TORONTO (Reuters) - Warren Buffett's Berkshire Hathaway Inc is providing a C$2 billion loan to Home Capital Group Inc and taking a 38 percent stake in the lender, with the U.S. billionaire pitching himself against short-sellers who have targeted the stock as Canada's housing market has turned riskier.Home Capital shares soared as much as 18 percent to its highest since April on Thursday.The deal brings to a close a near two-month process during which Home Capital's beefed-up board and advisers RBC Capital Markets and BMO Capital Markets sought funding to replace a costly credit facility with the Healthcare of Ontario Pension Plan (HOOPP).Canada's housing market has turned riskier as home prices in Toronto and Vancouver have fallen after the government introduced measures to cool overheating prices and household debt in Canada has reached record levels.Home Capital has played an important role in Canada's mortgage market, lending to new immigrants and self-employed workers who may not be able to get loans from the country's biggest banks. In a statement on Wednesday, Buffett said the lender's "leading position in a growing market sector make this a very attractive investment."Investors are wondering whether the deal will be as successful as Buffett's decidedly bigger deal to buy Goldman Sachs preferred shares after credit markets froze during the financial crisis in 2008.Alan Hibben, a Home Capital director, said the lender received interest from over 70 parties but decided Buffett's proposal was the best option, partly because of his credibility with investors and depositors. "This transaction represents a very strong validation and endorsement of Home Capital from a world-renowned long-term value investor," he told analysts on a conference call. "We believe that a strong corporate sponsor will further restore confidence in Home in the capital and deposit markets."Short sellers are continuing to take positions in Home Capital, which they have targeted for the past two years. They aim to make a profit by selling borrowed shares on the hope of buying them back later at a lower price. "We will see whether things change over the next week or so but shorts are still trying to accumulate a position in Home Capital," said Ihor Dusaniwsky, head of research at S3 Partners, in New York. Combined short interest in the company's Canadian and U.S.-listed shares stands at about $183 million, up $62 million this month, according to data from financial analytics firm S3 Partners.Marc Cohodes, a short seller who has been betting against Home Capital for two years, said on Thursday he continued to do so."If it wasn't Warren Buffett's name, the stock would be way, way way, down today," he said in an interview. Home Capital was forced into a capital squeeze after depositors rushed to withdraw funds from its high-interest savings accounts. They have pulled 95 percent of funds from Home Capital's high-interest savings accounts since March 27, when the company terminated the employment of former Chief Executive Officer Martin Reid.The withdrawals accelerated after April 19, when Canada's biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business.It reached a settlement with the commission last week and accepted responsibility for misleading investors about mortgage underwriting problems."The 'endorsement' from Warren Buffet may prove to rehabilitate depositor confidence, thus turning deposit flow positive," said National Bank of Canada analyst Jaeme Gloyn.The Berkshire credit agreement comes with an interest rate of 9 percent, with a standby fee on funds not drawn down of 1.75 percent, compared with 2.5 percent previously. Berkshire will buy C$400 million in new Home Capital shares, issued at C$9.55 per share, a 15 percent discount to the average share price prior to its final proposal on June 13 and a 33 percent discount to Wednesday's closing price.Berkshire Hathaway will also take a 38.4 percent stake in the company after buying $400 million worth of Home Capital stock. Buffett has not been especially active in Canada in recent years. He was a shareholder in oil and gas producer Suncor Energy Inc but sold the stake in 2016.Shares in Home Capital rose as high as $18.94 before easing to $17.21, up 15.1 percent. (Additional reporting by Jennifer Ablan and Saqib Ahmed in New York; Editing by Jeffrey Benkoe)
