Genworth Financial Inc. acting Chief Executive Officer Martin Klein said defending the firm’s investment-grade status at Moody’s Investors Service may be more harmful than a cut to junk, according to BTIG LLC.
“Klein indicated that the cost of taking action to stave off a Moody’s downgrade may be more detrimental to shareholders than accepting the possibility” the rating will be lowered, Mark Palmer, an analyst at BTIG LLC, wrote in a research note today that was based on a meeting with the leader of the Richmond, Virginia-based company.
The cost of protecting against the company’s default climbed and the stock posted the biggest decline in the 24-company KBW Insurance Index. Moody’s began a review of the rating in June and has said Genworth can help avert a downgrade by separating its unprofitable mortgage-insurance unit from the rest of the firm. Klein said in August that there were obstacles to isolating the mortgage-guaranty business.
Genworth also sells life insurance and long-term care coverage. The company is rated Baa3 by Moody’s, the lowest of 10 investment-grade levels.
“It’s better for Genworth that its investors understand what this means and, if the event were to occur, that it’s not the end of the world,” Palmer said in a phone interview discussing the possibility of a downgrade. “This is a company that’s doing an awful lot of contingency planning right now.”
Genworth dropped 2.9 percent to $5.66 at 4:15 p.m. in New York. The insurer has fallen 14 percent this year, while the index has gained 12 percent.
Contracts protecting against the company’s default for five years increased 0.4 percentage point to 3.3 percent upfront as of 4:47 p.m., according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $330,000 initially and $500,000 annually to protect $10 million of Genworth’s debt.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The contracts, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.
Klein said a downgrade wouldn’t cause “any meaningful movement in our bond spreads,” Palmer wrote. The CEO told the analyst that derivative-trading and sales to retail clients occur at subsidiaries with higher ratings, according to the note.
Klein became acting CEO at Genworth after Michael Fraizer resigned May 1 following a decision to shelve an initial public offering of the firm’s Australia mortgage-insurance unit. Klein said in August that a strategic review of the firm’s businesses is complete, and declined to discuss details of the analysis.
The analyst said he spoke with Klein for about an hour yesterday. Al Orendorff, a spokesman for Genworth, confirmed the meeting occurred.