Case study
Conseco's Debt Restructuring

by Prof. Ian H. Giddy, New York University

Sometimes a borrower with bad credit is in a good position to negotiate with its creditors. So it may be with Conseco, the insurance and finance company that is struggling to stay afloat while it tries to sell assets and put its house in order.

In March 2002, Conseco offered some bondholders a difficult choice. They were asked to delay the scheduled repayments of their bonds, with a total face value of $2.54 billion, by up to two and a half years. 

Those who agree will be doing Conseco a big favor. At the moment, the company could probably not borrow money in the bond market at any rate. So if Conseco could persuade bondholders to extend their bonds at existing rates, which range from 6.4 percent to 10.75 percent, it would borrow money at rates it could otherwise only dream of.

The carrot for those who agree to extend their maturities is that the new bonds they receive will rank ahead of the old bonds in terms of recovering money if Conseco filed for bankruptcy protection.

"That could be pretty significant," said Patrick Finnegan, a senior vice president of Moody's Investors Service. He said that Moody's expected to reduce the rating of the existing bonds to B3, a low junk bond rating, from B2, while the new bonds would be rated B2.

On the other hand, those who do not tender their bonds will be repaid more rapidly, assuming that Conseco is able to make the payments. Mr. Finnegan said he expected that relatively few of the bonds that mature in 2002 and 2003 would be tendered. Instead, he said, more of the bonds maturing in later years would probably be exchanged.

The markets did not have a positive view of the exchange offer. Shares of Conseco shares fell 65 cents, to $3.40, and Conseco bonds generally fell slightly in price. The bonds had slipped last week on speculation that an offer was likely.

Conseco's bonds with a rate of 8.5 percent that mature in October were quoted at 84 bid and 85 offered, meaning that an investor could buy a $1,000 bond that reaches maturity in seven months for $850.

Yesterday's exchange offer was made only to qualified institutional owners, which generally excludes individual investors, although some wealthy individuals could qualify. That apparently was done to allow the exchange to take place quickly, with bond owners having to tender by April 12. The delays would be longer if the new bonds had to be registered with the Securities and Exchange Commission, a necessary move if they were offered to all holders. Mark Lubbers, a Conseco spokesman, said that less than 10 percent of the bonds were in the hands of individual investors who might not be able to tender.

Two decisions that could affect Conseco's ability to operate are expected by the end of March. The first is from A. M. Best, which is considering whether to reduce Conseco's A- minus insurance rating. A cut would make it harder to sell certain insurance products.

The second is from PricewaterhouseCoopers, Conseco's auditor, which has not said whether it will give an unqualified audit opinion or warn that Conseco's ability to continue as a going concern is in doubt. That decision may hinge in part on Conseco's progress in renegotiating its bank debt and on expectations for the success of the tender offers announced yesterday.

One unanswered question is whether Gary Wendt, the chairman and chief executive of Conseco, will tender his $10 million of bonds, which have a rate of 10.75 percent and mature in June 2008. Those bonds are to be extended by one year. Mr. Lubbers declined to comment on Mr. Wendt's plans.

Adapted from "Conseco Seeks to Delay Bond Repayments" by FLOYD NORRIS and PATRICK McGEEHAN, New York Times, March 19, 2002


The Group's principal activity is to provide insurance and finance products through its subsidiaries throughout the United States. The Group operates in two segments: Insurance and fee-based segment and Finance segment. Insurance and fee-based segment provides supplement health, annuity, individual life insurance and other insurance products, which are sold through professional independent producers, career agents and direct marketing. Finance segment provides a variety of finance products, which include loans for the purchase of manufactured homes, home improvements, home equity loans, private label credit card programs and floorplan financing. These products are primarily marketed through intermediary channels such as dealers, vendors, contractors and retailers. Insurance and fee-based revenues accounted for 55% of 2001 revenues; finance revenues, 33% and corporate and other, 12%.

Conseco's troubles started in 1998, when it paid $6bn for Green Tree Financial, a company that provided financing for mobile homes, a sector notorious for high charge-offs. "The glut of repossessed manufactured housing units in the market will continue to have negative implications in this business segment and overall stability in the economy remains uncertain," said CEO Gary Wendt, ex-GE Capital chief executive who was brought in to save the company in 2000.. 

Assignment: Look up Conseco's bonds (try and compare the yields on different bonds. Explain the differences, and the effect of Conseco's debt restructuring. | | | | contact
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