An Ocean apart? Genworth and its merger partner face separate financing issues as stock plunges

Genworth Financial Inc. stock slid to its lowest level in five years, falling below $2 per share in morning trading on June 30 before rebounding a bit and closing near $2.3, down about 10%,  on the news that it must shore up its finances. This fall followed news that its pending takeover by China Oceanwide Holdings Group Ltd. suffered another delay, this one apparently tied due to the Chinese conglomerate’s own funding struggles which until now had been hidden by Genworth’s lengthy, multi-faceted pursuit of needed regulatory clearances.  

Although there merger has been pending since late October 2016, the new extension sowed doubt in the market that Genworth might not secure a deal after all with a deep-pocketed acquirer, at least to help it alleviate its near-term liabilities. These include about $1 billion in debt maturing in 2021 and over $200 million in potential liabilities owed to AXA over payment protection insurance misspelling losses in companies AXA had acquired.

Genworth has already made a £100 million interim payment or  $134 million to AXA in the wake of a December 2019 London court ruling that found for AXA. Genworth is still litigating the matter. 

Given these obstacles, one life insurance analyst noted that the situation now raises the chance that Genworth’s life insurance operations, including its long term care insurance business, could be placed into receivership at some point at the that the Richmond, Va.-based corporation could file for bankruptcy.

Thomas Gallagher, who leads an equity analyst team at Evercore ISIS, even also went as far as noting that the policyholders of Genworth’s life insurance could end up at the mercy the state guarantee funds, which would require hefty assessments. However, Genworth’s LTC shortfall could then potentially add many millions in assessment needs to the LTC-burdened state guaranty funds even as other LTC companies are struggling with reserves,seeking or undergoing

g rehabilitation or even discussing sales of their blocks in the private equity market, action which a source noted continues vigorously apace.  This is a slow process owing to the due diligence involved  and actuarial sensitivities in calculating reserve requirements.

Gallagher did acknowledge that the alternative financing plans Genworth is pursuing could push off any drastic outcomes, or at least delay them. 

Genworth’s U.S. life insurance company action level had an RBC [risk based capital] ratio of  213%  as of year-end 2019 compared  to 199% as of year-end 2018, due in part it said to  to strong in-force rate action LTC approvals at the state level. As of year-end 2018, there were only about a dozen companies with RBCs of 250% or less.

Gallagher’s research note focused on the implications of the Genworth-China Oceanwide merger delay for Ameriprise Financial Inc. because Ameriprise has reinsured half of its LTC block to Genworth’s life insurance company. However, Gallagher said that he believes the assets backing the reinsurance contract “should be safe, as it is collateralized in a bankruptcy remote trust.” However, the analyst pointed out that if Ameriprise actually does need to increase its reserves, Genworth’s life insurance company probably wouldn’t be able to pay up.   

Genworth stated it expects these plans to include a debt offering and a potential 19.9% IPO of its U.S. mortgage insurance business, subject to market conditions, if the China Oceanwide transaction falls through. Genworth has secured most, if not all, of its regulatory approvals for the deal from its U.S. and Australian federal and state regulators, sometimes gaining reapproval multiple times. It has even sold off its majority interest in its Canadian mortgage insurer in the past year to help smooth the way for its merger with China Oceanwide. In press releases, the company continually pointed to China Oceanwide’s own obligations to release money for the deal from mainland China. 

However, although the latest extension, the 15th waiver after the initial merger deadline passed in 2017, is for Sept. 30th, Genworth has told China Oceanwide it only has until Aug. 31 to ‘show it the money,’ so to speak. 

Specifically, Oceanwide must demonstrate evidence that $1billion is indeed available to Oceanwide from sources in mainland China to fund the deal and that Hony Capital and/or other “acceptable third-parties” have committed to give Oceanwide at least $1 billion from sources outside of China for the transaction.

China Oceanwide had said in early May that it was finalizing its funding plan for the formerly agreed-upon transaction purchase price of $5.43 per share and had a financing commitment for debt funding of up to $1.8 billion through Hony Capital to partially finance the acquisition of Genworth. Hony did not return a request for comment on its commitment to this financing.  China Oceanwide had been facing real estate delays and issues in California, and recently sold its  faltering San Francisco project to Hony after a previous deal failed. Oceanwide Plaza, in Los Angeles, has faced construction delays, liens  and losses. Reports in the real estate publications in California discuss Beijing tightening of outflows of capital from mainland China.

After the funding plan is secured, China Oceanwide must the successfully complete the currency conversion and transfer of funds with China’s State Administration of Foreign Exchange for the merger to be actually completed. 

Genworth put all the onus of the funding on its merger partner, this time: “China Oceanwide disagrees with any steps that Genworth takes to meet its financial obligations, it has the right to terminate the transaction, in its sole discretion,” the LTC giant stated in its press release.

In a press release issued early June 30 by Genworth, LU Zhiqiang, chairman of Oceanwide, said he remained committed to the merger.

“We have overcome many hurdles during the past three and half years and continue to persevere because of the future value of Genworth to our vision of pursuing the significant opportunities for long term care (LTC) insurance in the U.S., China and the rest of Asia. We remain committed to securing financing for the transaction in order to close the transaction as soon as possible,” Zhiqiang stated.