Brookfield deal could open door to international markets for Genworth MI Canada, analyst says
Brookfield Asset Management’s private equity arm has agreed to buy a controlling stake in Genworth MI Canada in a deal valued at $2.4 billion, which could clear the way for Canada’s largest private mortgage insurer to pursue business in international markets where it was previously restricted by terms of its ownership.
The transaction, which Richmond, Va.-based parent Genworth Financial Inc. opened the door to exploring in July, is primarily expected to ease the U.S. parent’s long-awaited merger with China Oceanwide Holdings Group Co. Ltd. That deal was struck in 2016 but has been held up while awaiting regulatory approval in jurisdictions including Canada.
Market watchers said they expect the Genworth MI Canada deal to have little impact on the Canadian mortgage insurance market, where the federal government guarantees the bulk of mortgage insurance that is provided by just three players.
However, Jaeme Gloyn, an analyst at National Bank of Canada, said in a note to clients that he expects the exit of the U.S. parent to remove an impediment to Genworth MI Canada’s expansion beyond Canadian borders, since the unit was previously limited to countries where Genworth Financial Inc. did not operate and will be backed by another global player.
“This hints at potential global expansion of MIC (Genworth MI Canada) operations … which could drive enhanced growth and profitability,” Gloyn wrote, noting that the new controlling shareholder, Brookfield Business Partners, holds more than US$30 billion of invested assets outside North America. In addition, Brookfield Asset Management, which owns about 30 per cent of Brookfield Business Partners, has “global reach,” he wrote.
The analyst did not specify which international markets might be favourable to Genworth Canada’s expertise in mortgage insurance.
Brookfied said Genworth MI Canada’s strong domestic market share, and the high barriers to entry in the sector, were among the reasons it purchased the 57 per cent stake at $48.86 a share. The private equity buyer, which plans to bring on institutional investors as partners in the venture, also highlighted Genworth Canada’s “excellent and long-standing relationships with high quality lenders including leading Canadian banks, mortgage finance companies, and other regional lenders and credit unions.”
Canada’s largest mortgage insurer for home buyers with less than a 20 per cent down payment is Canada Mortgage and Housing Corporation (CMHC), a Crown corporation. The third player is Canada Guarantee Mortgage Insurance Company, which was built from AIG’s Canadian mortgage insurance business after it was purchased by the Ontario Teachers’ Pension Plan and Canadian businessman Stephen Smith in the aftermath of the 2008 financial crisis.
Brookfield has 'deep historical knowledge and existing experience in both insurance and residential markets'Credit Suisse
Research analysts at Credit Suisse published a note Tuesday that said Brookfield’s purchase of Genworth MI Canada was “a bit unexpected.” But they pointed out that Brookfield has “deep historical knowledge and existing experience in both insurance and residential markets.”
The alternative asset manager is one of the world’s largest investors in real estate. Its holdings include residential, multi-family and student housing assets on five continents. Brookfield also provides construction services and develops and sells residential buildings, single-family homes and apartments, with brokerages including Royal LePage.
National Bank’s Gloyn suggested Brookfield could ultimately buy the remainder of Genworth MI Canada from public shareholders — even though that’s not in the cards right now.
“We believe the sale of the remaining 43 per cent interest in MIC (held by other investors) is not entirely off the table,” the analyst wrote, adding that “this scenario would likely unfold at a premium” assuming no material changes in the operating environment.
The transaction price represented a five per cent discount to Monday’s closing price for Genworth MI Canada shares, but is substantially above where the shares were trading before Genworth announced July 1 that it was looking at “strategic opportunities” for the Canadian unit.
In the July news release, which also announced an extension to try to close the Oceanwide deal, Genworth Financial Inc. chief executive Tom McInerney was quoted saying that Canadian regulators had not provided any feedback or guidance on their review of the deal, leaving the company “no choice but to look at strategic alternatives for (Genworth) MI Canada that would eliminate the need for Canadian regulatory approval of the Oceanwide transaction.”
The review was under way at a time of heightened tensions between the governments of China and Canada that culminated in the December 2018 arrest of the chief financial officer of China’s Huawei Technologies Co. Ltd. in Vancouver.
Officials at the Department of Finance did not respond to a request for comment Tuesday on whether the sale of Genworth MI Canada to Brookfield eliminated the need for regulatory approval of the tie-up between Oceanwide and Virginia-based Genworth Financial.
A report from debt rating agency DBRS on Tuesday said approval was also required from the Office of the Superintendent of Financial Institutions (OSFI). Officials at OSFI could not be reached for comment.
The sale of Genworth’s Canadian mortgage-insurance unit to Brookfield has been approved by China Oceanwide, but still requires approval of the Canada’s Minister of Finance. Brookfield hopes to close that transaction by the end of the year.
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