Google Finance
Filing
Mar. 28, 2017
Current Price: $25.5
1.Basic Information
(1) History
It is a specialized mortgage provider mainly on the GTA market who provide mortgage for self-employed or new immigrants. The company was mainly grew by Gerald Soloway who took role as CEO since 1987. He grew the company from $51m in assets to over $25B.
(2) Business related:
(3) Management.
Gerald Soloway is the key person for the company. He did quite well growing the business. However, where in a ethical way is very questionable. At the end of the day, we will find out.
(4) Debt and Credit facility.
(5) Insider holding, options, Insider trading info, share buy back.
(7) Auditor
(8) Industry comparison.
(9) Major events
2) Diana Soloway, Gerald's daughter, create Brookstreet and work with HCG to provide second mortgage for those who can't provide required 20% down-payment. The company disclosed at 2016.10 that the total amount between them is less than $10m.
3) At Apr. 2016, the company did a tender offer of 3.25m shares at $37.8/share. After that the CEO Martin Reid sold $1m worth of stock and another director John Marsh sold $5m worth of stock.
2. Financial data.
3. Short reasoning
The company has several weakness combined.
(1) The company booked incredibly low loss ratio and the loss reserve is also incredibly low. It was amazing after the income fraud was disclosed, those mortgages continue performed very well. All the company did was to sell pre-delinquent mortgage to a work-out company. Then the work-out company probably just force the owner sale the house and repay the mortgage or do some other things. Since the housing price is going up for the last decade, this always worked. This is so like the subprime mortgage in the US. Of course it won't work once the house price is down.
(2) It is very likely committed mortgage fraud in a large scale, once those are disclosed, the funding to the company will be halt. Actually even without the uncover, the CEO's departure will signal institutional investor to pull fund from the company and followed by retail investors as well. At least their funding cost will go up.
(3) Also for those insured mortgage, if the fraud document in involved, the insurer which is MIC will not likely valid the loss claim.
(4) The frequent change of CEO especially the current change is big alarm. There is no reason to install someone has no experience as intern while Soloway can easily take the role. It is just so unreasonable unless there is something serious going on that prevents him doing so.
(5) There might be a OSIF(Office of the Superintendent of Financial Institutions) investigation of the company's as well.
(6) Currently the credit loss provision seems still using incurred loss method, it might be changed to expected loss method at 2018 by OSIF. It is included in IFRS 9, don't really when it will be adopted.
4. Risk
(1) Short selling is extremely risky and hard as in general. Should really be careful and use it as just a hedge and do it occasionally instead of as a major investment option for now.
(2) The major fraud of the company is the fake income part which won't cause any issue as long as the house price is still going up, the company can always make the mortgage worked out in some how. Ideally one should wait until a clean signal of housing price drop. But I feel at that time the company probably already in big trouble.
(3)The value based Turtle Creek fund which I like added a lot of HCG lately, now it has more than 13% of the company. Turtle creek was in this stock previously. But why they add their position with since 2015 to now kind of unwise.
(4)OSC investigation and class action lawsuit will not be a big issue financially to the company. Currently the stock is trading close to book value and if it can stay profitable, the price will be strongly supported even profit shrinks.
5. Conclusion
The company has many issues and clearly is a good short, especially the lately CEO departure, is more like an abundance of the ship signal. In my view, it is really a much worse signal than any previous news. However, to be extra careful, one need to wait more signs: 1) Significant increase in delinquency. 2) Unable to get new funding or investor pull existing funding. 3)Board member resign. Maybe other things will happen.
Gerald Soloway is the key person for the company. He did quite well growing the business. However, where in a ethical way is very questionable. At the end of the day, we will find out.
(4) Debt and Credit facility.
(5) Insider holding, options, Insider trading info, share buy back.
As 2016 proxy, Gerald Soloway holds 3.5m shares.
(6) Employee numbers
John Marsh: 1.8m shares.
Martin Reid: only 40k shares.
(6) Employee numbers
(7) Auditor
(8) Industry comparison.
(9) Major events
1) At July 29, 2015, the company admitted mortgage fraud with fake income document of around $1.9B. They terminate relations to 45 broker who are involved. Currently at 2017, based on some ex-employee that the among might be $5B. Board Member James Baillie resigned two days before the release, He was the former head of Ontario Securities Commission.
