PrefBlog

Standard & Poor’s has announced:

• Manulife Financial Corp.’s (TSX/NYSE: MFC) operating performance is below expectations.
• MFC’s risk tolerance remains high and the majority of its
  equity-linked liabilities remain unhedged. Also, earnings and capitalization are highly sensitive to volatile equity markets and changes in interest rates.

• MFC’s planned reorganization will reduce its cash flow diversification.
• We are placing our ‘AA-‘ counterparty credit rating on MFC on CreditWatch with negative implications because we expect to restore standard notching following the reorganization.
• We are revising the outlook on our ‘AA+’ financial strength ratings on MFC’s subsidiaries to negative from stable.

Under its current organizational structure, MFC has two major cash flow streams consisting of MLI and its U.S. subsidiaries held under John Hancock Financial Services Inc. (John Hancock Financial). Its U.S. subsidiaries are currently organized in two columns with each providing approximately one quarter of the group’s operating performance. This organizational diversification is important to support the nonstandard two-notch differential between the counterparty credit ratings on MFC and the higher financial strength ratings on its core subsidiaries. Following the planned reorganization, MLI will be the only major direct source of earnings and cash flow for MFC. But, more importantly, the U.S. half of total earnings will be channeled through a single U.S. insurance company and, therefore, be subject to the dividend restrictions of a single U.S. insurance regulator instead of two. Although the eorganization results in many benefits to Manulife, including increased capital and operational efficiency, it is our opinion that the reduced diversification increases the potential for lower cash flows to MFC during severe or extreme stress events and is more in line with standard notching.

The target date for completion of the reorganization is year-end 2009. When completed, we expect to lower the ratings on MFC by one notch. This would restore a standard three-notch differential between the ratings on MFC and the higher financial strength ratings of its core ubsidiaries.

Meanwhile, Manulife CEO Daniel “Cowboy” Guloien thinks his luck will change:

But on a conference call with analysts Thursday, Mr. Guloien made it clear that he thinks he’s developed a strategy that will strengthen the company’s capital levels and still allow shareholders to benefit if stock markets go up. And he’s sticking to it – no matter what S&P says. “I could look like a hero [by taking] a huge one-time charge and say, ‘We’ve put it behind us.’ And I think that would mollify rating agencies and other people who are concerned about downside risk,” he said.

“I happen to believe that the shareholders who have suffered a great deal by seeing unhedged positions cost [the company] in terms of the market downdraft have a right to earn that back in the market updraft.

“And I’m not prepared to put their interest behind me because a rating agency has a view on an unhedged position.”

MFC has the following preferred shares outstanding: MFC.PR.A (OpRet), MFC.PR.B & MFC.PR.C (PerpetualDiscount), MFC.PR.D & MFC.PR.E (FixedReset). All are tracked by HIMIPref™.

This entry was posted on Friday, November 6th, 2009 at 12:18 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.