Buffett And Home Capital
Warren Buffett’s lifeline to Canada’s Home Capital Group Inc. comes with a sweetener that could juice his returns: discounted stock in the embattled lender. Buffet had to negotiate a price that he was interested in, in order to make it worthwhile for him to take a stake in this mortgage lender. Buffett describes his investment company Berkshire Hathaway as having become the “1-800 number” for banks in a market crisis. Buffett’s strategy is to invest in struggling companies, allowing him to make a lot of money, as well as to give a boost to the company.
When Buffett invests in a company, its stocks typically rise, in direct result to his purchasing shares. Buffett used this successful strategy on both Bank of America, General Electric Co, and Goldman Sachs during the 2008 financial crisis. Therefore, Berkshire Hathaway not only makes money on the debt portion of the deal, but also receives some type of equity during the transaction. While most Canadian banks have been proud of not needing any type of assistance, this particular lender, Home Capital Group, Inc. got into some difficulty when they didn’t properly screen some mortgages back in 2014.
Berkshire Hathaway’s C$400 million loan to Home Capital Group Inc. will provide a C$2 billion credit line to the company and allow Buffett’s company to take a 38% stake in the mortgage lender. The interest Berkshire Hathaway could potentially earn on the one year loan is C$180 million.