Home Working Capital Missive Of The Alphabet Grouping - It Is Fourth Dimension For The Canadian Regulator To Act
Home Capital Group is an aggressive Canadian habitation lender that has hitting a real stone oil patch. If you lot desire a history Twitter volition exercise it well. They guide keep been fighting with Marc Cohodes (a real good known curt seller) as well as you lot volition discovery a timeline of the unfolding disaster past times next Marc's tweets. [Disclosure: I guide keep known Marc for 17 years as well as nosotros are friendly.]
The crisis came this calendar week when Home Capital Group entered into an emergency loan. The press unloosen is here - but the salient points are repeated below.
This on the aspect upward of it is an extraordinary loan. It is secured by giving the collateral as well as costs something betwixt xv as well as 22.5 percentage depending on how much is borrowed.
Its too extraordinary because of what it does non mention. It does non scream who the lender is as well as it does non delineate what the precise working capital missive of the alphabet is.
But nosotros know that this is existence used to pay High Interest Savings Balances. We know at that spot is a run on the depository fiscal establishment hither here as well as the run is several hundred 1 one one thousand thousand dollars per day.
This is desperation financing. They are securing mortgages (average involvement charge per unit of measurement below five percent) to borrow funds that cost xv percentage or more. The negative send is huge. A fiscal establishment cannot remain inwards job organisation nether these terms.
The stock reacted - dropping lx percentage inwards a day. The Canadian central busted some trades virtually $8.20 (because it idea that they were done inwards error). Mine were alongside the busted ones. I was perfectly happy to sell at that toll even so inwards their wisdom the central idea that mine was a fat-finger trade. [Disclosure - transaction to sell 30,000 shares at 8.19 was reversed.]
--
Anyway the side past times side twenty-four hr menstruum nosotros flora out who the lender was. It was the Healthcare of Ontario Pension Plan (HOOP). This was odd because Jim Keohane was on the board of Home Capital as well as too the CEO of HOOP. Likewise Kevin Smith - Home Capital's Chairman - was on the board of HOOP.
The cries of conflict of involvement were loud as well as undeniable.
The side past times side twenty-four hr menstruum Keohane resigned from Home Capital's board as well as Smith resigned from HOOP's board.
--
Then (Friday Canadian time) Jim Keohane gave the most extraordinary interview. You tin dismiss discovery the whole thing here:
http://www.bnn.ca/video/home-capital-not-a-risky-investment-for-us-hoopp-ceo 1111585
But it is extraordinary because it gives the next details.
a). The loans are secured past times 200 percentage of their value inwards mortgages (which makes the investment almost riskless - as well as Mr Keohane goes to some lengths to depict how depression the adventure is), and
b). Me Keohane says the bargain is to a greater extent than akin to a "DIP deal". DIP stands for debtor inwards possession as well as he is thence maxim the bargain is bankruptcy finance.
This is an extraordinary seat for Mr Keohane to take. He was an insider to both institutions (a truthful conflict of interest).
What he is maxim is that he isn't taking whatever adventure because he has taken all the goodness collateral as well as he expects Home Capital larn popular off bankrupt.
And notation that he volition brand xv to 22.5 percentage render (more if the loan is repaid early on inwards a liquidation) whilst taking no risk.
I guide keep 2 words to order to this: fraudulent conveyance. In a rushed bargain (one that really surprised the market) done with undisclosed insiders upward to 4 billion of the collateral as well as mayhap 3 hundred 1 one one thousand thousand dollars of mass value has been spirited away. And at basically no adventure the recipient of all this largess.
Wow that was audacious. More audacious than merely virtually anything I guide keep e'er seen on Wall Street.
Jim Keohane seems to recognise what he has said because almost directly he says that he doesn't know what the acronym DIP stands for.
That surprised me: Mr Keohane uses the phrase DIP Financing exactly as well as accurately as well as inwards context as well as so says he doesn't know what it means. You should notation that Mr Keohane is a real sophisticated fixed income player. (If you lot desire a guide to how sophisticated read this...)
The seat of the Canadian Government
The Canadian Regulator is pose inwards an extreme bind. Up to $300 1 one one thousand thousand of value has been spirited away from a highly distressed institution.
The regulator even so has guaranteed a real large amount of funding of Home Capital (guaranteed deposits). They should move alarmed at upward to $4 billion inwards collateral existence spirited away to HOOP. This effectively subordinates the insured depositors as well as inwards the lawsuit of Home Capital's failure volition cost the taxpayer several hundred 1 one one thousand thousand dollars.
