Short seller sues Home Capital and three former executives for $4 million in damages

TORONTO — A short seller is suing Home Capital Group (TSX:HCG) and three former executives for $4 million, alleging the alternative mortgage lender’s false representations scandal cost him millions when he closed his position early.

Marc Cohodes filed a statement of claim Monday with the Ontario Superior Court of Justice saying he took a substantial short position in Home Capital’s shares in 2014 after determining the company was overvalued.

Between March and June 2015, the claim says based on positive information provided in Home Capital’s financial reporting, Cohodes repurchased 91,800 of those shares at more than $40 each, resulting in a purchase cost of more than $3.6 million.

Cohodes alleges Home Capital, former CEO Gerald Soloway and former CFOs Robert Blowes and Robert Morton knowingly misled investors in the company’s annual and quarterly results by misrepresenting risk management controls.

Home Capital did not immediately return a request for comment. None of the allegations have been proven in court.

In 2017, the lender was accused by regulators of misleading investors, which caused depositors to swiftly withdraw their money and leaving the company in crisis mode.

Home Capital eventually agreed to pay $29.5 million to settle with the Ontario Securities Commission and class-action lawsuit matters related to the allegations.

Soloway and Morton faced $1 million and $500,000 penalties respectively. Soloway was barred from acting as director or officer of a public company for four years, while Morton faces a two-year ban.

Blowes is the only executive named in the suit who remains on the company’s board of directors.

LOGiQ’s debenture holders gain three more years of 7% interest

It’s not quite the end of the road for holders of convertible debentures who are now the responsibility of LOGiQ Asset Management.

Thanks to a less-than-expected take-up by the holders, the debentures — they were originally issued by Aston Hill Financial in July 2011 for five years at a rate of six per cent and have undergone a number of adjustments since — will remain outstanding until June 2021.

But if enough of the holders had accepted the company’s offer to tender and receive $101 per $100 face value, the debentures would have most likely been redeemed later this year. The reason: After June 30, the offer price would have risen to $105 per $100 face value while the interest rate would have jumped to a very healthy 12 per cent.

Indeed, if holders had tendered more than three-quarters of the $20.226 million outstanding in the company’s recent offer — an offer that ended late last week — they all would have not have been able to get out. Instead, they would have had to take their pro-rata share.

For whatever reason that didn’t happen. As LOGiQ explained in a recent release, holders of $13.698 million of such debentures tendered, about $1.6 million less than required to set certain events in motion. As a result, there are now $6.528 million of debentures outstanding. LOGiQ, which resulted from the 2016 merger between Aston Hill and Front Street Capital, was flush because it had agreed to sell its retail funds business to Purpose Investments — a $32 million transaction.

So what have the remaining debenture holders gained by not tendering? Well, they stand to receive three things: a higher retraction price in mid-2021 given that they stand to receive $105 per $100 of face value; they will have benefited from more than three years of seven per cent interest payments; and they have given themselves to opportunity to convert their holdings into stock, if the share price performs.

Taken together those goodies are attractive. It’s not normal to receive more than face value when debentures are redeemed; seven per cent is a high rate of interest and an option (in this case to convert to shares) is always attractive given the time left to run.

So why tender?

One key factor is different time horizons of the various investors. Two hedge funds, understood to be largest investors, have probably benefited from their investment and don’t see the merits of holding on for the extra three plus years. A few months back when LOGiQ made its original offer — it planned to retract only half of the outstanding issue, meaning $10.113 million face value — the debentures were trading in the $80 per $100 face value range.

To get over the line support was required from holders of two-thirds of the debentures outstanding. So at the original meeting date, (Oct. 11) the vote by the debenture holders was not held because LOGiQ would have lost.

LOGiQ then called a special meeting for early December and offered more attractive terms for the debenture holders: The retraction amount was increased; shorter limits were placed on the ability of the debentures to remain outstanding; and limits were placed on LOGiQ’s ability to make financial and investment decisions.

Seemingly it was in everybody’s best interest to get the deal done.

Maybe there is a simpler reason why the revamped debenture offer didn’t reach the minimum. Given that holders were required to indicate their intentions by Jan. 11 some may have missed the note from their advisors regarding the deadline, while the do-it-themselves-crowd forgot.

Financial Post

Brookfield, Onex said to plan $3.7 billion offer for IWG

Brookfield Asset Management Inc. and Onex Corp. are preparing an offer for IWG Plc that will value the commercial real estate company at about 2.7 billion pounds (US$3.7 billion), people familiar with the matter said.

Zug, Switzerland-based IWG, which owns office space and competes with New York-based WeWork Cos., said last month it had received an “indicative proposal” for a cash deal from the consortium. The group is lining up a firm offer of about 300 pence a share but not more than that, said the people, who asked not to be identified because the matter is private. A final decision hasn’t been made and plans for a bid could change, they said.

