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GENWORTH FINANCIAL INC GNW
December 30, 2022 - 1:07pm EST by
venetian
2022 2023
Price: 5.29 EPS 0 0
Shares Out. (in M): 503 P/E 0 0
Market Cap (in $M): 2,660 P/FCF 0 0
Net Debt (in $M): 751 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0 0

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Description

GNW 6.5% Senior Notes due Jan 15, 2034

 

Thesis 

 

GNW Holding Company 6.5% 2034 notes appear attractive as a defensive investment as they are currently trading at 88.5/100 for an implied yield of 8%. In addition, there is the potential upside for an accelerated redemption that could increase the IRR to north of 10%.

 

The solvency of the notes appears strong as GNW holding company has significant assets and liquidity profile and there is no debt in front of the 2034 maturity.



GNW Holdco Capital Structure

 

GNW Holdco assets are: 

  • ~82% ownership stake in Enact Holdings Inc (“ACT”), a publicly listed domestic mortgage insurance operator

  • 100% stake in Genworth Life Insurance Co. (“GLIC”) which is an insurance regulated entity that holds the legacy LTC, Life Insurance and Annuities assets.

 

ACT has a current share price of $23.99 for a market cap of $3.9bn and a GNW stake of ~$3.2bn. 

 

For conservative purposes, we assume that GLIC value is zero.

 

In addition, GNW has an adjusted cash position of $295mm, composed of $145mm cash at end of Q3 plus $150mm of special dividend paid by ACT in December 2022.

 

 

It is important to note that the 2034 Notes are senior to the 2066 unsecured notes and have to be retired / reduced to below $100mm before any open market repurchase of the 2066 unsecured notes can happen.

 

GNW HoldCo liquidity is solid as yearly sources of funds include ACT regular dividend of ~$75mm, while interest rate expenses run ~$60mm per year. In addition, GNW is expected to receive approximately $150-200mm of remaining tax sharing payments and additional ACT distributions from participating in share repurchases / extraordinary dividends.

 

Potential for Accelerated repayment

 

GNW Holdco is expecting significant cash generation over the next 3 quarters and currently their stated capital allocation priority is to repurchase shares. 

 

As GNW shares are raising in price, there is the possibility that they may decide to shift cash allocation to open market repurchase / retirement of the 2034 notes to then repay the floating 2066 Subordinated Notes (which have interest of Libor plus 200bps) in order to mitigate their interest rate risk and enable access to additional strategic value creation opportunities including a spin-off of ACT.

 

Main Risks:

 

  • Significant deterioration of Real Estate market values leading to sustained losses / insolvency of ACT mortgage insurance

  • Continued abrupt increase in short term interest rates increasing payment of 2066 Floating Subordinated Notes

 

Catalysts

  • Accelerated repayment of 2034 Notes to enable open market repurchases / retirement of 2066 Floating Subordinated Notes and additional strategic value creation alternatives




I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Accelerated repayment of 2034 Notes to enable open market repurchases / retirement of 2066 Floating Subordinated Notes and additional strategic value creation alternatives
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