Berkshire Hathaway Inc's (>> Berkshire Hathaway) commitment to provide financing to Home Capital Group Inc (>> Home Capital Group Inc), Canada's largest nonbank lender, marks the billionaire's latest effort to shore up a company in desperate need of cash, or at least his full-throated support.
"It's a typical Buffett bailout trade," said Jared Dillian, an independent investment strategist and former trader betting the value of the Canadian dollar and several Canadian banks will fall. "He's set it up where he's risking a small amount to make a lot."
Home Capital joined Bank of America Corp (>> Bank of America), General Electric Co (>> General Electric Company), Goldman Sachs Group Inc (>> Goldman Sachs Group) and other companies that have welcomed Buffett's largesse, accepting a C$2 billion (US$1.51 billion) credit line - carrying a 9 percent interest rate - and up to C$400 million (US$302 million) in equity, for a 38.4 percent stake.
Its share price soared 27.2 percent on Thursday to C$19.00, leaving Buffett with a potential 90 percent paper profit on shares he is buying for just C$10 each. Home Capital's share price nonetheless remains nearly two-thirds below its 2014 peak.
"The deal is really low risk," said John Huber, a portfolio manager at Saber Capital Management LLC in Raleigh, North Carolina, which owns Berkshire stock. "It's an opportunistic deal that gives him very attractive risk-return terms."
Berkshire's infusion was much needed by Home Capital, which has suffered a deposit exodus resembling a bank run after being accused of, and then admitting to, concealing mortgage fraud.
"The assumption is that Berkshire did its due diligence, and came to a conclusion that there was presumably a franchise and business model worth saving," said Cathy Seifert, a CFRA Research equity analyst. "It implies a seal of approval."
Berkshire's investment lets Buffett deploy some of his Omaha, Nebraska-based conglomerate's recent $96.5 billion hoard of cash, equivalents and Treasury bills.
"Today's announcement is a modest positive," wrote Meyer Shields, a Keefe, Bruyette & Woods analyst. "But it also reflects how difficult it is for Berkshire to meaningfully use its cash."
Berkshire's Columbia Insurance unit is acquiring the Home Capital equity, pending shareholder and regulatory approvals.
Meanwhile, the credit line, if fully tapped, could generate C$180 million for Berkshire.
Buffett came to be seen as a lender of last resort during the global financial crisis.
From 2008 to 2011, Buffett spent more than $25 billion to buy high-yielding stocks and bonds in companies including Bank of America, GE, Goldman, Dow Chemical Co (>> Dow Chemical Company (The)) and Harley-Davidson Inc (>> Harley-Davidson Inc).
His $5 billion Bank of America bet looks particularly savvy: it throws off $300 million in annual dividends, and Berkshire is sitting on an $11 billion gain on accompanying warrants.
But with most of those investments having passed, the 86-year-old Buffett has been struggling to generate income in a persistently low interest rate environment.
"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," Buffett said in a statement.
Berkshire did not respond to requests for further comment.
Home Capital's problems accelerated in mid-April, when the Ontario Securities Commission accused it of deceiving investors.
Last week, the company reached separate settlements with the regulator and investors over making misleading statements about its mortgage underwriting.
Berkshire's investment reflects its willingness to commit to companies whose practices have drawn criticism, including Wells Fargo & Co (>> Wells Fargo), now embroiled in scandal for creating unauthorized customer accounts.
"Reputational risk is why he's getting 9 percent interest" at Home Capital, Seifert said.
Berkshire has other investments tied to real estate, including manufactured home company Clayton Homes and HomeServices of America, the second largest U.S. residential real estate brokerage.
It also has several investments in Canada, including the AltaLink electricity transmission company in Alberta, for which it paid about $C3.1 billion in 2014.
Many of Berkshire's more than 90 business units also offer goods and services in the country, including the Ben Bridge jeweler, Benjamin Moore paints and the BNSF railroad.
Despite his paper profit on Home Capital, Buffett believes investment gains and losses in a given period are usually meaningless.
Buffett's foray into Canadian real estate comes amid uncertainty about that country's housing sector. The Ontario government has levied a 15 percent tax on foreign buyers to cool a frothy Toronto-area real estate market.
Buffett is "not going to stop the credit cycle up there," said Marc Cohodes, a short seller betting against Home Capital. "But it's a bailout by the most renowned investor on the planet."
(Reporting by Jonathan Stempel and Trevor Hunnicutt in New York; Editing by Jennifer Ablan, Jeffrey Benkoe and Lisa Shumaker)
By Jonathan Stempel and Trevor Hunnicutt