Radian eyes return to investment grade with debt/cap ratio under 30%

By Paul Deckelman

New York, Nov. 29 – Radian Group Inc. has been cutting its debt and bringing its leverage measure of debt as a percentage of its total capitalization down below 30% – metrics it hopes will eventually bring the Philadelphia-based mortgage insurance company back to investment-grade status.

The company’s executive vice president and chief financial officer, Frank Hall, told participants at the Bank of America Merrill Lynch Leveraged Finance Conference on Tuesday in Boca Raton, Fla., that its “strong capital position,” with $483 million of liquidity at the parent holding company level as of the end of the third quarter on Sept. 30, is “the underpinning for our efforts to return to investment grade at the holding company. Currently, Radian Group is rated Ba3 by Moody’s and BB by S&P, and we have had multiple upgrades in the past two years.”

Hall said that Radian has “largely completed the capital plan that we outlined late last year, where we sought to improve our capital structure by removing the convertible notes and distributing our debt maturities more evenly, and we just announced the redemption of our 2019 convertible notes.”

Radian took out $288 million of those 2.25% convertibles due 2019 and $30 million of 3% convertibles due 2017 earlier this year, using the proceeds of a $350 million offering of 7% senior notes due 2021 sold in March.

It announced on Monday that it would redeem the final $60 million of the 2019 convertible paper at par plus accrued interest on Jan. 27.

Hall said that the company “completed several capital activities in the third quarter,” including its Aug. 12 redemption of its $195.5 million of 9% senior notes due 2027 for a total of $211.3 million of cash.

He said that “the combination of all of our 2016 capital actions decreased the company’s total number of diluted shares at Sept. 30 by 23.1 million shares, and Radian’s debt-to-capital ratio is well below our targeted 30%, at approximately 27%.”

Hall said that with the debt-to-capitalization ratio already down to 27%, the redemption of the 2019 convertibles “takes our debt level down even further.”

Debt falls

As of Sept. 30, the company’s total debt level had fallen to $1.07 billion from $1.22 billion at the end of fiscal 2015 on Dec. 31 of that year and a year-earlier third-quarter level of $1.23 billion.

Hall said that “in September, we received a ratings upgrade for both Radian Group and Radian Guaranty [its operating company entity], putting us one step closer to our goal for Radian Group. Radian Guaranty continues to be an investment grade-rated company by both Moody’s and S&P.”

He told the conference attendees that “another positive for Radian that supports our holding company cash management” is the parent company’s operating expense and interest expense reimbursement arrangement with its operating subsidiaries.

“This gives us the comfort and confidence that the bulk of holding company operating and interest expense is being supported by the positive cash flow and strong operating performance of the mortgage insurance subsidiary,” he said.

In answer to a question following his formal presentation, Hall said that the company considers it important to return to investment grade because “obviously, that would help potentially to reduce the overall cost of capital on a go-forward basis with higher ratings, and also we think there are some business opportunities that may be more available to us with an investment-grade rating, more so than [with] sub-investment grade. But both strategic and financial reasons are really the motivation to return to investment grade.”

He told another questioner that “we have sufficient holding company liquidity – roughly $483 million at the present time, [and] after we take care of the converts and allow for some other items, we expect that number to be slightly under $300 million. And we’ve targeted and said publicly between $300 [million] and $350 million of parent company liquidity” is a good level for Radian.

“As far as a target debt-to-cap, below 30% is what we’ve said generally where we need to be to achieve that investment-grade rating. If that drifts organically into the mid-20s, that’s probably ... about the right place.”

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