Moody's takes action on Genworth ratings due to merger delays and COVID-19

Moody's has downgraded the senior unsecured debt rating of Genworth Holdings to B3 from B2 and changed the outlook to "developing", having recently  downgraded its insurance financial strength (IFS) ratings due to a decline in profitability and net capital generation in the near term.

Moody's said the action reflects the "continuing delays to close the planned acquisition of the company by China Oceanwide Holdings Group", including obtaining the required regulatory approvals, which it noted underlines the risks to consummate the transaction.

Additionally, it stated that significantly higher volatility in the global financial markets due to the coronavirus pandemic will "challenge the company's ability to build liquidity".

US-based Genworth and China Oceanwide Holdings Group agreed to a fourth waiver and agreement of the planned merger in March 2018. The deal that would see the Chinese company buy Genworth for $2.7 billion was first unveiled in October 2016.

Moody's downgrade is largely driven by the expected deterioration in cashflow and limited access to the debt capital markets at the holding company, as well as the need to develop alternative financing arrangements, absent a transaction with China Oceanwide, to its upcoming debt maturing of approximately $1.1 billion in 2021.

"The downgrade also reflects the ongoing strain on Genworth's financial flexibility and balance sheet from the impact of the coronavirus pandemic on executing financings solutions to extend its debt ladder," said Moody's. "Genworth's ability to organically build additional liquidity is also constrained by its expected limited dividends in 2020 from its insurance subsidiaries, relative to its debt load."

The developing outlook reflects Moody's view that at this stage liquidity is pressured, and long-term financing solutions for its debt ladder remain uncertain.

"The uncertainty remains around the ability to execute alternative arrangements to address its upcoming debt maturities during heightened levels of financial market volatility absent a transaction with China Oceanwide, the potential amounts from the AXA lawsuit, and the final outcome of the planned acquisition of the company by China Oceanwide," it said.

However, it noted that Genworth has material holding company resources to evaluate potential refinancing alternatives, including its stake in its mortgage insurance operations and net cash and investments of approximately $575 million at March 31, 2020 to address upcoming debt maturities in case the transaction with China Oceanwide does not close.