Is Genworth Struggling Under Too Much Debt?

Genworth Financial (NYSE: GNW  ) is raising $400 million through a public offering of senior notes, one of the many capital-raising initiatives taken by Genworth in the past two years. The debt offering is for a period of 10.5 years with an interest rate of 7.6%. Deutsche Bank (NYSE: DB  ) and Goldman Sachs (NYSE: GS  ) are serving as the joint book runners for the deal. Genworth intends to use the proceeds for general corporate purposes, but seems to a have few things in mind as it looks forward to raising additional capital.

The performance
Debt is fine -- provided one can service it with reliable forms of income. Genworth has been witnessing an improvement in most of its key financial metrics, after a series of disappointing quarters. Total revenue of the company rose by $1.02 billion in 2010, from $9.06 billion in 2009. Earnings took a huge leap, from a net loss of $460 million in 2009 to net income of $142 million in 2010. Revenue for the fourth quarter of 2010 improved to $2.59 billion, from $2.46 billion in the year-ago quarter.

Too much reliance on one segment
Of the three segments Genworth operates in, the retirement and protection segment looks most promising. The segment's revenue rebounded to $6.76 billion in 2010, from $5.66 billion in the previous year, whereas revenue for the other two segments declined. The profit for the segment, too, showed an impressive growth, rising to $403 million in 2010, compared to the net loss of $60 million in the preceding year, much more than for its peers.

Digging deeper
But a deeper analysis is required to evaluate the company's performance and understand the growth trend. Interest expenses for the company went up from $393 million in 2009 to $457 million last year. The company has already raised approximately $2.8 billion of capital during the past two years through varied sources. Out of this, $1.5 billion was raised through senior notes. The latest $400 million issuance has been assigned a "BBB" rating by Standard & Poor's, which, if you believe in the solemn word of the ratings institutions, is a credit-worthy grade.

This means that, officially speaking, Genworth's level of debt is manageable. But Fools should know better. Fundamentals dictate what levels of debt are appropriate and here I think Fools should be growing concerned.

The Foolish recommendation
Genworth has not been able to impress much with its overall performance and the purpose of these capital-raising moves is not very clear at the moment. The rising interest expenses, though not a major concern at the moment, may pose serious threats to the company's growth prospects if the plans don't work out in the desired way: while overall debt-to-equity may be a moderate 77%, the company's operating earnings-to-interest ratio is incredibly low, at just 1.2 times.

For the moment, I would advise Fools to be cautious of Genworth.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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