3) At Apr. 2016, the company did a tender offer of 3.25m shares at $37.8/share. After that the CEO Martin Reid sold $1m worth of stock and another director John Marsh sold $5m worth of stock.
4) Nov. 2016, the OSC notice the company that it violated the disclosure regulation for the mortgage fraud and several law firm fired lawsuit against the company as class action. At Feb. 2017, there is second OSC notice to the company about the disclosure and stock trading of insiders.
5) Feb. 2016, the long term CEO Gerald Soloway retired and named Martin Reid as new CEO. Less than just one year now, the company fired Martin Reid and named Bonita Then, who is a director of the company but has no financial company background as the intern-CEO.
3. Short reasoning
The company has several weakness combined.
(1) The company booked incredibly low loss ratio and the loss reserve is also incredibly low. It was amazing after the income fraud was disclosed, those mortgages continue performed very well. All the company did was to sell pre-delinquent mortgage to a work-out company. Then the work-out company probably just force the owner sale the house and repay the mortgage or do some other things. Since the housing price is going up for the last decade, this always worked. This is so like the subprime mortgage in the US. Of course it won't work once the house price is down.
(2) It is very likely committed mortgage fraud in a large scale, once those are disclosed, the funding to the company will be halt. Actually even without the uncover, the CEO's departure will signal institutional investor to pull fund from the company and followed by retail investors as well. At least their funding cost will go up.
(3) Also for those insured mortgage, if the fraud document in involved, the insurer which is MIC will not likely valid the loss claim.
(4) The frequent change of CEO especially the current change is big alarm. There is no reason to install someone has no experience as intern while Soloway can easily take the role. It is just so unreasonable unless there is something serious going on that prevents him doing so.
(5) There might be a OSIF(Office of the Superintendent of Financial Institutions) investigation of the company's as well.
(6) Currently the credit loss provision seems still using incurred loss method, it might be changed to expected loss method at 2018 by OSIF. It is included in IFRS 9, don't really when it will be adopted.
4. Risk
(1) Short selling is extremely risky and hard as in general. Should really be careful and use it as just a hedge and do it occasionally instead of as a major investment option for now.
(2) The major fraud of the company is the fake income part which won't cause any issue as long as the house price is still going up, the company can always make the mortgage worked out in some how. Ideally one should wait until a clean signal of housing price drop. But I feel at that time the company probably already in big trouble.
(3)The value based Turtle Creek fund which I like added a lot of HCG lately, now it has more than 13% of the company. Turtle creek was in this stock previously. But why they add their position with since 2015 to now kind of unwise.
(4)OSC investigation and class action lawsuit will not be a big issue financially to the company. Currently the stock is trading close to book value and if it can stay profitable, the price will be strongly supported even profit shrinks.
5. Conclusion
The company has many issues and clearly is a good short, especially the lately CEO departure, is more like an abundance of the ship signal. In my view, it is really a much worse signal than any previous news. However, to be extra careful, one need to wait more signs: 1) Significant increase in delinquency. 2) Unable to get new funding or investor pull existing funding. 3)Board member resign. Maybe other things will happen.
6.Links
2016.09 Scotia Mortgage Services Panel
http://www.platformwebcast.com/scotiabank090716/agenda.html
Apr. 27, 2017
Current price: $7.
A lot of things happened during the passed two weeks. First OSC finally shotted the company, the price down to $17. Then the company pre-released its "good" Q1 numbers. Price went up a little bit. Then it announce departure of Soloway. Then the company's saving account customer pulled $0.5B in 4 days. The company forced to enter a 15% $2B loan Apr. 26(yesterday). Price dropped to $6. Today it backed to $7.
The $2B high interest loan is actually surprised to me and I believe it was to many people as well. The funding squeeze is expected, however, I thought the company should be able to sell its mortgage to other party to get new funding. But obviously there is no one to buy their mortgage which means they are actually junk no matter how low the LTV(loan to value) ratio appears to be. Secondly the company has to pay 15% interest to get a loan means the no one want to lend it money which means either the company's asset is bad or no one trust the management. Either way, this move is a very desperate move to me and will cause more funding squeeze. Obviously no one can save the company unless the government interview which is their only hope I think.
