Summary
- With the China Oceanwide deal on the brink of failure, Genworth is going to need to raise nearly $973 million to meet its upcoming liquidity needs.
- Management is planning to use Genworth's U.S. mortgage insurance subsidiary to raise the necessary cash using both a debt and equity offering.
- Raising capital at Genworth's subsidiary will benefit the company because it will lower the firm's cost of borrowing and raise the market value of Genworth's shares.
[img src="https://static.seekingalpha.com/uploads/2020/7/18/... alt="Genworth Financial more time for COW to raise a seemingly impossible amount of capital (for readers unfamiliar with this saga, "more" is emphasized to clue readers into the fact that COW has had nearly four years to arrange financing in order to consummate the merger agreement).
Without the transaction, Genworth needs to find another way to create shareholder value. But a more pressing matter is how the company will navigate the next 14 months considering Genworth's holding company (hereinafter "HoldCo") has $1.07 billion senior notes coming due, plus an additional $200 million prepayment if Genworth wants to take advantage of the interest rate reduction provision on the secured notes due 2022. With slim prospects of dividend payments from its operating subsidiaries due to the current market downturn, Genworth needs to figure out a way, quickly, to come up with approximately $1.27 billion for the HoldCo to cover its cash outlays coming up over the next year.
Fortunately, management has already signaled to the market how it anticipates meeting its liquidity needs in the event the transaction with COW is further delayed or outright fails. Genworth plans to raise capital via a secured loan at its U.S. mortgage insurance subsidiary (hereinafter "U.S.M.I.") - Genworth's crown jewel - followed up with a 19.9% equity carve-out of that business. The actual amount the company will raise from these transactions will largely depend on market conditions, but considering valuations of four publicly traded mortgage insurers, its probable Genworth will succeed in raising the capital required to remain a going concern.
The equity carve-out should also benefit Genworth's shareholders. Valuations of U.S.M.I.'s competitors suggest that the enterprise value of U.S.M.I. is worth roughly $3.06 billion as a public traded company. As such, the remaining 80.1% held by Genworth after the IPO and debt financing will carry a value estimated around $1.99 billion. Currently, Genworth's market cap, inclusive of U.S.M.I as well as all its other operating subsidiaries, is only $1.10 billion. Assuming an efficient market, unlocking the value of Genworth's U.S.M.I. business should enhance the market cap of the parent to reflect the market value of U.S.M.I. - implying GNW is presently undervalued by 81%!
