When thinking of Australia, one traditionally imagines a country that is nothing but a secondary derivative of China's trade surplus, and an unpegged currency that allows for more trading flexibility than the Yuan. As a result, recurring calls warning of a housing weakness in the country are often ignored as there always appears enough liquidity to mask the issue just long enough. That may all soon be changing. Earlier today, insurance company Genworth Financial pulled the IPO of its Australian unit, sending its shares plunging by over 20% and its default risk soaring. Unfortunately for GNW, and soon for the entire Australian financial sector, instead of merely blaming market conditions, in the IPO, which was supposed to take public up to 40% of the company's Australian mortgage business, and has instead been delayed to 2013, GNW laid out a far more nuanced, and detailed explanation of what is happening. Alas, it also may be the canary in the coalmine that has been so long overdue in yet another regional, bubblelicious housing market.
Morgan Stanley's David MacGown explains:
Genworth announced that it will delay the IPO of up to 40% of its Australian mortgage business to 2013 from a previously targeted 2Q12 transaction. Recent news reports hinted that weak equity market conditions could delay the unit’s IPO, but GNW’s rationale was more problematic: the company cited deteriorating market conditions in the Aussie mortgage market. Specifically, the company noted “…elevated loss experience in Australia as lenders accelerated the processing of later-stage delinquencies from prior years through to foreclosure and claim at a higher rate and severity than expected, particularly in coastal areas of Queensland that experienced natural catastrophes and regional economic slowdowns and among certain groups of small business owners and self-employed borrowers.”
If anyone is desperately looking for a clue that things may be about to go, er, downer underer in Austrlia, it doesn't get any clearer than this. And if China is indeed facing a hard landing, or whetever the CCP wants to telegraph to the world in its first and foremost desire to avoid popular discontent, this may just be the straw that breaks the camel's back.
Unlike the troubled US MI business, GNW’s Canadian and Australian businesses have been consistently profitable, with the Australian business producing run rate quarterly earnings averaging about $50 million per quarter over the last two years. GNW now expects the Aussie MI business to report a “modest” first quarter loss.
It gets worse for the US company, whose loss of nearly $1 billion in market cap today alone may be just the beginning.
- I had been constructive on the GNW recovery story, anticipating an improving trajectory of US MI losses (helped by profitable new business written), continued performance of the International MI business, and in particular the 2013 return of the US life companies to positive earned surplus and thus dividend-paying status to the holding company. I viewed the Australian MI IPO as another positive step in this process in that it was expected to provide additional financial flexibility (estimated proceeds of approximately $500mm as estimated by MS equity analyst Nigel Dally (Pressure Building to Shrink to Prosperity, 2/1/12) to the holding company while managing the company’s global MI exposure.
- With the IPO shelved until 2013, I see little in the way of near-term positive catalysts for the credit. But it’s important to note that a 2012 IPO isn’t necessary for the company to maintain strong holding company liquidity. With $1.4B of cash in hand, GNW can easily cover an estimated $350mm of holdco interest and operating expenses and $222mm of maturities. Moreover, with the US MI subsidiaries running above the 25:1 risk-to-capital ratio limit (28.8:1 for the segment, 32.9:1 for the lead company at 12/31/11) and climbing as the company writes new business this year, it’s reasonable to posit that GNW’s North Carolina regulators will require the company to inject additional capital in order to continue writing new business. NC and numerous other state regulators have granted waivers of the 25:1 limit, allowing the company to write new business without injecting fresh capital. I estimate as much as a $250mm injection. The net of these cash uses implies that GNW would still end 2012 with nearly $600 million in holdco liquidity, and note that this estimate assumes no dividends from operating subsidiaries. GNW has previously projected $300mm of dividends from its life insurance and wealth management units this year and dividends of $160mm from International MI. Holding company liquidity is the key credit positive for GNW at this point.
Yet for those who are worried the only move here in GNW is up, the trade may well be to start getting increasingly cautious on other Australian equities such as QBE, ANZ, NAB, WBC and CBA. Because, to mix metaphors, when the light is shone, there is never just one canary. And central-planner can only delay mean reversion for so long...