It turns out the $2B loan is from Healthcare of Ontario Pension Plan which the CEO is a board member of HCG. This non arm-length deal is very controversy. My guess is either HCG can't get better deal from others or it didn't even tried other options. Still the first one is more possible given the management still a lot of shares.
With 2 of the 3 conditions I mentioned happened in already. Although the 3rd one would be helpful, but it is not that important to the company because its new funding cost is way too high. The major risk with shorting at current price is the government intervene, which I doubt it can save the common share.
Although the price is low. The company's finance is way worse than it appears to be. It is still a short-able in my view although is less profitable. However, there is the risk that the company got bail out at a higher price than today's, but the chances is low.
Some thoughts about the Canadian RE market
Some people argue HCG is the pin of the bubble while others think not. The logic is that with the sub-prime lender in funding trouble, the availability of mortgage will be down while mortgage interest will go up. Currently sub-prime mortgage might count around 20% to 25% of total mortgage market. Thus will drag the market down. However, I think this will more likely affect the volume while not the price, just like the 15% tax on Vancouver shows.
An interest rate increase still the number one trigger pin for the bubble. But even without that, I believe the bubble could be popped if it is really bubbly. A lot of events could turn into fear. Any way, I feel the fall of HCG is much more negative than the 15% foreign tax on RE market.
http://www.canadianbusiness.com/economy/why-canadas-politicians-wont-do-what-it-takes-on-the-housing-market/
May 2, 2017
Current Price: $8.00
The company only has two fate now:
(1) Got bought out
The question is how much the buyer will be paying. First the $2B credit already taken $4B assets as collateral. A new buyer should first remove those loans with sth better. The second is the litigation liability could be very big. Although there is $1B assets there. Since the fraud is big, the loan quality is really hard to valuate. Even EQB seems not interested at its loan. Eventually is the loan in its book really decides what the buyer will pay. There is another possibility that it got bailed out so it won't spread to other banks. For shorting the stock, this is the biggest risk since it could be paid higher premium than its real worth. But I guess by maximum it shouldn't be more than $1B which is around $15.6/share.
(2) Asset sale
There is no way it can sell its mortgage at $1 for $1 bases. Even a 10% discount will wipe out all the equity value plus there is litigation liability there. I do view this is more likely than bee bought out.
(3)Other
Government intervene, bankruptcy etc. Equity shouldn't be worth anything in those case.
Conclusion: It is still short-able at current price. The result should be revealed soon.
May 11, 2017
Current Price: $10.81
(1) The share re-bounced quite a lot from the low of $5. The major reasons are 1) It indicated $1B unsecured + $500m secured mortgage sales to an undisclosed party. 2) Both CIBC asset management and Turtle creek had increased their holding on HCG.
(2) Today the company released Q1 2017 numbers. The most important is the 2B HOOPP credit is actually backed by two pool of mortgages as collateral. Pool A at 50%, Pool B at 26%. Totally is $5.4B. So it should be $2.4B pool A + $3B pool B.
(3) The most critical information of the mortgage sale is missing which is whether it is on par or at at discount. Also both pool A and pool B of the HOOPP credit has criteria been redacted.
(4) Originally it said the collateral is only $4B. Now it became $5.4B. If the $5.4B is for all the $2B, then its $2.4B pool A + $3B pool B. If the $5.4B is only for the existing $1.4B, then it must be all Pool B.
(5) The reason behind magic change from $4B to $5.4B is most likely is that at beginning they give HOOPP the "good" assets as collateral, now they want to sell the good one. So they added the "bad" assets pool in collateral. It confirms they can't sell its mortgage at par, even the pool A get a good price. The pool B won't.
May 15, 2017
Current Price: $9.65.
(1) After the conference call, stock drop to $9 and bounce back today because it released that its HISA balance is stable now.
(2) In the conference call, the company refuse to give GIC inflow, just said it is low.
(3) The $1.5B assets sales is actually not just a referral agreement. Which the company unload new mortgage and renewals to the third party. (Most likely the third party is MCAP). HCG will be able to offload $500m commitment and then another $1B renewals, new mortgages, existing mortgages etc. The agreement is just like a secularization in which I think HCG might incur a loss doing it but it has no choice.
