Genworth's Acquirer (China Oceanwide) Looks To Be Drowning In An Ocean Of Debt

Summary

• In our previous piece we focused on signs of liquidity issues at China Oceanwide including spiking debt levels, negative operating performance, and the aggressive pledging of equity in its subsidiaries.
• Today we share a deeper-dive into Oceanwide’s operations, including an overview of its leverage-fueled trophy asset development spree which has shown recent signs of stalling.
• We have also identified accounting red flags, including booking $11.4 billion of “development costs” as a current asset, as well as $4.8 billion in questionable related-party receivables.
• Bloomberg recently reported an Oceanwide operating sub was “scrambling to sell assets to repay debt.” With another $1.6b of key bond maturities due in Q1'19 we expect significant near-term instability.
• We do not think China Oceanwide will fulfill its commitments to Genworth's policyholders and reiterate our view that this deal looks starkly at odds with the interests of policyholders.

Overview

In our previous piece we highlighted signs of liquidity issues at Genworth’s emergent acquirer, China Oceanwide (“Oceanwide”). In particular we focused on Oceanwide’s ((i)) consistently negative operating & investing cash flow ((ii)) spiking debt levels; and ((iii)) the aggressive pledging of equity in Oceanwide’s public subsidiaries, which have all steadily declined in value.

Today we are sharing a deeper-dive into Oceanwide’s operations, including an overview of the conglomerate’s leverage-fueled trophy asset development spree, which has recently shown signs of stalling.

We have also taken a closer look at Oceanwide’s audited financials, identifying red flags with its working capital balances including ((i)) the reporting of $11.4 billion of “development costs” as a current asset; and ((ii)) the reporting of $4.8 billion in questionable related-party receivables as a current asset. Finally, we review Oceanwide’s debt maturities, with a particular focus on a large $1.6 billion slate of bonds due in Q1 ’19, just after the hoped-for Genworth deal closing.

Collectively this analysis bolsters our view that Oceanwide is overleveraged and facing a severe and current liquidity crunch. The nearly unlimited access to credit the conglomerate has enjoyed historically has recently tightened.

If the Genworth deal were to close we believe it would buy Oceanwide some additional time, but we do not see it materially altering Oceanwide’s collision course. We predict that China Oceanwide will collapse within 24 months barring a financial miracle.

Background

The key question facing regulators right now is whether the Oceanwide deal will leave Genworth’s policyholders better or worse off.

The consensus seems to be that Genworth is a financially weak holding company. Many have taken the view that if Oceanwide can contribute some cash to Genworth’s insurance carriers then it would be better than nothing.

We think that view is misguided, and that the opaque Chinese conglomerate is

Analyst’s Disclosure:I am/we are short GNW.

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