--Genworth announces capital plan for mortgage insurer
--Firm will create new parent company and contribute at least
$100 million to mortgage insurer
--Plan de-links mortgage insurer from existing company to
address default risk on senior notes
Genworth Financial Inc. (GNW) shares soared as executives
announced plans to create a new parent company and contribute at
least $100 million to its money-losing mortgage-insurance unit,
reducing the risk of default on its bonds and addressing
rating-agency concerns.
The creation of the new parent, which doesn't alter shareholder
ownership of the company nor its operations, will allow Genworth to
work around debt covenants related to the performance of the
mortgage insurer. Under the new structure, additional trouble at
the mortgage-insurance operation can't trigger a default in the
bonds--a key demand of Moody's Investors Service, which had
threatened to cut Genworth's credit rating to junk.
Genworth said it will likely contribute the $100 million to its
U.S. mortgage insurer in the second quarter. The company agreed to
contribute another $100 million if future projections show the unit
may not have sufficient resources to pay claims or if its main
regulator steps in to limit claim payments due to lack of
capital.
In the face of shareholder concern about the mortgage-insurance
operation weighing on the rest of the company, Genworth executives
have repeatedly said they would think long and hard before
contributing additional capital to the unit. But investors
applauded the company's plans Wednesday morning, sending shares up
12% to $9.08, its highest in nearly a year.
It was the biggest gainer in the S&P 500 by far, well ahead
of the 3.9% gain for car-parts company BorgWarner Inc (BWA) in
morning trading.
On a conference call with analysts, Genworth Chief Financial
Officer Martin Klein called the plan "capital efficient and cost
effective," and said it "is the most beneficial option for
shareholders and bondholders."
The plan also involves moving the company's European
mortgage-insurance subsidiaries under the main U.S.
mortgage-insurance unit to boost capital levels, and the approval
of an effort to create another legal subsidiary that could sell new
mortgage insurance policies under some circumstances.
"We don't really foresee" that option being used, but it adds to
the company's flexibility, Mr. Klein said on the conference
call.
Holders of the senior notes affected by the reorganization don't
get to vote on the plan. The North Carolina Department of
Insurance, the main regulator for the U.S. mortgage insurer, has
given its approval, and so have Fannie Mae and Freddie Mac, who are
effectively the two main customers of the unit, executives said on
the conference call. Other needed regulatory approvals are expected
in the second quarter, they said.
Some shareholders have pushed for Genworth to spin off or sell
its mortgage insurer to sever ties with a business that has
produced about $2 billion in operating losses since 2008. But
executives have long insisted that wasn't the right choice in the
near term. Mr. Klein said the restructuring "certainly does not
indiciate that we plan to separate" the unit.
The U.S. mortgage insurer is expected to report a breakeven to
slightly profitable quarter by yearend, he said.
The creation of the new parent generally won't affect
shareholders. The new entity will be renamed Genworth Financial
Inc., the existing name of the firm, will trade under the same
ticker on the New York Stock Exchange and the company said
shareholders "will not recognize any gain or loss for U.S. federal
income tax purposes in connection with the reorganization."
Write to Erik Holm at erik.holm@dowjones.com and Melodie Warner
at melodie.warner@dowjones.com
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