After a year of searching for urgently needed growth capital, Canada’s sixth-biggest broker channel lender got the boost it required.
Street Capital Group has agreed to be bought by RFA Capital.
The deal will take Street private. RFA is acquiring all shares for $0.68, a 36% premium over Friday’s closing price and about 1-times book value
(a meaningful premium to where larger peers like Home Trust and Equitable Bank are trading today).
RFA started considering a Street acquisition last summer, RFA Managing Partner, Ben Rodney says.
They formally started the process with BMO (Street’s investment banker) in January. The deal then presumably got an initial blessing from banking regulator OSFI since it’s involved in all planned bank acquisitions.
Pending the acquisition closing, RFA wants to take the combined entities from $6 billion a year in originations to $10 billion. “We have the funding in place to do that,” says Rodney.
RFA will inject $50 million of equity on day one. That should make OSFI happy, given many had questioned Street’s long-term viability after its stock price slid to half a buck.
But that’s the past. The future is brighter, for three reasons:
- Street will get $5 billion in new funding
- The funding will principally be for prime insured and uninsured mortgages. Not long ago, Street was completely out of the market on uninsured pricing due to an absence of willing investors.
- It will also be used to ramp up Street’s non-prime lending. Rodney says, “Street doesn’t have efficient non-insured funding right now.” These new funds will “significantly increase the Street Solutions [alternative lending] business.”
- The source of this funding is 100% Canadian institutional investors, says Rodney. Much of it comes from very high net worth investors who are patient long-term capital.
- RFA will also “ramp up” Street’s deposit business and “diversify the channels we obtain those deposits (from)…,” Rodney said. Someday it will likely launch direct-to-consumer deposits, but we get the sense that is well down the road.
- Street will get new products
- We hear that, in time, the plan is to add a new HELOC, better refinance options, and an ultra-competitive “Value” (low-frills) mortgage product, among others. (Ideally, they’ll also consider competitive 1- to 4-year prime uninsured fixed terms, a market that’s been corned of late by big banks.)
- Street will offer better pricing
- “Expect to see more competitive rates,” Rodney said. And that’s not just PR talk. The lender he runs now, RFA Mortgage Corporation, is a highly efficient operator that has the lowest 5-year fixed rate in Canada.
“We are thrilled with the opportunity before us with RFA as our capital partner,” Street Capital Bank CEO Duncan Hannay told CMT. “This brings new strength to the broker channel…We’ll combine the benefit of a bank balance sheet to support non-prime lending with a scale originator in prime.”
Being a Small Bank: Burden or Advantage?
Naysayers may question the deal, citing the extreme regulatory and expense burden of running a schedule I bank. We asked Rodney how RFA would ensure a good ROI given that burden. “The way we are recapitalizing the structure and utilizing technologies to create efficiencies in the bank will allow us a competitive advantage,” he said.
“We are fixing the balance sheet,” he said, adding that “scale will cover the regulatory cost.”
Other facts of note:
- Rodney says RFA hasn’t decided yet if it will keep the name (Street Capital Bank of Canada) and run with a multi-brand strategy (like MCAP and RMG, for instance), or rebrand and consolidate both lenders.
- There are no plans to replace Duncan and Street’s senior management team, Rodney said.
- The deal is expected to close in the fall. Someone could always try to top RFA’s bid for the company and Street would be compelled to review such offers. But that’s less likely now, given the $4 million penalty Street would have to pay RFA for backing out, the need to win OSFI’s pre-approval, and the fact that RFA’s 68 cents-per-share offer is amply fair (relative to peer valuations), according to analysts like NBF and Raymond James.