Conseco: Bankruptcy Filing Possible

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Conseco Inc. warned at press time that it might have to file for Chapter 11 bankruptcy court protection to ward off demands for the immediate repayment of $4.6 billion in debt.

The Carmel, Ind., financial services company was scrambling to improve its debt-to-capitalization ratio enough to come back into compliance with its bank credit agreement, and to make August interest payments on four series of notes by Sept. 9.

If the company fails to make the August interest payments by Sept. 9, it could face the “immediate maturity” of all of its notes, its $1.5 billion bank credit facility balance, and $1.1 billion in guarantees on loans that Conseco directors and officers used to buy Conseco stock, Conseco says in its quarterly report.

Conseco could face an acceleration of its obligations under the bank credit agreement even if it meets the deadline for the August interest payments.

A.M. Best Company, Oldwick, N.J., on Aug. 14, lowered the financial strength rating for Consecos principal insurance subsidiaries to B from A- earlier in the year.

Conseco says its bank credit agreement requires it to “take certain actions to generate liquidity and accelerate the repayment of the bank credit facility” if the Best rating falls to B.

Conseco emphasizes in its quarterly report that it must try to restructure the capital of the parent company.

“We cannot predict whether any restructuring will be effected out-of-court or through a Chapter 11 bankruptcy proceeding, nor can we predict how long any restructuring of our debt will be required to implement,” Conseco says. “If we are unable to achieve a consensual restructuring, we will be unable to satisfy all of our debt obligations and we will be forced to petition for relief under the U.S. Bankruptcy Code.”

Conseco has a major consumer finance unit as well as large insurance operations. It admits the consumer finance unit could use cheaper cash.

But “the insurance companies are operating business as usual,” says Ellen Hostetler, Conseco spokeswoman. “They all have the cash to keep on going as they always have.”

Revenue for some insurance products actually increased in the second quarter: long-term care insurance premium revenue rose 4.1%, to $227 million, and supplemental health insurance premium revenue increased 1.6%, to $564 million.

But Conseco suggests in the quarterly report that the insurance subsidiaries deteriorating ratings could hurt their ability to get and keep new business.

Many experienced agents and brokers shifted away from Conseco products as soon as stories began appearing about its difficulties with paying off its debts.

Appleby & Brown Financial Group, Akron, Ohio, a life insurance marketing firm, was still listing Conseco products on its Web site as recently as last week. But the firm began moving to other suppliers a while ago, and now, distributing Conseco insurance “is a very small part of what we do,” says Timothy Brown, Appleby & Browns president.

So far, however, the Conseco insurance subsidiaries seem to be doing a good job of maintaining service for agents and customers, Brown says. “I havent seen any change. I would say its been business as usual.”

Conseco looked like a high-flying, rapidly expanding financial-services success story in the mid-1990s, but it ran into trouble later in the decade as a result of problems with the finance operations.

In June 2000, the company brought in Gary Wendt, a hard-charging GE Capital veteran, to reduce the companys debt load and turn the company around. Until early August, Wendt talked about the importance of maximizing shareholder returns by taking a slow, steady approach to restructuring the companys billions of dollars in debt.

Conseco changed gears Aug. 9, when it said it would have to use grace-period provisions to postpone the August bond interest payments.

The New York Stock Exchange delisted Consecos stock Aug. 12.

Two days later, Conseco reported a $1.3 billion net loss for the second quarter on $1.5 billion in revenue.

The net figure includes $260 million in investment losses, and a $1 billion write-down of a deferred “income tax valuation allowance.” Conseco reported a $1.3 million operating profit for the quarter.

But Conseco says it is writing off the income tax valuation allowance because it is not sure it will ever have enough taxable income to use the allowance, and Wall Street focused on the net income figure.

Conseco also acknowledged, near the front of the quarterly report, that it was considering filing for bankruptcy.

In a section on litigation and other legal proceedings, Conseco said the U.S. Securities and Exchange Commission has started a formal investigation of its accounting in and before the spring of 2000 for matters such as its interest-only securities and servicing rights. Conseco addressed the issues in a write-down it took in 2000.

Conseco also revealed that it has been having trouble with setting up the reinsurance agreements it was counting on to generate cash.

Another problem Conseco faces is a feeling among some analysts and creditors that creditors have already spent years trying to help it get back on its feet.

“I wouldnt say theres a lot of patience left,” says Jayan Dhru, an analyst with Standard & Poors, New York.

Conseco has also irritated members of the financial community by publishing operating income figures that have little in common with the net income figures.

Although Conseco has cooperated with ratings analysts and regulators, “the company has never really reported a clean quarter of results in recent years,” says Julie Burke, an analyst in the Chicago office of Fitch Ratings. “Every quarter had some kind of special charges.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 19, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.