NU Online News Service, Aug. 9, 4:45 p.m. – Conseco Inc. has decided to use grace periods that give it the right to put off interest payments on five bond issues for 30 days.
The Carmel, Ind., financial-services company says it has also hired an investment bank, Lazard Freres & Company L.L.C., New York, and a law firm, Kirkland & Ellis, to help it begin “immediate discussions with our debt holders with a goal of restructuring the capital of the parent company.”
The Indianapolis Star reports that it has obtained Conseco memos suggesting that a bankruptcy filing could be one of the strategies under consideration.
Representatives for Conseco were not immediately available to comment on the Star report.
Conseco expanded its life insurance and consumer finance operations rapidly in the mid-1990s through a series of big acquisitions, but it later ran into trouble as a result of defaults on consumer loans and other problems with the non-insurance units.
The company brought in Gary Wendt, a hard-charging GE Capital veteran, in June 2000 to turn the company around.
Up till now, Wendt has been emphasizing the importance of maximizing shareholder returns by taking a slow, steady approach, rather than wasting assets by rushing to raise cash and refinance debt at any cost.
But Wendt said today that he and other Conseco executives now believe the company must make a “radical change in the company’s capital structure” rather than simply continuing with a gradual financial restructuring.
“We cannot emphasize strongly enough our continued belief that the insurance and finance businesses that comprise Conseco are profitable businesses that serve important markets,” Wendt said in a statement about the company’s latest moves. “The businesses of Conseco are good businesses that can have bright futures. The problem with Conseco has been the over-leveraged capital structure of the parent.”
Conseco believes it has more than enough cash to run its businesses as it restructures, and none of its operating subsidiaries “will be directly involved in the planned restructuring,” Wendt said.
Conseco executives will be meeting with regulators, rating agencies and other stakeholders in the next few weeks to explain the restructuring, Wendt said.
Although Conseco has a legal right to use a 30-day grace period to postpone its upcoming bond interest payments, Standard & Poor’s, New York, immediately put out a report changing the counterparty credit ratings of Conseco Inc. and its CIHC Inc. subsidiary to “SD,” for selective default, from triple-C-plus.
S&P assigns an SD rating when it “believes that the obligor has selectively defaulted on a specific issue or class of obligations but will continue to meet its payment obligations on other issues or classes of obligations in a timely manner,” S&P says.
A week ago, before Conseco announced its use of the 30-day grace period, analysts at Moody’s Investors Service, New York, argued that recent cuts in Conseco’s insurance claims-paying ratings could hurt the company’s ability to raise cash by selling and retaining insurance business.
Julie Burke, an analyst in the Chicago office of Fitch Ratings, leaves some room for optimism about Conseco’s core insurance operations.
“We do still think the insurance companies have good capital and liquidity,” Burke says.
But Burke says the parent company is suffering from a combination of an unforgiving financial climate and its own, company-specific credibility problems.
Although Conseco has cooperated with ratings analysts and others, “the company has never really reported a clean quarter of results in recent years,” Burke says. “Every quarter had some kind of special charges.”