Brookfield is Canada’s largest alternative asset manager, while Onex is the country’s largest private equity firm. IWG rose 0.5 per cent to 264.4 pence a share in London Tuesday.

Representatives for Brookfield and IWG declined to comment. An Onex representative wasn’t immediately available for comment.

IWG, in its former incarnation as Regus, filed for bankruptcy protection for its U.S. business in 2003 after it expanded too rapidly during the dot-com boom. IWG has a market value of about 2.4 billion pounds despite having almost 3,000 locations worldwide, compared to WeWork’s 283.

Shares in the Swiss company had dropped almost 40 per cent after Oct. 19 when it issued a profit warning, citing in weakness in the London market. The shares have rallied back by about 35 per cent since Dec. 23, when IWG confirmed the proposal from Brookfield and Onex.

Under U.K. takeover rules, the consortium has until Jan. 20 to either announce a firm intention to make an offer for IWG, or to say it doesn’t intend to make a bid.

Canada’s six biggest banks accused in lawsuit of rigging a rate benchmark to boost ‘illegitimate profits’

A Colorado-based pension fund accused Canada’s six biggest banks and three foreign lenders of conspiring to manipulate a Canadian interest rate benchmark to boost “illegitimate profits” on derivatives trades for several years until 2014.

The Fire & Police Pension Association of Colorado alleged in a New York court filing that the banks sought to boost their earnings from derivatives trades by manipulating the Canadian Dealer Offered Rate, or CDOR, a benchmark lending rate. The alleged violations, including conspiracy under the U.S. Sherman Act and manipulation of the Commodity Exchange Act, took place for almost seven years, according to the filing.

The proposed class-action dispute names Toronto-Dominion Bank, Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada, as well as HSBC Holdings Plc, Bank of America Corp. and Deutsche Bank AG. All the banks declined to comment on the matter.

The fund, which manages about US$4.66 billion, claims banks “reduced the amount of interest owed,” resulting in investors paying more or receiving less than the amount generated through trading derivatives based on CDOR. The pension fund said it made US$1.2 billion in CDOR-based derivatives trades over the period.

Suppressed Rates

“Defendants conspired to suppress CDOR by making artificially lower submissions that did not reflect the true rate at which they were lending Canadian dollars in North America,” according to the Jan. 12 filing in U.S. District Court for the Southern District of New York. “Economic analyses show that defendants consistently made CDOR submissions well-below prevailing Canadian dollar money market rates, inexplicably offering to lend for less than what it cost them to borrow funds.”

The banks held on average more than US$1 trillion in CDOR-based swap contracts with U.S. counterparties during the period covered by the class-action suit, according to the filing.

Representatives for the Canadian Bankers Association, the Investment Industry Regulatory Organization of Canada and the Office of the Superintendent of Financial Institutions declined to comment.

CDOR is the interest rate benchmark used to set terms on short-term loans of less than a year. It’s set by Thomson Reuters each day based on submissions from the banks and used to determine rates on bankers’ acceptance contracts.

Canada Response

Canadian regulators took steps to prevent any potential manipulation of the rate in the 2014 in the wake of allegations that global banks had rigged the Libor benchmark in the U.S. and Europe.

OSFI, as the bank regulator is known, said in 2014 that it would begin supervising the governance and controls surrounding the banks’ CDOR submission process and outlined expectations for their work, including providing rates in a consistent manner.

Royal Bank was among 16 global banks sued by the U.S. Federal Deposit Insurance Corp. in 2014 for its role in manipulating the London interbank offered rate from 2007 to 2011. Royal Bank of Canada continues to face litigation risk from Libor-rigging investigations, according to Bloomberg Intelligence.

* The case is Fire & Police Pension Association of Colorado v. Bank of Montreal, 18-cv-00342, U.S. District Court, Southern District of New York (Manhattan)

Growth-by-acquisition strategy can come with drawbacks for REITS, RBC report shows

As expected there are a lot of gems in the recently published 377-page report by RBC Capital Markets on the sector outlook for REITs, a group with a market capitalization of about $75 billion.

One of the more interesting observations — in what is the bank’s 80th such quarterly outlook — was that 2018 will be a busy year for asset dispositions: $5.4 billion of “intended or announced property dispositions” are expected to be completed in this year and beyond.

To put that number, which has risen for four years in a row, in perspective: there were only $2.4 billion of such dispositions in 2015; $3.7 billion in 2016; and $5.3 billion last year. (According to CBRE, there were about $40 billion of commercial property transactions last year.)

Based on what’s happened already, we are more than 20 per cent of the way to that 2018 estimate, in part because some of the “grander plans” announced by three REITs have already been achieved.