(4) At May 12, The company's HISA balance stable at $125m. However, GICs still down $34.5m/day for the past 9 days. If using 250 days/year, that equals $8.6B which is more than the $6B GICs mature in 1 year. So this means there is almost no GIC inflows. By May 25, 8 days after, it will bleeding another $34.5*8=$276m plus the $325m term loan. Then it would only have $900m liquidity left. I think they needs to reveal the mortgage deal by then.
May 16 , 2017
Current Price: $9.00
(1) At May 15, the company deposit reduced by another $100m. In the first 2 weeks of May, it lost $610m deposit and $510m in liquidity.
(2) In 2016 the company issued $9.2B new mortgages. Scheduled payment $400m. Discharge $6.7B. Secularized $2.5B. In a weekly basis, that equals $184m new mortgage/week. $142m/week discharge+payment, $50m/week secularization. However, in busy month like Apr. May. Sept. Oct., Both new mortgage and discharge might be higher, it needs extra funding in those months.
(3) Since there is $300m/week lost in deposit last two weeks, the discharge+payment just half of that. Even it is $200m/week, still there is $100m/week shortfall. Since the liquidity was down by $250m/week, so the new loan originated should be around $150m. If anything above that, those should have been sold to MCAP or secularized.
(4) The $1.5B asset sale agreement should give it 6 week time to breeze if current liquidity loss of $250m/week continues.
(5) Possible result before June 29th: 1) It off load new loans to others just like the $1.5B MCAP deal. This is actually most likely. But MCAP gonna be picky with what loan they want to buy as well. It will incur losses and loan book will shrink. It is equal to a run down but with less losses. Also it will sell better quality loans and keep the worst one and it still needs new capital or write less loans. 2) It secures a similar long term credit facility like EQB did. It is hard for them because the HOOPP deal and also the continue run down of the GICs. Even it can, both interest rate and collateral would be much higher than EQB's. This is actually the company's best hope but I highly doubt it can get a interest rate lower than 5%. 3) Running down, if the first two options is not available, it will have to stop issuing new loans. That is not what the company want and it will have a major effect on whole mortgage market.
May 24, 2017
Current Price: $9.00
(1)It paid the $325m term debt with another $250m drawn from the HOOPP loan. Now its liquidity is at $1.14B. During the first 3 weeks in May, it lost $710m in deposit while lost $520m in liquidity. Both were slow down during the 3rd week. The difference of $200m is due to lower loan volume or offload to MCAP. Especially in the 3rd week. I feel very likely it starts to offload loans because the liquidity changed very little.
(2)It hiked 1 year GICs for 85 base point and 1m GIC for 50 base point since the bank run. The second hike at May 15-16 from 2.0% to 2.35% seems worked somehow. The deposit lose slowed down from $50m/day to around $15m/day after that. The last hike at May 23 yet to watch how it works. I think most likely some people start to buy its short term 1-3m GICs. It definitely wants the longer term ones.
(3) Its gross interest is around $800m/year, plus $80m secularization income. Interest expense around $350m/year. SG&A $250m/year. Leave $280m/year pre tax and $200m/year net income. First there is $100m one time fees with the HOOPP loan. Also the HOOPP loan will cost 7.5% extra in interest which is $150m/year extra. Even it can replace it with something better, there will be financing fees etc. The $13B deposit currently will cost 50-80 bps more in interest, assuming it can be fully absorbed by higher mortgage interest, its volume should be down quite some. Also there will much more legal fees etc. Overall, I believe it will incur significant losses this year even without credit losses.
(4) However, it could get deposit stable if it keep raising interest rate. Especially the short term GICs or saving account. But a long term funding is still the most critical for the company because I believe few people will buy its long term GICs. Given the deposit stabilized, actually it might be able to do that. I believe most likely in next 2 weeks or so. The most it must did it before annual meeting.
2016.09 Scotia Mortgage Services Panel
http://www.platformwebcast.com/scotiabank090716/agenda.html
Apr. 27, 2017
Current price: $7.
A lot of things happened during the passed two weeks. First OSC finally shotted the company, the price down to $17. Then the company pre-released its "good" Q1 numbers. Price went up a little bit. Then it announce departure of Soloway. Then the company's saving account customer pulled $0.5B in 4 days. The company forced to enter a 15% $2B loan Apr. 26(yesterday). Price dropped to $6. Today it backed to $7.
