* To create new parent company
* Removes U.S. mortgage unit from bond indentures
* To add $100 mln to U.S. mortgage unit
* Existing shares to automatically convert to shares of new
* Shares up 9 pct
By Jochelle Mendonca and Tanya Agrawal
Jan 16 Genworth Financial Inc on
Wednesday said it was reorganizing itself to separate its
mortgage insurance business from the rest of the company,
reducing the risk of default on its bonds and sending its shares
up 9 percent.
Genworth's shareholders -- including hedge fund Highfields
Capital Management -- had been asking the company to take steps
to insulate the loss-making mortgage business from the life and
long-term care insurance business.
Bond rating firm Moody's piled on the pressure in September
when it said it would likely downgrade Genworth unless the
company could protect itself from continuing losses from its
mortgage insurance (MI) unit.
Genworth's plan, disclosed a month after it named former ING
executive Thomas McInerney as chief executive, will create a new
holding company that will own the life and long-term care
businesses, and the U.S. and European MI units.
"We view this plan as a game-changer. It addresses what has
been a primary risk - that of contagion from the mortgage unit
to the holding company," BTIG analyst Mark Palmer said.
The company, which will remain responsible for its senior
and subordinated bonds, also removed the U.S. MI unit from the
indentures governing its notes, reducing chances that the unit
could start a default on its debt.
Genworth has about $4.2 billion in outstanding debt
according to Thomson Reuters data.
Moody's said the reorganization addressed its concerns and
ended the review on Genworth's debt rating. The bond rating
agency confirmed Genworth's debt rating of 'Baa3' with a stable
The reorganization pushed the company's credit spreads to
their tightest level since the 2008 credit crisis.
"Overall this is great, it addresses rating agency concerns,
improves risk-to-capital and creates structure for future
financial flexibility," said a Genworth shareholder who declined
to be named.
Under the reorganization, the insurer will transfer the
ownership of the company's European MI subsidiaries to GMICO,
its main U.S. MI unit.
The European units will provide about $200 million in
additional statutory capital to the U.S. mortgage business.
Genworth will contribute an additional $100 million to GMICO
as part of a deal to create a 'NewCo' that would issue mortgage
insurance if GMICO was forced to stop writing new business by
"It (the capital infusion) is not sufficient to offset the
negative credit pressure attributable to diminishing support
from Genworth and the potential for GMICO being placed into
run-off," Moody's said.
The bond rating agency downgraded the institutional
financial strength rating of the U.S. MI operating units to Ba2
from Ba1, with a negative outlook.
Shares of Genworth, which have risen about 37 percent since
reporting a third-quarter profit in October, were up 9 percent
at $8.88 on Wednesday morning on the New York Stock Exchange.