Cominar REIT, which had a year to forget with a credit rating downgrade (the first for the sector) and a cut in distributions, has already made good on its plan, announced last August, to divest $1.2 billion of non-core assets, via the recent sale to Slate Acquisitions. It plans to sell another $1 billion – $1.5 billion of properties.

But there’s more to come given that RioCan REIT wants to sell $2 billion of smaller market properties by 2020, while H&R REIT has announced plans to sell 91 properties valued at US$895 million.

The RBC report gives another perspective to asset dispositions: over the period 2004-2007, or three years before the global financial crisis, the levels were low with just one REIT, Dream Office, engaged in any major sales. Over those years, REITs sold $3.118 billion of properties, of which Dream accounted for $2.375 billion.

But over the 2014 to 2017 period, almost $10 billion of assets were sold. As with the prior period, the recent numbers are skewed by DREAM’s activity: after its re-entry to the REIT world, it has now made $3.415 billion of dispositions with another $100 million targeted.

As for the reasons for the increase, the report posits that it’s related to “normal-course portfolio pruning and capital recycling,” a “heightened” focus on core markets and properties and “a path to correcting past strategy missteps.”

In this way, the report said it sees capital recycling via non-core asset sales as “a means towards achieving the goal of continuous quality improvement. As capital is a precious resource, we also believe the process instills asset-management discipline.”

It may be precious but it seems that it’s always available. All the properties that are now targeted for sale were financed, often with a healthy does of equity, by investors who were generally told that the acquisitions were accretive.

Growth-by-acquisition programs

As for the missteps, RBC said generally they were rooted in “very aggressive growth-by-acquisition programs through which we believe the affected enterprises aggregated assets on a non-strategic basis, and/or in conjunction with higher financial leverage.”

For those cases where the REIT is managed externally often there are incentives (the receipt of fees) for doing transactions — all of which can encourage growth by acquisition.

It’s worth noting that three REITs now planning the largest asset dispositions — Cominar, H&R and RioCan — have all underperformed the S&P composite real estate sector index on a total return basis over the past seven years. In Cominar’s case, the return has been negative over the period.

The report makes SmartCentres REIT its top pick. In 2017, the REIT posted a 1.13 per cent total return.

Financial Post

One of the biggest British corporate failures in recent years could be felt all the way to Canada

LONDON — Britain’s Carillion collapsed on Monday after its banks lost faith in the construction and services company, forcing the government to step in to guarantee major public works contracts.

In one of the biggest British corporate failures in recent years, Carillion went into compulsory liquidation after costly contract delays and a slump in new business left it swamped by debt and pensions liabilities of around 1.5 billion pounds ($2.1 billion).

The demise of the 200-year-old business poses a headache for Theresa May’s government which had employed Carillion to work on 450 projects including the building and maintenance of hospitals, prisons, defence sites and a high-speed rail line.

Although the government has promised to support workers and ensure contracts are delivered, it has stopped short of bailing out the company as it did with major banks during the financial crisis almost a decade ago.

Employing 43,000 people around the world, including 20,000 in Britain, Carillion has been fighting for survival since July when it revealed it was losing cash on several projects and had written down the value of its contract book by 845 million pounds.

Carillion employs over 6,000 people in Canada where it has an annual revenue of approximately $1 billion. Among other service contracts it maintains 40,000 kilometres of highways in Ontario and Alberta.

With banks refusing to accept the group’s latest attempt to restructure, May’s senior ministers met around the clock in recent days, under pressure from the opposition Labour Party and unions not to use taxpayer money to prop up the failing company.

Ministers, top bankers and company bosses scrambled to find a way to save the company in last ditch talks over the weekend. But Carillion announced its own “compulsory liquidation” just over an hour before the London Stock Exchange opened on Monday.

Weekend talks fail

Carillion owed around 900 million pounds to banks which include the country’s five biggest – RBS, Santander UK, Lloyds, HSBC and Barclays – and it has a pension deficit of 580 million pounds.

“In recent days we have been unable to secure the funding to support our business plan and it is therefore with the deepest regret that we have arrived at this decision,” Chairman Philip Green said.

“This is a very sad day for Carillion, for our colleagues, suppliers and customers that we have been proud to serve over many years.”

Government under pressure

Spun out of Tarmac nearly 20 years ago and having bought Alfred McAlpine in 2008, Carillion has worked on major construction projects including London’s Royal Opera House, the Suez Canal road tunnel and Toronto’s Union Station.

In July last year, a week after its initial profit warning, it was named as one of the contractors on Britain’s new High Speed 2 rail line, a flagship project that will better connect London with the north of England.

At its headquarters in Wolverhampton, central England, a handful of workers could be seen holding meetings.

Shares in rival businesses such as G4S, Interserve , Balfour Beatty and Kier Group advanced on hopes they would pick up some additional work.

However, Balfour, which worked with Carillion on three British road projects, said the collapse would probably cost it between 35 and 45 million pounds.