The $2B high interest loan is actually surprised to me and I believe it was to many people as well. The funding squeeze is expected, however, I thought the company should be able to sell its mortgage to other party to get new funding. But obviously there is no one to buy their mortgage which means they are actually junk no matter how low the LTV(loan to value) ratio appears to be. Secondly the company has to pay 15% interest to get a loan means the no one want to lend it money which means either the company's asset is bad or no one trust the management. Either way, this move is a very desperate move to me and will cause more funding squeeze. Obviously no one can save the company unless the government interview which is their only hope I think.
It turns out the $2B loan is from Healthcare of Ontario Pension Plan which the CEO is a board member of HCG. This non arm-length deal is very controversy. My guess is either HCG can't get better deal from others or it didn't even tried other options. Still the first one is more possible given the management still a lot of shares.
With 2 of the 3 conditions I mentioned happened in already. Although the 3rd one would be helpful, but it is not that important to the company because its new funding cost is way too high. The major risk with shorting at current price is the government intervene, which I doubt it can save the common share.
Although the price is low. The company's finance is way worse than it appears to be. It is still a short-able in my view although is less profitable. However, there is the risk that the company got bail out at a higher price than today's, but the chances is low.
Some thoughts about the Canadian RE market
Some people argue HCG is the pin of the bubble while others think not. The logic is that with the sub-prime lender in funding trouble, the availability of mortgage will be down while mortgage interest will go up. Currently sub-prime mortgage might count around 20% to 25% of total mortgage market. Thus will drag the market down. However, I think this will more likely affect the volume while not the price, just like the 15% tax on Vancouver shows.
An interest rate increase still the number one trigger pin for the bubble. But even without that, I believe the bubble could be popped if it is really bubbly. A lot of events could turn into fear. Any way, I feel the fall of HCG is much more negative than the 15% foreign tax on RE market.
http://www.canadianbusiness.com/economy/why-canadas-politicians-wont-do-what-it-takes-on-the-housing-market/
May 2, 2017
Current Price: $8.00
The company only has two fate now:
(1) Got bought out
The question is how much the buyer will be paying. First the $2B credit already taken $4B assets as collateral. A new buyer should first remove those loans with sth better. The second is the litigation liability could be very big. Although there is $1B assets there. Since the fraud is big, the loan quality is really hard to valuate. Even EQB seems not interested at its loan. Eventually is the loan in its book really decides what the buyer will pay. There is another possibility that it got bailed out so it won't spread to other banks. For shorting the stock, this is the biggest risk since it could be paid higher premium than its real worth. But I guess by maximum it shouldn't be more than $1B which is around $15.6/share.
(2) Asset sale
There is no way it can sell its mortgage at $1 for $1 bases. Even a 10% discount will wipe out all the equity value plus there is litigation liability there. I do view this is more likely than bee bought out.
(3)Other
Government intervene, bankruptcy etc. Equity shouldn't be worth anything in those case.
Conclusion: It is still short-able at current price. The result should be revealed soon.
May 11, 2017
Current Price: $10.81
(1) The share re-bounced quite a lot from the low of $5. The major reasons are 1) It indicated $1B unsecured + $500m secured mortgage sales to an undisclosed party. 2) Both CIBC asset management and Turtle creek had increased their holding on HCG.
(2) Today the company released Q1 2017 numbers. The most important is the 2B HOOPP credit is actually backed by two pool of mortgages as collateral. Pool A at 50%, Pool B at 26%. Totally is $5.4B. So it should be $2.4B pool A + $3B pool B.
(3) The most critical information of the mortgage sale is missing which is whether it is on par or at at discount. Also both pool A and pool B of the HOOPP credit has criteria been redacted.
(4) Originally it said the collateral is only $4B. Now it became $5.4B. If the $5.4B is for all the $2B, then its $2.4B pool A + $3B pool B. If the $5.4B is only for the existing $1.4B, then it must be all Pool B.
(5) The reason behind magic change from $4B to $5.4B is most likely is that at beginning they give HOOPP the "good" assets as collateral, now they want to sell the good one. So they added the "bad" assets pool in collateral. It confirms they can't sell its mortgage at par, even the pool A get a good price. The pool B won't.
Current Price: $9.65.
(1) After the conference call, stock drop to $9 and bounce back today because it released that its HISA balance is stable now.
