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Back to Square One at Conseco


When Gary C. Wendt pulled the insurance and finance company Conseco Inc. (CNC) back from the brink of bankruptcy in August, 2000, he looked like a hero. The former boss of GE Capital wrestled concessions from banks to get the company's $8.3 billion in debt under control. The shares rebounded from $4.75 before he took over as chief executive to a peak of more than $20 last May.

Now, the Indianapolis company is back at Square One. The stock is at $3.90. And Wendt is again seeking help from creditors. This time, investors are skeptical he'll be able to mount another 11th-hour rescue. The credit and insurance-rating agencies Moody's Investors Service, Standard & Poor's, and A.M. Best have the company on watch for a downgrade or negative outlook. Merrill Lynch & Co. and Salomon Smith Barney have sell recommendations on the stock. "If [Conseco] continues to languish, it's inevitable they'll have to file for Chapter 11," says Eric K. Tutterow, debt analyst at KDP Investment Advisors Inc. Conseco spokesman R. Mark Lubbers says: "We will not respond to comments about bankruptcy."

But if Conseco does slip into bankruptcy, it won't be for lack of effort by Wendt. He saw that Conseco's debt was its biggest problem when he arrived and managed to cut it by $2.2 billion. But the economic slowdown pulled the rug out from under him. Revenues from insurance, 70% of Conseco's business, have declined, while investment losses have totaled $770 million over the past two years. And delinquencies on Conseco Finance Corp.'s mobile-home loans, mostly to lower-income borrowers, have soared. Wendt says Conseco is in much better shape today than when he arrived, and that he can pull it through: "We remain confident of our long-term success, and if we get a little help from the economy should show progress this year."

A.M. Best says in a report issued on Apr. 2 that Conseco will probably muddle through this year, thanks to asset sales. Still, Wendt faces a hard slog. In October, Conseco said it couldn't service its $6 billion in debt from cash flow in 2002. It has $500 million in payments due this September and October. After losses totaling $469 million in the second half of 2001, Conseco had just $152 million in cash at yearend.

On Mar. 28, an agreement with banks to extend the maturity of $1.5 billion in loans was challenged in court by seven money-management funds, most of them affiliated with New York-based Angelo Gordon & Co. The funds, which hold $200 million of Conseco loans, want the company to stick to previous terms. Lubbers says the lawsuit is "without merit" and the mischief of investors who have shorted Conseco, one of the most shorted stocks on the New York Stock Exchange. But Bruce S. Bennett, partner at the law firm Hennigan, Bennett & Dorman, who represents the funds, says: "Angelo Gordon is not short any Conseco stock."

In any case, the dispute could torpedo Wendt's strategy of selling noncore assets and staving off creditors until an economic recovery restores profits. Debt eats up virtually all of Conseco's cash from operations--$700 million in 2001. Since late 2001, Wendt has bought back $266 million of traded debt at deep discounts. He has asked lenders to agree by Apr. 12 to extend the maturity by up to 2 1/2 years on $2.54 billion of debt due between 2002 and 2008. But he's running out of road. "We think it's time to pull the plug on this credit," says Kathy Shanley, an analyst at debt-research firm Gimme Credit.

Even Chapter 11 protection wouldn't offer Conseco much relief. The company would lose its A- insurance rating from A.M. Best--and its corporate clients, which can't use insurers with less than A-.

The main thing now keeping creditors at bay is Conseco's insurance operations. Policyholders are first in line for assets in the event of bankruptcy. That's why banks have renegotiated debt terms twice. This bind is attracting some bold investors. "This year, Conseco will stabilize, and then it's game, set, and match," says Robert L. Rodriguez, CEO of First Pacific Advisors Inc. in Los Angeles, which owns $60 million of Conseco debt and $16 million worth of its shares.

That had better happen soon, though. Even if Wendt manages to buy more time, the trick is getting harder and harder to pull off. By Pallavi Gogoi in Chicago


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