Capital Markets

Fed’s Commercial Paper Standards Exclude Genworth

Former GE unit can't participate in selling paper under the funding facility because of a recent credit-agency downgrade.
Stephen TaubNovember 11, 2008

The Federal Reserve’s eligibility standards for buying securities under the Commercial Paper Funding Facility (CPFF) have eliminated from the program a perhaps-surprising potential participant: Genworth Financial Inc., the insurer spun off by General Electric Co.

Under the CPFF, which became operational on Oct. 27, a special purpose vehicle will purchase eligible three-month unsecured and asset-backed commercial paper from eligible issuers using financing provided by the Federal Reserve Bank of New York. The SPV will hold the commercial paper until maturity, and will use the proceeds from maturing paper and other assets of the SPV to repay its loan from the New York Fed.

The program’s purpose is to improve liquidity in short-term funding markets, which would theoretically increase the availability of credit for businesses and households.

However, not all 90-day commercial paper is eligible. According to the bank, the paper must be rated at least A-1/P-1/F1 by a major nationally recognized statistical rating organization and, if rated by multiple major NRSROs, must be rated at least A-1/P-1/F1 by two or more major NRSROs.

It was this stipulation has forced Genworth to drop out of the program.

Genworth said in a regulatory filing that although earlier in October it was approved, and participated in the CPFF, a recent downgrade of its holding company by a credit rating agency has removed it from eligibility to sell commercial paper to the facility. The outstanding paper currently held by CPFF will continue to be held until maturity, however.

On Nov. 6, Genworth reported a loss from continuing operations for the third quarter of 2008 of $258 million, compared with income of $339 million in the third quarter of 2007. It also suspended its common dividend and its share repurchase program, and contributed $500 million of cash from the holding company to its life operating companies. “We are also looking at other avenues — including the potential for asset sales, debt refinancing or a possible capital raise,” chairman and CEO Michael D. Fraizer said at the time. “These steps may be needed to navigate continued market uncertainty and turmoil in the credit markets, while effectively positioning Genworth for the future.”

The next day Standard & Poor’s Ratings Services lowered its long-term counterparty credit rating on Genworth to ‘A-‘ from ‘A’. It also said the outlook is negative, and the outlook on Genworth’s life insurance subsidiaries was downgraded to negative from stable. In addition, Standard & Poor’s affirmed its ‘AA-‘ counterparty credit and financial strength ratings on these companies.

“The GNW downgrade reflects its increased funding needs to meet debt maturities in 2009, reduced fixed-charge coverage, and contraction in diversified cash flows,” said S&P’s credit analyst Kevin Ahern.