(2) In the conference call, the company refuse to give GIC inflow, just said it is low.
(3) The $1.5B assets sales is actually not just a referral agreement. Which the company unload new mortgage and renewals to the third party. (Most likely the third party is MCAP). HCG will be able to offload $500m commitment and then another $1B renewals, new mortgages, existing mortgages etc. The agreement is just like a secularization in which I think HCG might incur a loss doing it but it has no choice.
(4) At May 12, The company's HISA balance stable at $125m. However, GICs still down $34.5m/day for the past 9 days. If using 250 days/year, that equals $8.6B which is more than the $6B GICs mature in 1 year. So this means there is almost no GIC inflows. By May 25, 8 days after, it will bleeding another $34.5*8=$276m plus the $325m term loan. Then it would only have $900m liquidity left. I think they needs to reveal the mortgage deal by then.
May 16 , 2017
Current Price: $9.00
(1) At May 15, the company deposit reduced by another $100m. In the first 2 weeks of May, it lost $610m deposit and $510m in liquidity.
(2) In 2016 the company issued $9.2B new mortgages. Scheduled payment $400m. Discharge $6.7B. Secularized $2.5B. In a weekly basis, that equals $184m new mortgage/week. $142m/week discharge+payment, $50m/week secularization. However, in busy month like Apr. May. Sept. Oct., Both new mortgage and discharge might be higher, it needs extra funding in those months.
(3) Since there is $300m/week lost in deposit last two weeks, the discharge+payment just half of that. Even it is $200m/week, still there is $100m/week shortfall. Since the liquidity was down by $250m/week, so the new loan originated should be around $150m. If anything above that, those should have been sold to MCAP or secularized.
(4) The $1.5B asset sale agreement should give it 6 week time to breeze if current liquidity loss of $250m/week continues.
(5) Possible result before June 29th: 1) It off load new loans to others just like the $1.5B MCAP deal. This is actually most likely. But MCAP gonna be picky with what loan they want to buy as well. It will incur losses and loan book will shrink. It is equal to a run down but with less losses. Also it will sell better quality loans and keep the worst one and it still needs new capital or write less loans. 2) It secures a similar long term credit facility like EQB did. It is hard for them because the HOOPP deal and also the continue run down of the GICs. Even it can, both interest rate and collateral would be much higher than EQB's. This is actually the company's best hope but I highly doubt it can get a interest rate lower than 5%. 3) Running down, if the first two options is not available, it will have to stop issuing new loans. That is not what the company want and it will have a major effect on whole mortgage market.
May 24, 2017
Current Price: $9.00
(1)It paid the $325m term debt with another $250m drawn from the HOOPP loan. Now its liquidity is at $1.14B. During the first 3 weeks in May, it lost $710m in deposit while lost $520m in liquidity. Both were slow down during the 3rd week. The difference of $200m is due to lower loan volume or offload to MCAP. Especially in the 3rd week. I feel very likely it starts to offload loans because the liquidity changed very little.
(2)It hiked 1 year GICs for 85 base point and 1m GIC for 50 base point since the bank run. The second hike at May 15-16 from 2.0% to 2.35% seems worked somehow. The deposit lose slowed down from $50m/day to around $15m/day after that. The last hike at May 23 yet to watch how it works. I think most likely some people start to buy its short term 1-3m GICs. It definitely wants the longer term ones.
(3) Its gross interest is around $800m/year, plus $80m secularization income. Interest expense around $350m/year. SG&A $250m/year. Leave $280m/year pre tax and $200m/year net income. First there is $100m one time fees with the HOOPP loan. Also the HOOPP loan will cost 7.5% extra in interest which is $150m/year extra. Even it can replace it with something better, there will be financing fees etc. The $13B deposit currently will cost 50-80 bps more in interest, assuming it can be fully absorbed by higher mortgage interest, its volume should be down quite some. Also there will much more legal fees etc. Overall, I believe it will incur significant losses this year even without credit losses.
(4) However, it could get deposit stable if it keep raising interest rate. Especially the short term GICs or saving account. But a long term funding is still the most critical for the company because I believe few people will buy its long term GICs. Given the deposit stabilized, actually it might be able to do that. I believe most likely in next 2 weeks or so. The most it must did it before annual meeting.
