Genworth Financial downgraded, still investment grade

[Update: A previous version of this article did not specify  it was the U.K.-Europe arm of Genworth Financial Mortgage that received a ratings downgrade.]

Standard & Poor’s cut the counterparty credit rating for Genworth Financial Inc. from ‘BBB/A-2’ to ‘BBB-/A-3’ on Friday.

“The U.S. mortgage insurance subsidiary of Genworth Financial was not affected by this rating action,” S&P said. But the firm did downgrade Genworth Financial Mortgage Insurance Ltd, the U.K.-Europe mortgage unit, to BBB- since it relies on a guarantee from the holding company.

“We continue to view GNW as investment grade due to its increased liquidity at the holding company, significant improvement in its U.S. mortgage insurance platform year to date, the Australian mortgage insurer’s return to profitability in the second quarter, and the positive momentum in unassigned surplus at the U.S. life operations,” said Standard & Poor’s credit analyst Jeremy Rosenbaum.

Still, Genworth faces difficulty in expanding its business globally, leaving ratings at its parent company just above junk status at the lowest investment grade.

“GNW let its two five-year credit facilities expire this year, and although we don’t think a full renewal was necessary given a shift in its mix of businesses, the move highlights a straining of its financial flexibility in the capital markets,” S&P said.

The company’s U.S. life operations also were downgraded a notch because of its sensitivity to interest rates.

“The outlook on GNW is negative, reflecting the low fixed-charge coverage metrics, the uneven business performance, and the continued poor, albeit improved, performance at the U.S. mortgage insurer,” S&P concluded. “Financing costs are more than peer companies’ and likely factored into management’s decision not to renew the credit facilities. We believe that the ongoing strategic review will address many of the factors that currently strain the company’s financial flexibility.”

But S&P says until management executes its plans, the company remains under close watch due to recent years of volatility in the insurer’s operating performance since the onset of the financial crisis.

Last month, executives with Genworth confirmed they were working with Moody’s Investors Service as the ratings giant ponders the possible downgrade of the firm’s U.S. mortgage insurance unit and the holding company’s unsecured debt rating.

While analysts called for the possible spin-off of Genworth’s MI unit, the company said such a move was not necessary.

“We are acting with focus and urgency and believe that the actions we are pursuing will improve returns, strengthen the company’s financial position, support a stronger credit profile and drive greater value for our shareholders,” said Genworth Chief Executive Martin Klein.

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