NU Online News Service, March 18, 11:08 a.m. – Conseco Inc., Carmel, Ind., wants to buy itself time by exchanging up to $2.54 billion in new, “senior,” “guaranteed” notes for $2.54 billion in senior unsecured notes now held by mutual funds, pensions and other institutional investors.

The new notes would have the same principal and carry the same interest rates as the old notes, but the maturity dates would be extended 12 months to 30 months.

The longest extension would be for $778 million in notes due in February 2004.

Conseco would compensate noteholders for accepting the extended maturity dates by having CIHC Inc., the holding company for its principal operating subsidiaries, guarantee the new notes on a “senior subordinated basis,” according to a shareholder memo from Conseco Chairman Gary Wendt.

“The new notes will be structurally senior to the existing notes,” Wendt writes in the memo.

The purpose of the note exchange offer “is to improve our financial flexibility and to enhance our future ability to refinance public debt,” Wendt adds.

“The exchange offer is subject to the receipt of requisite consents from bank lenders under Conseco’s senior credit facilities,” Wendt warns. “We are currently in discussions with our bank consortium regarding this issue.

If the offer is approved, it will expire April 12.

Conseco is offering new guaranteed notes to institutional and non-U.S. holders of:

  • $302 million in senior notes paying 8.5%, due October (12-month extensions).
  • $250 million in senior notes paying 6.4%, due February 2003 (12-month extensions).
  • $400 million in senior notes paying 10.75%, due June 2008 (12-month extensions).
  • $550 million in senior notes paying 9%, due October 2006 (18 month extensions).
  • $250 million in senior notes paying 6.8%, due June 2005 (24-month extensions).
  • $778 million in senior notes paying 8.75%, due February 2004 (30-month extensions).

When applied to notes, terms such as “senior,” “subordinated” and “unsecured” refer to the status holders of notes would have if the issuer applied for bankruptcy court protection.

Secured claims are those backed by specific properties or income streams. Unsecured claims are backed only by a company’s ability to make its payments.

Holders of senior notes come before creditors holding subordinated notes.

In bankruptcy court, the holders of senior, secured notes would be in a better position than subordinated, guaranteed notes, and holders of the subordinated guaranteed notes would probably be in a better position that holders of ordinary, senior unsecured notes.

Moody’s Investors Service, New York, put out an alert stating that, although the claims of the holders of the new guaranteed Conseco notes would come before the claims of holders of the old, senior unsecured notes, they would still come behind the claims of Conseco’s bankers.

Moody’s analysts are still looking closely to see whether Conseco can come up with the cash it needs when it needs the cash, the firm says.

Analysts in the Chicago office of Fitch Ratings, a credit rating agency, reacted to the Conseco announcement by placing ratings of existing Conseco debt securities on “Rating Watch Negative.”

Fitch does not view the proposed note exchange offer as a “distressed debt exchange,” firm says.

But, if nothing else, the exchange would weaken the position of the holders of the notes that are now subordinated to the new, guaranteed notes, Fitch says.