As Genworth Financial Inc. and China Oceanwide Holdings Group Co., Ltd. are facing down less than two weeks of time before it is time to fish or cut bait in their merger, based on a previously stated milestone for evidence of funding commitments, the insurance company is forging ahead with Plan B, involving its subsidiary, Genworth Mortgage Holdings Inc.
Genworth Mortgage, led by the parent, rolled out a colorful and detailed 29-page investor presentation Aug. 17 touting the subsidiary company’s strengths, such as leadership, capitalization, risk management and operating performance over the years.
The presentation, led by Dan Sheehan, Genworth CFO and CIO, Genworth Mortgage CEO Rohit Gupta and CFO Dean Mitchell, served as a primer in the structure of the company, a lesson on private mortgage insurance from how it operates and how Genworth Mortgage it is separate from the long-term care insurer, the largest in the U.S.
The LTC and life and annuity insurance businesses are shown in grayish blocks while other segments are in bright colors. It also focused on future plans, mortgage unit’s financial results, how it is dealing with mortgage delinquencies under U.S. government forbearance programs put in place due to the Covid-19 pandemic.
Genworth executives noted that the Covid-19 pandemic had created delays in the Chinese company’s funding plans. In fact, they called it “the primary factor currently holding up the transaction closing.”
The presentation said that Genworth Mortgage expected to reach an agreement “with the GSEs [Government Sponsored Enterprises] to maintain necessary PMIERs [private mortgage insurer eligibility requirements] at 115% of current requirements and for any near-term debt financing at GMI to be limited to $750mm, with a $300mm holdback to pay interest and support capital.”
It also pointed to the GSE’s “desire for Genworth to strengthen its financial profile or for [Genworth Mortgage] to gain greater independence, access to capital and improve ratings.”
This comes at a time when Genworth is considering a potential partial 19.9% IPO of its U.S. mortgage insurance business if the China Oceanwide transaction is terminated, which it could be if China Oceanwide doesn’t secure funding. Genworth has spent the better part of four years getting the necessary U.S. federal, international and state approvals or even selling stake in a subsidiary in Canada where a timely approval was not foreseen.
A couple of days after the presentation, on Aug. 19, Genworth proposed selling $750 million in debt in the form of senior notes due in 2025 in Genworth Mortgage.
The proceeds of the notes, less $300 million, will flow to the parent, Genworth Holdings Inc., to pay AXA under a settlement agreement and also reduce debt coming due. The AXA case involves losses on acquired Genworth policies that suffered under misspelling allegations. Although part of the settlement has been made, Genworth still has to make deferred cash payments totaling approximately £317 million in two installments at the end of June and September 2022 and to pay a significant portion of all future mis-selling losses incurred by AXA, which AXA will invoice quarterly. Genworth’s (#GNW) stock rose on the news, closing at $2.73 per share, up almost 12%, and was still rising in after-hours trading.
China Oceanwide signed a deal almost four years ago to acquire Genworth for $5.43 per share, or about $2.7 billion. Oceanwide also committed to contribute $1.5 billion to Genworth over time.
The merger agreement with China Oceanwide had earlier this summer been extended Sept. 30, but with a waiver requiring the Chinese conglomerate, to show evidence by Aug. 31 that it had funding for the deal, namely about $1 billion from sources in Mainland China and another $1 billion from Hony Capital and/or other acceptable third parties.
The Genworth executives said in the presentation that “Genworth’s management team remains focused on closing the Oceanwide transaction while also retaining flexibility to address near-term liquidity needs and maximizing shareholder value.”
The Richmond-based company said in its second quarter earnings release last month that it expects these steps to include a debt financing in the near term, which comes in the form of the senior note offering, and steps for the partial IPO of the mortgage subsidiary if the deal fails, the so-called Plan B.
“Maintaining an 80% ownership of USMI preserves important benefits, including preservation of tax consolidation and future structuring flexibility,” a Genworth spokeswoman emailed in response to a query on the rationale for an approximately one-fifth offering in any potential mortgage company IPO.
HONY and China Oceanwide did not respond to inquiries. Genworth has pointed to its publicly available releases for more information.
China Oceanwide had said back in early May that it was finalizing its funding plan for the transaction. After the funding is secured, China Oceanwide must then successfully complete the currency conversion and transfer of funds with China’s State Administration of Foreign Exchange for the merger to be completed. The companies have both continually repeated commitment to the merger’s closing.