This is non an idle concern. The funding itself indicates that it is real probable Home Capital volition collapse. And a old manager described this equally akin to DIP Financing.
If I were the regulator
If I were the regulator I would move doing my duty here. My duty hither is to protect the taxpayer.
Very chop-chop Home Capital needs to discovery a buyer to assume the authorities insured obligations. It does non affair if this happens at 20c per share. Indeed from a regulatory perspective it is improve if it happens at a depression percentage toll because it gets rid of claims of bailouts inducing moral hazard.
If Home Capital cannot discovery a buyer so it should move liquidated. Immediately. And the transaction with HOOP should move reversed nether measure bankruptcy rules for reversing fraudulent conveyance. There is no argue that taxpayers should select subordination to a loan yielding 15-20 percent.
Indeed regulators guide keep a duty to halt that form of thing.
John
Disclosure: I am curt a pocket-size amount of Home Capital stock so I guide keep a vested involvement inwards its collapse. Canadian taxpayers are on the claw for billions inwards guarantees. They guide keep a bigger vested interest. Either way this 1 is toast. But a exceptional form of toast which allows HOOP to proceed all the cream as well as jam spread.
Also note: this is the kickoff Australian or Canadian mortgage lender to close collapse. That is an of import stride inwards the cease of the belongings bubble.
--
It is too worth noting that Wikipedia hand a measure listing of indicators that fraudulent conveyance has taken place. Most look to move triggered here.
The crisis came this calendar week when Home Capital Group entered into an emergency loan. The press unloosen is here - but the salient points are repeated below.
TORONTO – Apr 27, 2017 – Home Capital Group Inc. (“The Company” TSX: HCG) today announced that its subsidiary, Home Trust, has secured a theatre commitment for a $2 billion credit line from a major Canadian institutional investor.
The Company too announced it has retained RBC Capital Markets as well as BMO Capital Markets to propose on farther financing as well as strategic options.
The $2 billion loan facility is secured against a portfolio of mortgages originated by
Home Trust.
Home Trust has agreed to paying a non-refundable commitment fee of $100 1 one one thousand thousand as well as volition brand an initial pull of $1 billion. The involvement charge per unit of measurement on outstanding balances is 10 per cent, as well as the standby fee on undrawn funds is 2.5 per cent. The facility matures inwards 364 days, at the pick of Home Trust.
The facility, combined with Home Trust’s electrical flow available liquidity, provides the Company with access to around $3.5 billion inwards full funding, exceeding the amount of outstanding High Interest Savings Account (HISA) balances.
Home Trust had liquid assets of $1.3 billion equally at Apr 25, plus an additional portfolio of
available for sale securities totalling around $200 million.
Access to these funds is intended to mitigate the deport upon of a turn down inwards Home Trust’s HISA deposit balances that has occurred over the past times 4 weeks as well as that has accelerated since Apr 20. The Company volition function closely with the lender to guide keep the funds available equally shortly equally possible.
This on the aspect upward of it is an extraordinary loan. It is secured by giving the collateral as well as costs something betwixt xv as well as 22.5 percentage depending on how much is borrowed.
Its too extraordinary because of what it does non mention. It does non scream who the lender is as well as it does non delineate what the precise working capital missive of the alphabet is.
But nosotros know that this is existence used to pay High Interest Savings Balances. We know at that spot is a run on the depository fiscal establishment hither here as well as the run is several hundred 1 one one thousand thousand dollars per day.
This is desperation financing. They are securing mortgages (average involvement charge per unit of measurement below five percent) to borrow funds that cost xv percentage or more. The negative send is huge. A fiscal establishment cannot remain inwards job organisation nether these terms.
The stock reacted - dropping lx percentage inwards a day. The Canadian central busted some trades virtually $8.20 (because it idea that they were done inwards error). Mine were alongside the busted ones. I was perfectly happy to sell at that toll even so inwards their wisdom the central idea that mine was a fat-finger trade. [Disclosure - transaction to sell 30,000 shares at 8.19 was reversed.]
--
Anyway the side past times side twenty-four hr menstruum nosotros flora out who the lender was. It was the Healthcare of Ontario Pension Plan (HOOP). This was odd because Jim Keohane was on the board of Home Capital as well as too the CEO of HOOP. Likewise Kevin Smith - Home Capital's Chairman - was on the board of HOOP.
