Warren Buffett’s company is lending $1.5 billion to Home Capital and spending roughly $300 million to purchase nearly 40 percent of the troubled Canadian lender’s stock.
Berkshire said Thursday that the credit line will carry a relatively hefty 9 percent interest rate once Berkshire completes its initial stock investment later this month. The rate is similar to what Berkshire charged on loans it made during the financial crisis to companies including Goldman Sachs and General Electric.
Berkshire Hathaway will also take a 38.4% stake in the company after buying $400 million worth of Home Capital stock.
Home Capital had sought new funding to replace a costly emergency credit line it received on April 26 from the Healthcare of Ontario Pension Plan (HOOPP) after depositors rushed to withdraw funds from its high-interest savings accounts.
“[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,” Warren said in a statement, as quoted by the Financial Times.
This type of assistance from Buffet was not unprecedented, as he similarly provided $5 billion to the embattled Bank of America (which was struggling with legal problems in the wake of the global crisis) around six years ago.
“This transaction will help the company further stabilize its liquidity position and highlights the flexibility and options created by the quality of our assets,” Home Capital interim president and CEO Bonita Then said.
“Proceeds from the transaction are expected to have an immediate impact by enabling us to enhance our liquidity and reduce the outstanding debt under the Company’s $2 billion credit facility", the CEO added.
These developments tie into the channel lender’s attempts to stabilize itself in the wake of rapidly depleting deposits and allegations from the Ontario Securities Commission that it misled investors in 2015.
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