DBRS has announced that it:
has today changed the trend on the ratings of Manulife Financial Corporation (Manulife or the Company) and its affiliates to Stable from Positive, including the Company’s AA Issuer Rating and R-1 (middle) Commercial Paper rating.
In light of the equity market deterioration through the third quarter of 2008 and into October and November, Manulife has become increasingly exposed under its variable annuity and segregated fund guarantees, requiring both additional actuarial reserve development and regulatory capital for its major operating subsidiary, The Manufacturers Life Insurance Company (MLI). Even though Manulife managed to increase MLI’s available regulatory capital in the third quarter, the increased capital requirement for the market-related guarantees increased at a faster pace, reducing the minimum continuing capital and surplus requirement (MCCSR) ratio to 193% from 200% at the end of the second quarter. Since that time, the Office of the Superintendent of Financial Institutions (OSFI) has revised the required capital to be held against such guarantees to the Company’s advantage and Manulife has arranged a $3 billion credit facility with the six major Canadian banks, $2 billion of which is expected to be injected into MLI as Tier 1 capital. Following the 20% decline in North American equity markets in the month of October, the MCCSR ratio would now be 225% on a pro forma basis. A further 10% decline in equity markets would reduce the MCCSR ratio by an estimated 20 percentage points.
Even though DBRS remains confident that Manulife is well positioned to be one of the strongest credits in the financial services sector, the Company’s overexposure to the current softness in global equity markets by virtue of these product guarantees and the associated economic uncertainty suggests that a Positive trend is, for the time being, no longer appropriate.
The rating trend was changed from Stable to Positive on July 8, 2008, reflecting the Company’s strong earnings performance since the acquisition of John Hancock Financial Services, Inc. in 2004, its advantageous strategic positions in selected diverse products and geographic market segments and its consistency in being among the first to introduce new and innovative products, tempered by effective risk and expense management controls and the most conservative capitalization of its peer group. With the recent increase in financial leverage, taking the total debt ratio to just below 25%, Manulife’s capitalization is no longer more conservative than others in the industry, but it is still within the accepted DBRS level for the current ratings.
The prior trend change to positive was reported by PrefBlog in July.
It is most interesting to speculate as to whether we will see Fixed-Reset issuance from MFC in the near future. The press release announcing the $3-billion term loan stated:
MFC today also announced that it has executed a binding credit agreement with the six largest Canadian banks to provide a 5-year term loan of $3 billion. The loan will be fully drawn down by November 20, 2008, and will be deployed, as necessary, to provide additional regulatory capital for its operating subsidiaries.
So … how will they pay off the loan? I see from the 3Q08 Slides that the loan is at a rate of BAs+380bp and is fully prepayable.
All three issues are tracked by HIMIPref™. MFC.PR.A is included in the OperatingRetractible index; MFC.PR.B and MFC.PR.C are members of the PerpetualDiscount index.
[…] These issues were last highlighted on PrefBlog when DBRS changed the trend from positive to stable. […]