Canadian lender is quickly burning through $2 billion emergency loan
Canadian alternative lender Home Capital is in a death spiral. Last month it was forced to take an emergency loan at interest rates above 20%.
The company touted it as a major buffer but it hasn't stopped a run on deposits. Today, executives revealed they've drawn down on $1.4 billion of the loan already.
The company uses deposits and lends to mortgage buyers who couldn't qualify for traditional home lending.
Today Home Capital said it expects only $192 million will remain deposited in its high-interest savings accounts by the end of Monday, down from $1.4 billion two weeks ago.
The good news is that they have enough of a buffer to survive all their liquid deposits exiting. Another $12.6B is held in GICs, which are term deposits that can't be redeemed early. It's difficult to imagine those can be rolled over and the holders are surely itching to get their money so eventually the money will be all gone.
What will probably happen here is that the company will limp along and wipe out shareholders but bonds and GICs will be safe. The only reason the stock is at $5 is hopes for a takeover, which is certainly a possibility.
Of course, no one knows what the next shoe to drop will be and if Home Capital were to fall into bankruptcy and redemptions for the GICs were in doubt, that's what could roil the system.
For now, I think the market is coming around to the idea that Home Capital is small and easily dealt with in the Canadian financial system.
The other thing to watch is mortgage fraud. What kicked off the crisis at the company was a disclosure that fraudulent applications were rising. That's the kind of thing that could mark the beginning of the end of the Canadian housing bubble.
