Tag: BBU

Genworth MI – sold to Brookfield Business Partners

The winner of the Genworth MI auction (presumably there were multiple interested partners) was Brookfield Business Partners LP (TSX: BBU.UN) at CAD$48.86 per share, for 57% of Genworth MI shares. Brookfield Asset Management owns about 80% of Brookfield Business Partners. I’m not going to dissect more of Brookfield’s capital structure or even the LP unit, but suffice to say, they have the assets to consummate the transaction, assuming they receive regulatory approval.

The transaction, if approved, will close sometime in the first half of 2020 and apparently will receive regulatory approval by the end of 2019. I had speculated earlier that Genworth would not receive more than CAD$55/share for the unit (and my initial opinion was CAD$50) and this appears to be right on the mark. Genworth MI’s stated book value was $47.17 at the end of Q2-2019, so Brookfield is paying a very modest premium over book.

Here’s the interest part of the release:

Brookfield Business Partners has also agreed, between now and the closing of the transaction, to provide Genworth Financial, Inc. with a bridge loan of up to US$850 million that is intended to be repaid from proceeds of the sale of its interest in Genworth Canada.

Genworth Financial has some solvency matters to deal with.

The other logistical matter for Genworth MI is that they share services with Genworth Financial for some business operations. This will have to be carved out and transitioned over with the takeover. In addition, it is not clear whether the senior staff of Genworth MI will go back to Genworth Financial, or whether they will stay with the MI subsidiary. When businesses are acquired like this, there is always an element of disruption, if not handled carefully!

As for the other 43% of Genworth MI, currently Brookfield indicated they do not wish to repurchase it:

Given the short time frame available to complete this transaction, Brookfield Business Partners has no current intention to make an offer for the balance of the outstanding Shares. Brookfield Business Partners may in the future consider the appropriateness of such an offer after discussion with Genworth Canada’s shareholders and other stakeholders.

This may happen if Genworth MI starts to trade significantly under CAD$48.86. One needs to look no further than the treatment of minority shareholders of Teekay Offshore (NYSE: TOO) which are currently receiving a lowball offer for their shares.

I would suspect very limited upside for the capital value of Genworth MI shares at current market prices.

Teekay / Teekay Offshore / Brookfield financing

Brookfield Business Partners (TSX: BBU.UN) announced a $750 million investment (Brookfield’s release) (Teekay’s release) in Teekay Offshore (NYSE: TOO).

I’ve written extensively about Teekay Offshore and thought they would cut their distributions to zero and likely cutting their preferred unit distributions because of impending financing issues. This prediction turned out to be mostly incorrect – they are cutting their common unit distribution to 1 penny per quarter (down from 11 cents), and maintaining their preferred distributions.

In general, my expectations for the outcome for this pending recapitalization transaction have been worse than what materialized.

Not surprisingly, Offshore’s preferred units are trading considerably higher in the markets – up about 28%.

Teekay (parent) unsecured debt traded up to 98.5 cents on the dollar today – I am happy regarding this transaction – it is likely to mature at par (January 2020) or earlier via a call option. Offshore debt holders have even more reason to be happy – theirs are up from 82 cents to 97 cents, with a 7% yield to maturity. (On a side note, I notice somebody was asleep at the switch at 5:00am today – there was a $100k bond trade for 90.8 cents on TK unsecured, which was a steal for the buy-side – NEVER leave those GTC orders out in the open unless if you’re willing to scan the news before the market opens!).

Summary thoughts (apologies in advance for this not being in a more professional manner, I am not writing from my usual location):

The first chart is from their today’s presentation, while the second chart was from an early 2016 presentation. Compare the two:

1. With this equity injection, Offshore buys itself a couple years of time (which is what they desperately needed) – however, their debt leverage goes from “very high” to “above average” – slide 9 is considerably above what they were anticipating in their 2016 slide when they initially recognized the pending financial crisis. Pay attention to the Y-Axis of those charts!
2. Teekay dumps its $200 million loan to Brookfield for $140 million cash and 11 million warrants in Offshore;
3. It’s not entirely clear what the terms of these warrants are, or how Brookfield picks up 51% control of the GP (they get 49% of it right now);
4. Offshore’s financial metrics (cash flows through vessel operations) should start to improve, but I suspect there will be upcoming challenges as long as the oil price environment is not supportive (thinking counterparty risk, potential future contract renewals, pricing pressure, etc. – examining Diamond Offshore, TransOcean, etc., although not strictly in the same market as TOO, leads one to believe that the present environment is also not favorable to maintenance offshore oil production expenditures);
5. Teekay also liquidated their preferred unit holding in Offshore, and this is functionally a sell-off to Brookfield.
6. The creation of a “ShuttleCo” subsidiary of Offshore will create some more financial complexity in the operation – they probably want to spin this out for valuation and/or leverage purposes (as this division apparently is doing reasonably well).
7. Offshore’s operational challenges and risks are still not going away with this equity injection, but Teekay has more or less divested as much as they could from them.
8. Teekay also get relieved of guarantees from Offshore, which will improve its financial position dramatically in the event of insolvency (this is huge for Teekay unsecured debt holders). Teekay is functionally at this point a play on their LNG daughter entity, while having some minority economic participation in offshore.
9. Teekay’s cash flows through Offshore will obviously be curtailed significantly, they have their own vessel operations which are cash neutral, so they will be solely reliant on either equity distributions of Offshore (if they decide to fully liquidate) or LNG’s distributions.

If I was an investor in the preferred shares or debt of Offshore, I’d be taking gains right now and going elsewhere.

I remain long TK unsecured debt and do not have any intentions to sell – I took a full position back in them last year. I’m not keen on any of the equity.