Genworth rings the bell for a housing top


From the AFR:

Lenders’ mortgage insurer Genworth will launch its $800 million initial public offering next week, with pre-marketing research due to hit fund managers’ desks as early as Monday. Sources said investor meetings had been arranged for Sydney and Melbourne next week, with general lunches and one-on-one sessions organised by brokers Goldman Sachs, Macquarie Capital, UBS and CBA.

Genworth is one of the two halves of Australia’s lenders mortgage insurance (LMI) duopoly. It is, in effect, a monoline insurer that is on the hook for all of the bad debts  in the Australian banks mortgage books. If the term “monoline” sends a shiver down your spine with respect to similar operations in the US pre-GFC than you’d be on the right track.

This is an on-again, off-again IPO that is an implicit signal of institutional perceptions of the strength of the Australian housing market. It is very easy to see it’s coming to market now is a contrarian warning bell that things are as good as they’ll get for housing.

No doubt Australia is different, but let me take you though a risk scenario just in case. If China does keep slowing and the terms of trade fall faster than our authorities calculate in concert with the mining investment cliff then unemployment will overshoot. If that triggers a housing correction then it is Genworth’s business that is directly in the gun (as well as QLMI) because it insures the mortgage repayments of all of the riskiest loans on the bank’s books.

The spruikers will tell you that the insurers are well capitalised but, let’s face it, they are very untested by adversity. Genworth bought its business from the government and I would not be at all shocked if that little arrangement did not come full circle in the fullness of time.

David Llewellyn-Smith
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  1. Very excited by this news, this will be a great way to get exposure to the housing market on the ‘short’ side.

    I’m already wondering whether any future shorting bans would cover this insurer, though….

  2. I’m not sure it is a contrarian indicator. Wouldn’t a float make sense when the expected future profits are highest, because this would result in a higher price. This implies that the risk of default by LMI policy holders is low.

    • Exactly – Genworth are expecting several years of high profitability and low write offs.

      • Glenworth are expecting or the ‘market’ are expecting?

        They are not quite the same.

        Generally the best time to sell is when the market believes you are more valuable than you know you are.

      • PF, I recommend you go long and hard on this fine addition to the ASX. If ever there was a way to smother the bears and make a motza, this is it. The mortgages insured are very high quality, backed by secure incomes in a rich first world country. They have tons of capital against the puny risk of a handful of foolish borrowers defaulting. It’s a no-brainer. The margin lenders will pony up most of the money for you (eg AMP, Suncorp 70% QBE 75%).

        Go on.

      • David why would I need to use a margin lender?

        Most IPO’s are overpriced so I’ll wait but if I feel that they are priced well based of the anticipated yield I just might buy, but I don’t buy on a dare.

        Genworth isn’t a speculative play, it will be a yield based hold that I may wish to accumulate. Basically it’s just another insurer.

      • mine-otour in a china shop

        Fair play Peter putting your money where your mouth is and backing your own opinions. My own opinion – I hope you are as well capitalised yourself as you believe the LMI’s are.

        Where are those APRA LMI stress tests? MMM thats right – they stress tested the banking sector and told us all was fine – one problem though the LMI’s are regulated as insurers and we havent seen any stress testing of the Insurance sector, or a linked housing stress test with the ADI sector.

        Who knows when APRA becomes transparent I might join you Peter? Until then I think they have something to hide and will sit on the sidelines given their exposure to a single risk.

      • Thanks Mine-otour – you give good advice, which I will take re the capitalisation..

        I’m pretty sure that I’ve seen some advice that mentioned stress testing the LMI’s but I couldn’t find it on a Google search. I doubt that APRA will have overlooked that but it could be opaque.

        I know that some of the lenders were told to increase the interest rate buffer that they use, and to add on an extra buffer in the cost of living allowances they make. There have not been any press announcements on that, but it happened, and it happened before Glenn Stevens recent speech on that issue.

        It’s difficult to quantify loan quality except by using the arrears numbers during a recession, so we will have to wait to gauge the results of their work. I think that they have done a pretty fair job. Capacity and willingness to service is the most important metric in a loan assessment.


      • Peter, thank you for your posts, they challenge my preconceived views!

        I’m sure you have already but perhaps before lashing out Deep T’s deserve rereading.

    • Cognitive Dissonance

      So what do the owners stand to gain from selling a perfectly good company to complete strangers ?

      Where else are you going to go looking for ‘good earners’, and why would you look to raise capital to buy alternative ‘good earners’ by offloading one ? Is a little leverage not cheaper in this case.

      Perhaps one day we will read in the papers about how risk tends to get under priced during the goods years so that products can be sold.

      • Owners sell perfectly good businesses all the time. One good reason is if you can put the money to better use elsewhere. Leverage may be cheaper. But it may not be. Maybe the float is to raise capital for further expansion of the existing business. Lots of reasons, not all indicating the housing market is about to collapse.

        I do agree with Pfh that Genworth may have different expectations to the market. They may think this is the best price they will get. It’s a possibility.

    • Dont buy that. IPOs tend to happen in favrouable market conditions. The perception of the housing market right now is good. In other times, they would receive a lower valuation.

      You could argue it might be better to surprise the market on the upside, but no company (or more important its advisers) wants to start with a lowball price.

      I guess we may really be debating the accuracy of stock valuations…

    • IPO’s are often cloaked exit strategies. A float makes sense when you’re ready to cash out.
      Are the fundamentals of the domestic mortgage insurance business set to improve? Hell no – it’s float time!

    • Yes – i thought the RBA selling its Kirribilli ‘safe house’ was the top. Hmm has that been sold?

      I wonder if they threw in the contents of the pantry of the survivalist bunker ‘boom boom’ had installed.

    • No I’m buying a house for my future needs at the moment. I can see the prices in Brisbane rising over the next 18 months to 2 years so it’s time to act IMHO.

      Thanks for your advice though.

  3. This IPO had to be pulled last time around after they suddenly started losing $50M a qtr after the Rudd Vendor Boost. That was in a so called recovery. I would imagine that should a real recession hit it would not take long for them to be scrambling around looking for extra shareholders. The parent in the U.S is wobbly there would be no money from them to prop it up.

    I think this is analogous to the RAMS listing.