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Genworth Australia IPO boosts credit quality but better value elsewhere

by Justin McCarthy | May 27, 2014

Last week, Genworth Mortgage Insurance Australia Limited completed their long-awaited IPO. The US-based parent, Genworth Financial Inc, sold a 34% stake, raising $583m and valuing the company at just a touch under $2bn.

The IPO was the largest financial sector listing on the ASX since 2007 and was well received by equity markets with the shares trading 13% above the $2.65 issue price on the first day of trading. They are now just shy of 16% above the issue price.

The US parent said the IPO would allow it to reduce risk and rebalance capital amongst its three major mortgage insurance businesses – in the United States, Canada and Australia.

Following the successful closing of the IPO, Standard & Poor’s affirmed the Australian operation’s rating and moved the outlook from negative to stable.

Relative Value

Whilst the successful IPO is seen as a credit positive (as it provides greater disclosure, improved access to equity funding and further reduces pressure on the lower rated US-based parent), we continue to assess the Genworth Australia subordinated FRNs as “fully priced” and can see value elsewhere in the subordinated debt space.

The Genworth June 2021 (callable June 2016) subordinated FRN is offered at a yield to first call date of 4.90% but it does have a very healthy running yield of 7.07%, among the highest in the market for a FRN.

However, on an outright yield basis we prefer the recent Bendigo and Adelaide Bank January 2024 (callable January 2019) subordinated FRN issue, currently offered at an expected yield of 5.33% to first call date or the IAG/Insurance Australia Limited March 2040 (callable March 2019) subordinated FRN offered at an expected yield of 5.60% to first call date, albeit both are longer dated and with lower running yields.

Please speak to your FIIG representative if you are interested in the Genworth Australia, Bendigo and Adelaide Bank or IAG/Insurance Australia Limited subordinated FRNs.

All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities. Genworth Australia and IAG/Insurance Australia Limited FRNs are only available to wholesale investors only in minimum parcel sizes of $10,000. The Bendigo and Adelaide subordinated FRNs are available to retail and wholesale investors in minimum parcel sizes of $10,000.