs, with no backup welfare/taxfare income from Uncle Sam for sex and reproduction.

Some types of jobs may just naturally lead to stabler lifestyles. People want to poo poo manufacturing. But my area of the country has a semi housing bubble. It shows up in bright hues in about four areas of the city and the surrounding areas. These bubblets are often caused by people with a ton of retirement money, moving in here to avoid a state income tax, and I would not be at all surprised if people were moving here to avoid the impending economic collapse in big cities with lots of pension debt, welfare families and high crime. Supposedly, that is an international trend: a migration of wealth out of the big cities.

We have these pockets of wealth with value-added, quality-of-life factors, but the rest of the area looks nothing like it did 20 years ago. We have always had these sections with notable wealth, mostly old-money wealth, but some new-money people, too. All during this 20 years and beforehand, the manufacturing plants that moved from the heavily unionized North to the South were busy packing up and moving to Mexico and China.

There was not such a huge quality gap a few decades ago; the big move took awhile due to the South's low wage base. Whole sections of the city that were middle class 20 years ago are now blighted. Part of that is the mass flux of illegal immigration that drove overall wages down. Whole malls that were once hub malls--THE malls--drawing the wealthy and middle class alike are now literally closed. Many formerly middle-class areas are now poor.

The only middle-class oases in the whole city and surrounding areas are two areas with auto plants. And the jobs they provide are not even permanent for most employees. They have their older union workers and, otherwise, they hire temps, paying them much higher wages than most college grads are paid.

In the area with the Japanese-owned plant, there is lots of housing and retail activity, and it looks fresher and more prosperous. The same thing is true for the area with an American-owned plant. The combination of some permanent, older workers and these highly paid, young temps seems to boost up those areas.

Manufacturing jobs have a history of creating a middle class for whatever reason, probably just the extra money workers make, but it might be other things, like the general industriousness and hopefulness of the people who do that type of work.

Except in these pockets of wealth where the bubbles are, the service sector and the office job economy, in general, has done the exact opposite. I think it is because only the managers in the service sector are paid anything at all. They are the only ones who have stable employment and any kind of a future from work.

Putrid_Scum's picture

I see you're new here Napolean. There's a book you should read, called The Reset, Volume Three of The Philosophy of Capitalism.

Don't be put off by the pauciy of reviews, it's just that when people read it, they go into instant shock. If what was in that book was understood by the masses then there'd be an instant panic.  The System is finished buddy, take cover and survive.

Putrid

www.amazon.com/s/ref=nb_sb_noss?url=search-alias%3Daps&field-keywords=ca...

 

 

walküre's picture

much is already known but the series looks like a good summer's read when markets reach new ATH.. wait? do we have this summer?

Putrid_Scum's picture

I wouldn't bank on it. If you marry the System Framework with the real data---the System has Finished.

What follows The Reset is the most pressing question. I expect turmoil in the USA.

walküre's picture

Turmoil everywhere but also pockets where you can survive. Inside the US inside the EU and so on. A good clue to your chances of survival is how the locals treat their own people and what their heritage / cultural / spiritual background is.

Hint. Multicultural frameworks are D.O.A. as in YOU'RE DEAD ON ARRIVAL

As a white person, look for a place with at least 90% white population. Christians are less inclined to devour you for what you're worth than muslims or atheists. A place where people live with at least 3 generations of their OWN KIND in the same jurisdiction. Where people have been through political turmoil and survived. Hardhips have been overcome and the folks still remember how to plant potatoes.

Putrid_Scum's picture

I'm Irish...potatoes are good!

BLOTTO's picture

I love reading Zerohedge in the morning while i wake n' bake to some super lemon haze...
.
Solid comments as per usual.

Glyndwr will return's picture

Free money out of thin air buys you anything

EconoIdiot's picture

There is nothing sweeter than the smell of free money first thing in the morning.

Herodotus's picture

Perhaps he received a quid pro quo to purchase the Canadian Pacific or Canadian National Railway.

SithApprentice's picture

33% discount on price?  Was there warrant coverage or other covenants as well?  Probably will make a 50% return on this or worst case fold into the Berkshire brand if it fails.  Can't lose investment.

thunderchief's picture

The Midwest mobile home tycoon goes to Canada. 

Run for your livelihoods Canadians. 

Veruca Salt's picture

This c#nt is just looking to make money from another bailout ... coming soon. Genious is a relative term. 

syzygysus's picture

Recently overheard at Bohemian Grove:

Buffett, we all know it isn't yet time for the world wide collapse and war to reduce the population to 500,000,000, so we are proposing you take shares in HCG using this fiat we produced out of thin air. You'll get your dukedom in one of the 10 kingdoms we create after the fall.

Calculus99's picture

Ah shucks, he's just a coke drinking hamburger guy.

RealityCheque's picture

"Ah shucks, he's just a blood drinking pizza guy."

FIFY.

Downtoolong's picture

 

Never forget one of Buffett’s core mantras, which he learned early on from his mentors. He has stated it many times as something he attributes to his success.

 

“Wait until there is blood in the streets before you buy.”

 

In other words, profit from the misery of others.

 

 

    

Vardaman's picture

That's no way immoral if the "others" made their own misery.

GRDguy's picture

Don't forget Warren started his workdays with Goldman-Sachs.

The best mentor there is for lyin' and stealin' without going to jail.

Vardaman's picture

 I despise Buffett's "your taxes should be higher" spiel, but this looks like vulture capatalism in its best thought out form.

Hubbs's picture

Obviously an inside job with insider guarantees.

Catullus's picture

Looks like another TXU

gmak's picture

Buffett has always practiced predatory business (on those who can least resist). Just look at his insurance companies and their delays and refusal to pay on claims. Look at their mobile home lending business.

This will be no different. They will be preying on people who bought too much house and squeezing them. WHen there is nothing left, they will either make claims to CMHC (government) and / or seize the assets as well. If the .gov takes the assets (houses), they will probably buy the houses back for dimes on the dollar and then rent them out to the people who failed to pay their mortgage.

 

Rinse and repeat.

Vardaman's picture

Yeah, I get absurd joy from throwing out Geico mailings...