The company’s collapse comes at a difficult time for May who is trying to negotiate Britain’s exit from the European Union.

The opposition Labour Party questioned why May’s government continued to award contracts to Carillion despite its profit warnings and questioned why Britain had handed over so much of its public service work to private companies.

“This company issued three profit warnings in the last six months yet despite those profit warnings the government continued to award government contracts to this company,” Labour’s business spokeswoman Rebecca Long-Bailey told BBC TV.

“We’re … asking for a full investigation into the government conduct of this matter.”

Many of Britain’s service providers have been hit in recent years after they took on work during the financial crisis at low prices for long-running, fixed-price contracts.

The contracts left little room for delay or failure and have led to problems for groups including Capita, Mitie and Interserve.

© Thomson Reuters 2018

Not your usual economic forecast: debt levels, demographics and income inequality

It wasn’t your usual economic and financial forecast, but in his first presentation to Canadian clients, Eric Winograd, senior economist at New York-based money manager Alliance Bernstein, devoted considerable time to three secular U.S. trends: rising debt levels, demographics and rising income inequality. Any one of them could derail the U.S. economy’s progress.

“What happens if interest rates rise,” he asked, after noting that while U.S. consumers have borrowed record amounts of debt, the debt service ratios are at near-record lows. “This is a real risk,” he said, noting interest rate changes can be caused by third-party actions, such as the reduced willingness of, say, China to purchase U.S. government securities.

As for demographics, the aging of the population and the reduced percentage of workers in the population “is crashing everywhere,” except India and Africa, both of which wouldn’t be large enough to compensate for the reduced demand from elsewhere. “It’s reasonable to be skeptical,” said Winograd, adding an aging population is associated with slower growth and lower inflation. “That’s the Japan problem,” he said.

Winograd said income inequality is the “one that matters most.” He presented a chart showing the steady rise in corporate profits relative to the slow gains in wages: For the period 1970 to 1992, they moved in parallel, but since then (and even more after 2002) profits have surged.

That pattern “raises risks, the idea of social harmony and that everybody benefits,” he said. “Excellent monetary policy (including quantitative easing) has contributed,” to that inequality, because of the effects on the financial markets, he argued, noting inequality “leads to populism.”

Then there are the puzzles, specifically the still-low inflation rate despite the strong U.S. economy and near full employment. While that pervades at the aggregate level, Winograd delved deeper, by focusing on state and local data to ascertain whether the Phillips Curve — the inverse relationship between unemployment and wage gains — was at work.

For the 13 largest U.S. cities during the period 1997-2017, he was able to generate a graph showing a negative relationship between annual changes in inflation and the unemployment rate. “Cities with lower unemployment have higher inflation,” he said, adding the result isn’t “proof” the Phillips Curve applies to the whole country.

But Winograd also gave a more traditional presentation, in which his base forecast calls for global economic growth of 3.2 per cent — about the same as for 2017 — and for a “gradual increase” in inflation over the course of the year. All of which makes “for a pretty good investment environment,” given that equity and fixed income returns have historically been strong in a high growth/low inflation world.

But that world doesn’t have a “by-the-book” policy response for a central bank. The Fed has raised rates but done it “really slowly and has communicated that it won’t go too far because inflation is low. That will be good enough to allow the environment to persist,” Winograd said, given that the objective is to “extend” the good conditions. He predicts the Fed will raise rates four times this year, one more than what the Fed has conveyed to the market.

Given his view that the U.S. economy “is really strong” — it’s led by a robust manufacturing sector, an easing of financial conditions, a healthy small business sentiment and consumer confidence, against the backdrop of a stronger global economy — what will bring the business cycle to an end?

One way is for a gradual tightening of financial conditions that would bring continued high growth but rising inflation. “The environment (starting later this year) will become less favourable from an economic and financial perspective,” he said.

RBC first to raise fixed mortgage rate ahead of Bank of Canada decision

TORONTO — Canada’s largest bank increased its fixed-rate mortgage rates amid rising yields on the bond market and a strengthening economy.

The Royal Bank of Canada says its posted five-year fixed mortgage rate moved to 5.14 per cent Thursday, up from 4.99 per cent.

The bank’s special offer rate for a five-year fixed with a 25-year amortization moved to 3.54 per cent from 3.39 per cent.

RBC (TSX:RY) says the changes reflect the activity of competitors, costs for funds on the wholesale markets as well as other costs and market considerations.

Scotiabank (TSX:BNS) says it is reviewing its rates and will likely soon make changes.

Yields on the bond market, where the big banks raise money, have been on the rise since late last year.

Many economists are also predicting that the Bank of Canada may raise its key interest rate target next week, a move that would likely prompt the big banks to raise their prime rates.

Increases in the prime rates push up the cost of variable-rate mortgages and other loans such as home equity lines of credit that are tied to the benchmark rate.