Genworth Locked Out of Fed's Commercial Paper Facility

WASHINGTON, Nov 11, 2008 (A. M. Best via COMTEX) -- GNW | Quote | Chart | News | PowerRating -- Genworth Financial Inc. has become ineligible to participate in the Federal Reserve's Commercial Paper Funding Facility, the life and mortgage insurer disclosed in a regulatory filing, taking off the table one potential liquidity option for a firm that has experienced trouble obtaining short-term financing.

In its 10-Q filing with the U.S. Securities and Exchange Commission, Genworth said it would be excluded from participating in the Fed facility, which launched Oct. 27, due to a recent downgrade by Moody's Investors Service of its holding company. The company also noted that stresses in the credit markets made it difficult for the company to issue commercial paper during the third quarter.

"Credit spreads widened for many corporate issuers of commercial paper and long-term debt resulting in less favorable financing terms," Genworth said in its filing. "If these trends continue, it may be difficult for us to complete various financing or funding transactions at desired times or on attractive terms or at all."

First announced Oct. 7, the CPFF funds purchases of commercial paper in an attempt to improve liquidity in short-term funding markets. Genworth noted that it already has participated in the CPFF, and that despite the downgrade, its "outstanding commercial paper that is currently held by CPFF will continue to be held until maturity."

Genworth recorded a $258 million net loss in the third quarter, largely due to $321 million of credit and/or cash-flow related impairments, as well as $55 million of impairments related to a change of intent to hold securities to maturity, and $86 million of realized losses on portfolio-reposition asset sales. Of its after-tax impairments, $153 million were related to subprime and Alt-A residential mortgage and asset-backed securities, while $145 million were in corporate bonds by several large financial services firms.

Following the quarter, the company announced it was suspending the dividend on its common stock, formally suspending its share repurchase program and contributing $500 million in cash to life insurance operating companies from the holding company. Following the infusion, Genworth retains about $435 million of cash at the holding company level, Chairman Michael D. Fraizer said during the company's quarterly conference call.

"We have two available five-year lines in credit, totaling approximately $1.8 billion effective liquidity. We have not drawn on these facilities, but have had a long-standing letter of credit using up a small portion of the lines as collateral," Fraizer said. He added the company would be looking at potential asset sales -- including the possible spin-off of its mortgage guaranty insurance business -- as well as debt refinancing and a possible capital raise.

"Currently, we have cash and cash equivalents at all of our operating companies totaling some $6.2 billion, and that's up from $4.3 billion as of Sept. 30," Fraizer said. "We have modeled policyholder obligations and cash needs under a variety of stressed scenarios to ensure that we are prepared for contingencies."

On Nov. 6, A.M. Best Co. placed the financial strength rating of A+ (Superior) of Genworth's key life/health insurance subsidiaries under review with negative implications, reflecting "the deterioration in the statutory capital of Genworth's life/health entities as of midyear 2008," as well as reduced financial flexibility brought about by a decline in the company's common stock. Over the past two months, shares of Genworth (NYSE: GNW | Quote | Chart | News | PowerRating) have fallen 91.8% from a Sept. 19 high of $15.25 to $1.25 a share in late afternoon trading on Nov. 11.

"Potential pressure on interest coverage is of concern due to an expected decline in earnings and the potential for higher capital costs from the need to fund $1.1 billion of maturing debt in mid-2009. A.M. Best believes that further negative implications exist for the cost and availability of funding for Regulation XXX and AXXX reserves," A.M. Best said.

(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)

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