Genworth likely to spin off MI business as Oceanwide deal stalls again

After its deal with China Oceanwide failed to close by the Dec. 31 deadline, Genworth Financial is focusing on its alternative path, including an initial public offering of the U.S. mortgage insurance business.

Unlike the past occasions when the Oceanwide deal deadline was not met, the end date was not formally extended at the end of December. The merger agreement remains in effect, although either party can terminate it at any time.

"When we considered our most recent extensions of the merger agreement, Genworth's board of directors believed we were on a path to a near-term closing based on the information we were provided," James Riepe, its chairman, said in a press release. "Given the most recent update, we do not believe a closing can occur in the near term. Thus, the management team will fully focus its efforts on executing our contingency plan."

Genworth blamed the closing's delay on a failure to finalize the financing terms for Hony Capital, which is supplying the funding for China Oceanwide. COVID-19 also played a role, they said.

"If the driving factor delaying the transaction is COVID-19, it is possible that a deal can be completed at some point as vaccinations become more widespread and the pandemic subsides," said BTIG's Ryan Gilbert in a report. "We see a lower probability of merger completion if financing is the primary reason for the delay."

Currently China Oceanwide is still working toward closing the transaction, Chairman Lu Zhiqiang said in the press release.

Genworth Financial has $1 billion in debt payments coming due this year, including $338 million in February and $659 million in September. The company's current $1 billion in available liquidity includes $340 million dedicated to meet the February due date.

Options to meet the September deadline, Gilbert said, include the U.S. mortgage insurance spinoff and/or an issuance of convertible notes.

"U.S. housing market conditions are robust and credit trends continue to improve, although valuations of Genworth's publicly traded PMI peers remain well below pre-COVID-19 levels," he said.

Any spinoff will be subject to market conditions as well as the satisfaction of various conditions and approvals, Genworth said.

As part of recent capital raising efforts, Genworth sold its majority ownership of the Canadian mortgage insurance business for $1.8 billion in December 2019 — which at the time was promoted as a maneuver to bypass the stalled regulatory approval process in that country — and completed a $750 million debt offering at the U.S. MI holding company last August.

In July 2020, Genworth Financial settled its legal issues with AXA. As part of that agreement, it gave AXA a note secured by 19.9% stakes in the U.S. and Australian MI businesses.

The transaction with China Oceanwide was announced in October 2016, at a time when Genworth was seeking additional capital due to issues around the long-term care insurance business. Several months before that, Genworth first raised the possibility of a mortgage insurer IPO to help shield that business from those problems.

While the transaction previously received all U.S. regulatory approvals needed, given the passage of time as well as the terms of these approvals, the parties will need to assess whether re-approvals or confirmations are necessary at the appropriate time.

"The parties retain the ability to ultimately complete the transaction if Oceanwide can secure the required funding and the parties can complete the remaining steps to closing, and if the transaction is still in the best interests of Genworth at that time," said Tom McInerney, Genworth's president and CEO. "At the same time, we are moving forward with our contingency plan to meet our near-term obligations and maximize long-term value, which we believe is the best approach for our shareholders."