The cries of conflict of involvement were loud as well as undeniable.
The side past times side twenty-four hr menstruum Keohane resigned from Home Capital's board as well as Smith resigned from HOOP's board.
--
Then (Friday Canadian time) Jim Keohane gave the most extraordinary interview. You tin dismiss discovery the whole thing here:
http://www.bnn.ca/video/home-capital-not-a-risky-investment-for-us-hoopp-ceo 1111585
But it is extraordinary because it gives the next details.
a). The loans are secured past times 200 percentage of their value inwards mortgages (which makes the investment almost riskless - as well as Mr Keohane goes to some lengths to depict how depression the adventure is), and
b). Me Keohane says the bargain is to a greater extent than akin to a "DIP deal". DIP stands for debtor inwards possession as well as he is thence maxim the bargain is bankruptcy finance.
This is an extraordinary seat for Mr Keohane to take. He was an insider to both institutions (a truthful conflict of interest).
What he is maxim is that he isn't taking whatever adventure because he has taken all the goodness collateral as well as he expects Home Capital larn popular off bankrupt.
And notation that he volition brand xv to 22.5 percentage render (more if the loan is repaid early on inwards a liquidation) whilst taking no risk.
I guide keep 2 words to order to this: fraudulent conveyance. In a rushed bargain (one that really surprised the market) done with undisclosed insiders upward to 4 billion of the collateral as well as mayhap 3 hundred 1 one one thousand thousand dollars of mass value has been spirited away. And at basically no adventure the recipient of all this largess.
Wow that was audacious. More audacious than merely virtually anything I guide keep e'er seen on Wall Street.
Jim Keohane seems to recognise what he has said because almost directly he says that he doesn't know what the acronym DIP stands for.
That surprised me: Mr Keohane uses the phrase DIP Financing exactly as well as accurately as well as inwards context as well as so says he doesn't know what it means. You should notation that Mr Keohane is a real sophisticated fixed income player. (If you lot desire a guide to how sophisticated read this...)
The seat of the Canadian Government
The Canadian Regulator is pose inwards an extreme bind. Up to $300 1 one one thousand thousand of value has been spirited away from a highly distressed institution.
The regulator even so has guaranteed a real large amount of funding of Home Capital (guaranteed deposits). They should move alarmed at upward to $4 billion inwards collateral existence spirited away to HOOP. This effectively subordinates the insured depositors as well as inwards the lawsuit of Home Capital's failure volition cost the taxpayer several hundred 1 one one thousand thousand dollars.
This is non an idle concern. The funding itself indicates that it is real probable Home Capital volition collapse. And a old manager described this equally akin to DIP Financing.
If I were the regulator
If I were the regulator I would move doing my duty here. My duty hither is to protect the taxpayer.
Very chop-chop Home Capital needs to discovery a buyer to assume the authorities insured obligations. It does non affair if this happens at 20c per share. Indeed from a regulatory perspective it is improve if it happens at a depression percentage toll because it gets rid of claims of bailouts inducing moral hazard.
If Home Capital cannot discovery a buyer so it should move liquidated. Immediately. And the transaction with HOOP should move reversed nether measure bankruptcy rules for reversing fraudulent conveyance. There is no argue that taxpayers should select subordination to a loan yielding 15-20 percent.
Indeed regulators guide keep a duty to halt that form of thing.
John
Disclosure: I am curt a pocket-size amount of Home Capital stock so I guide keep a vested involvement inwards its collapse. Canadian taxpayers are on the claw for billions inwards guarantees. They guide keep a bigger vested interest. Either way this 1 is toast. But a exceptional form of toast which allows HOOP to proceed all the cream as well as jam spread.
Also note: this is the kickoff Australian or Canadian mortgage lender to close collapse. That is an of import stride inwards the cease of the belongings bubble.
--
It is too worth noting that Wikipedia hand a measure listing of indicators that fraudulent conveyance has taken place. Most look to move triggered here.
- Becoming insolvent because of the transfer;
- Lack or inadequacy of consideration;
- Family, or insider human relationship amid parties;
- The retentiveness of possession, benefits or purpose of belongings inwards question;
- The existence of the threat of litigation;
- The fiscal province of affairs of the debtor at the fourth dimension of transfer or after transfer;
- The existence or a cumulative upshot of a serial of transactions after the onslaught of debtor’s fiscal difficulties;
- The full general chronology of events;
- The secrecy of the transaction inwards question; and
- Deviation from the commons method or course of report of business.
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