S&P Places Genworth Financial (GNW) Ratings on CreditWatch Developing Amid Merger Agreement

October 24, 2016 2:05 PM EDT

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S&P Global Ratings said it placed its ratings on Genworth Financial Inc. (NYSE: GNW), as well as the ratings on its U.S.-based mortgage insurance and life subsidiaries, Genworth Mortgage Insurance Inc. and Genworth Life and Annuity Insurance Co. (GLAIC), on CreditWatch with developing implications.

At the same time, S&P Global Ratings placed its ratings on the company's subsidiaries primarily in the long-term care business, namely Genworth Life Insurance Co. (GLIC) and Genworth Life Insurance Co. of New York (GLIC-NY), on CreditWatch with negative implications.

The CreditWatch placement reflects recent news that Genworth Financial has entered into a definitive agreement to be purchased by China-based China Oceanwide Holdings Group (Oceanwide) as well as other developments. We do not rate the legal entity and potential acquirer, Oceanwide, though we do maintain a 'B' counterparty credit rating on a portion of Oceanwide through its subsidiary Oceanwide Holdings Co., Ltd. (Shenzhen listed).

Based on statements made by Genworth management, Genworth would benefit post-close in 2017 from a capital infusion in the U.S. life division, and by specifically addressing its $600 million senior debt maturing in May 2018.

"Beyond the capital outlay and debt pay-down, we don't have sufficient information on the acquirer, its resources, its intent, potential influence, and return expectations, all of which could affect our view of the current operations' creditworthiness with varying magnitudes, potentially positively or negatively," said S&P Global Ratings credit analyst Hardeep Manku.

While we view favorably the capital outlay by the new owner and deleveraging initiatives, the announced reserves charges and potential for additional reserve strengthening offset the benefit and could be a drag on our stand-alone view of the life/long-term care business. And although interest in Genworth's long-term care business has been cited as one of the reasons for the transaction, the company has been striving to isolate its legacy long-term care exposure from ongoing operations and has publicly stated it doesn't plan to provide support beyond a certain point. Furthermore, the effort to isolate long-term care business can have a varying impact on individual legal entities involved, which is reflected in the negative CreditWatch placement on GLIC and GLIC-NY.

We continue to view both the Australian and Canadian mortgage insurance entities as relatively insulated at the respective current rating levels given local regulatory oversight, external minority ownership, and restriction on capital fungibility. We have not de-linked the ratings on Genworth's ongoing Australian and Canadian entities from the group credit profile.

The CreditWatch developing reflects the uncertainty related to the new ownership that may affect our view either due to, or in combination with, the stand-alone or group-wide considerations. The potential impact on the current operations may be of varying magnitudes and could potentially be either positive or negative. The CreditWatch negative on GLIC and GLIC-NY reflects the potential for further deterioration of their stand-alone creditworthiness due to ongoing reserve issues and in consideration of efforts to isolate these subsidiaries from the group, which could result in a downgrade of one or more notches. We expect to update the CreditWatch within the next 90 days.

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