Anyone following the latest on Home Capital Group (HCG)?
After the OSC gets them for $30 million in penalties, and seeing their liquidity drop dangerously low (remember, this is a mortgage lender at 20:1 ratio) they get a loan from an Ontario pension plan (for which an investigation should be undergoing - if I was a member of that pension I would be livid about the relationship between HCG and the HOOP).
Now Warren Buffett steps in to save the day as one of his subsidiaries will replace the HOOP loan with a equity/debt deal.
On the equity side he gets 38% for about $400 million.
His real goal, however, is to get $4-5 billion in mortgages which backstop the $2 billion loan on offer (at 9% rate plus other details).
If HCG goes broke, he gets those mortgages and loses on the equity (although who knows, maybe he sells out of the equity after the lock up period).
If HCG does survive, then he can ride the equity which he got on the relatively cheap ($10 per share) while still earning 9% on his loan.
Either way, hard for WB to lose on this deal even if GTA RE collapsed by 40%. So good for him.
Then we have the chicken farmer from San Francisco, Marc Cohodes, who is shorting HCG from when the stock was around $53, allegedly is still shorting it.
He is convinced that the equity will go to $0 and is waiting for the "fat lady" to sing.
Frankly, I would have ended my short when HCB touched $7 but whatever.
I think it is still possible for both Cohodes and Buffett to make a lot money here:
A) HCG goes to $0 so Cohodes makes his $50+ per share (since he sold shares around $50 or so and would be buying them at $0 he will have done very well).
B) Buffett loses, worst case, $400 million on the equity and the $2 billion on the loan. However, he gets $4+ billion in high interest (albeit subprime) mortgages.
Who knows, maybe Buffett will start shorting HCG to hedge his position - hope HCG considered that and wrote it into the deal to not allow him to do this.
Isn't high finance fun?!