NU Online News Service, Oct. 7, 5:36 p.m. – Questions remain over how Conseco Inc., Carmel, Ind., will handle its upcoming Oct. 17 debt payment deadline.

Regulators say Conseco’s insurance units continue to meet solvency requirements, even though the troubled holding company faces $6.5 billion in debt payments that come due next week.

But The Wall Street Journal reports that bondholders are demanding ownership of the company and were responsible for a decision by Gary Wendt, who was the company’s chairman and chief executive officer, to step aside as the CEO. Wendt says he will continue as the company’s chairman.

Last week, Standard & Poor’s Corp., New York, downgraded the ratings on Conseco’s senior debt and preferred stock to ‘D,’ from ‘CC.’

S&P says the ‘D’ rating reflects the belief that Wendt’s resignation is “a prelude to an ultimate bankruptcy filing,” according to credit analyst Jayan Dhru. “Therefore, Standard & Poor’s expects that Conseco’s future payments on principal and interest will be adversely affected.”

Regulators say they are watching Conseco’s insurance subsidiaries closely.

The insurance units continue to be monitored and “to the best of my knowledge, continue to be solvent,” says Indiana Insurance Commissioner Sally McCarty.

“We are watching our own domestics very carefully,” and they are solvent and have proper risk-based capital standards, McCarty adds.

Regulators were told about the fact that Wendt was going to step down, but not about the reason he was stepping aside, McCarty says.

McCarty has confirmed earlier reports that dividends were passed to the parent company, up from the insurance operations.

However, she adds, some of those dividends were reallocated and paid back down to the insurance units.

Any holding company can request an extraordinary dividend, according to McCarty. She says regulators can allow the dividend if it meets state holding company laws.

McCarty says regulators will be asking whether Conseco can meet its upcoming debt payment as they monitor the company’s progress.

No other extraordinary dividends are pending, according to Kenneth Elliot, the deputy for regulatory matters with the Texas department.

Conseco management had indicated that small dividend amounts could be requested as the need arises, he says.

At this point, the insurance companies are adequately capitalized and regulators are not pressing for the sale of the units, he says.

Regulators declined to say how much has been requested in dividends, how much has actually been approved, or what percentage of the approved dividends has been diverted back to the insurance units.