“It is definitely possible” that an agreement will be reached between Conseco Inc., and some of its bondholders, says a lawyer representing the bondholders.
The discussions between the parties are focusing on debt capacity and enterprise value and the need to deleverage, according to Brad Eric Scheler, a lawyer with the New York law firm of Fried, Frank, Harris, Shriver & Jacobson.
“So far, it looks pretty good,” he says. “What is clear is that they need to deleverage.”
Since the companys debt exceeds the companys value, bondholders would in effect have control of the company, Scheler explains.
Consecos debt stands at $4.6 billion at June 30, according to a filing with the Securities and Exchange Commission.
Determining how much cash is available to pay debt will entail examining individual Conseco business units, Scheler says. The companys A.M. Best ratings going forward will also be important, he adds.
Discussions are focusing on $2 billion in debt, including $1.5 billion in straight bank loans and $500 million in directors and officers loans, says Scheler.
An extension of a temporary waiver granted by Consecos senior lenders expires on Oct. 17, and Conseco is negotiating to extend it. The debt came due on Aug. 9, and the company invoked a 30-day grace period. On Sept. 9, a waiver through Oct. 17 was granted.
Mark Lubbers, a Conseco spokesman, declined to comment on financial restructuring discussions. He also would not comment on reports saying bondholders demanded that Gary Wendt step down as the companys CEO, which he did earlier this month. He will remain the companys chairman.
Scheler says he was not part of the conversation regarding Wendts announcement and could not comment on that point.
Even as the future of the parent is being worked out, insurance regulators say Consecos insurance units continue to meet solvency requirements.
The insurance units continue to be monitored and “to the best of my knowledge, continue to be solvent,” says Sally McCarty, Indiana insurance commissioner. “We are watching our own domestics very carefully,” and they have proper risk-based capital standards, she adds.
Regulators were made aware of the fact that Wendt was going to step down, but not the reason he was doing so, she says.
McCarty confirms that dividends were passed up from the insurance operations to the parent company (see NU, Sept. 23). However, she adds, some of those dividends were reallocated and paid back down to the insurance units.
Townsend & Schupp, Hartford, Conn., says a total of $276 million was distributed to the parent company.
Any holding company, McCarty says, can request an extraordinary dividend that regulators can allow if it meets state holding company laws.
McCarty says regulators will be asking whether Conseco will be able to meet its upcoming debt payment as they monitor the companys progress.
New York Superintendent Greg Serio says the New York-domiciled Conseco operations are financially sound and properly insulated from the issues of its parent.
No other extraordinary dividends are pending, according to Kenneth Elliot, deputy for regulatory matters with the Texas department.
Conseco management had indicated that small dividend amounts could be requested as the need arises, he adds.
At this point, the insurance companies are adequately capitalized and regulators are not pressing for the sale of the units, he adds.
Rating agencies also continue to weigh in on Conseco. Earlier this month, Standard & Poors Corp. downgraded the senior debt and preferred stock rating on Conseco to D from CC.
S&P said the D rating reflects the viewpoint that Wendts resignation is “a prelude to an ultimate bankruptcy filing,” according to credit analyst Jayan Dhru. “Therefore, Standard & Poors expects that Consecos future payments on principal and interest will be adversely affected.”
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 14, 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.