Better: over hyped Spac deal has shaky foundations

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This is not great timing for a US mortgage company to go public. The 30-year fixed rate on home loans rose to 7.31 per cent last week — the highest since December 2000. A lack of inventory has persistently propped up house prices, making it tough for Americans to buy a home. 

Mortgage origination volume is expected to drop by a third this year, according to the Mortgage Bankers Association. The fall would come on the heels of a 50 per cent collapse in volume in 2022.

None of this will deter Better. The SoftBank-backed online mortgage lender is set to go public on Thursday. It will do so via a merger with a special purpose acquisition company. Yet the timing of Better’s public debut is the least unusual aspect of the deal.

This deal values Better at a pre-transaction equity value of $6.9bn. The implied enterprise value is unchanged from what was agreed in 2021 despite a sharp deterioration in Better’s profits. The company reported $1.2bn in losses for 2021 and 2022 after making $184.9mn in net profit in 2020. It is also a long way off from the $1bn profit it said it would make in 2023, as per its investor slideshow from May 2021.

Given these profit drains, SoftBank has had to step in. It has already provided $650mn in bridge financing to Better, and its Vision Fund 2 invested $500mn in April 2021. Post merger, Better will receive $565mn of fresh capital, including $528mn from a convertible bond issue to SoftBank. 

Ironically shrinking loan volumes are not necessarily bad news for big non-bank mortgage lenders. Some now have improved pricing power. That has been reflected in the share price of Rocket Company, which owns Quicken Loans, America’s largest non-bank mortgage lender. These have rallied 48 per cent so far this year. Those in rival UWM, the parent company of United Wholesale Mortgage, have risen by two-thirds.

Better has a very small market share (less than 1 per cent). Do not expect it to receive the same boost when the shares start trading on Thursday.