SALB cuts Conseco
(SB)CNC: WALKING A TIGHTROPE, 2000E LOWERED $0.05 TO $0.60
10/2/0 16:42 (New York)
Salomon Smith Barney (Colin Devine 212-816-1682) CNC NFS
SALOMON SMITH BARNEY
Conseco, Inc. (CNC)#
CNC: WALKING A TIGHTROPE, 2000E LOWERED 3H (Neutral, High Risk)
$0.05 TO $0.60 Mkt Cap: $2,476.7 mil.
October 2, 2000 SUMMARY
* Recent amended 8-K/A, provides details behind bank
INSURANCE--LIFE debt restructuring under terms, CNC was required to
Colin Devine discontinue common and preferred dividends (but not
212-816-1682 trust preferreds), de-leverage, maintain increasing
colin.devine@ssmb.com levels of tangible net worth, and generate minimum
targets for "adjusted" earnings.
* Agreement provides for numerous events of default,
most pressing of which is that CNC must regain "A-"
rating status from A.M. Best by March 31/01.
* Under debt restructuring terms, lender banks, as well
as Merrill Lynch, received full guaranty from CNC's
intermediate holding company, CIHC, which owns its life
insurance operations. Effectively this provides them
with preferred status versus other senior unsecured
creditors.
* While Appendix A references revised Lehman Agreement,
dated Sept. 22/00, relating to Conseco Finance,
document has yet to be filed with SEC.
* 2000E lowered $0.05 reflecting fees paid for bank debt
restructuring.
FUNDAMENTALS
P/E (12/00E) 12.7x
P/E (12/01E) 7.6x
TEV/EBITDA (12/00E) NA
TEV/EBITDA (12/01E) NA
Book Value/Share (12/00E) $16.60
Price/Book Value 0.5x
Dividend/Yield (12/00E) $0.20/2.6%
Revenue (12/00E) $9,166.5 mil.
Proj. Long-Term EPS Growth 5%
ROE (12/00E) 5.0%
Long-Term Debt to Capital(a) 46.7%
CNC is in the S&P 500(R) Index.
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (9/29/00) $7.63 Current Rating 3H
52-Week Range $24.38-$4.63 Prior Rating 3H
Shares Outstanding(a) 324.6 mil. Current Target Price $5.00
Convertible No Previous Target Price $5.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/99A Actual $0.91A $0.84A $0.80A $0.64A $3.21A
12/00E Current $0.30A ($0.09)A $0.14E $0.25E $0.60E
Previous $0.30A ($0.09)A $0.19E $0.25E $0.65E
12/01E Current NA NA NA NA $1.00E
Previous NA NA NA NA $1.00E
12/02E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 12/00E $0.63; 12/01E $1.03; 12/02E NA
OPINION
As confirmed by documents filed with the SEC relating to its recent bank debt
restructuring, Conseco continues to face numerous challenges as it attempts to
put its "house" back in order. In this regard, we believe the key issue for
investors to resolve is whether the company's current share price incorporates
enough of a discount, relative to other life insurers in its peer group, to
compensate for the considerable risks it still faces. In our view, as
evidenced by our 3H (Neutral, High Risk) rating and $5 price target, that
answer is "no." Conseco is currently trading at 7.6x our 2001E. By
comparison, a company with a generally acknowledged "elite" business franchise
with sustained 15%-plus EPS growth potential in Nationwide Financial Services
(NFS, 2M, $37.38), is at only 9.3x. Even deep-value play UNUMProvident# (UNM,
1H, $27.25), at 9.9x, is trading at only a moderate premium to Conseco, and yet
we believe the continuing demonstrable improvement in UNM's operating
fundamentals will reward investors with potential 30% share appreciation over
the next 12 months. Further, neither of these companies faces a potential
issue over the next six months of being in default under their bank debt
agreement terms if they fail to regain an "A-" rating from A.M. Best prior to
March 31, 2001. We also continue to expect that Conseco will need to undertake
a major recapitalization, thereby implying considerable dilution, in
conjunction with a write-down to the approximate $3.9 billion of goodwill it is
presently carrying against its life insurance operations, reflecting the
material deterioration in their profitability levels over the past year. In
recognition of the fees paid by Conseco to restructure its bank debt, we have
reduced both our 3Q00E and 2000E by $.05 to $0.14 and $0.60 respectively. At
this point our 2001E of $1.00 is unchanged, however given Conseco's stated
intent to slow down its consumer finance origination activities, coupled with
continued earnings uncertainty at the life insurance operations, it could need
to be revised at a future date. Looking ahead, should Conseco's earnings, debt
level and cash flow picture become more stable, it may well make sense to re-
consider whether to invest in the company, however, until then, we believe far
more attractive opportunities, on a relative basis, exist elsewhere.
BANK DEBT RESTRUCTURING REVIEW
* Borrowing levels - As of Sept. 22, 2000 Conseco's direct bank debt totaled
an estimated $2,071 million. Under the restructuring agreement, in addition
to its borrowing cost increasing, all of Conseco's bank debt is now
supported by a guarantee from CIHC, the intermediate holding company that
effectively owns its life insurance operations. While the establishment of
the guaranty does not impact common shareholders, it does provide the banks
with a first charge on the life insurance operations ahead of other senior
unsecured creditors, specifically public bondholders. There are three
separate credit facilities:
- $155 million facility due Dec. 31, 2001.
- $1,500 million five-year facility of which $150 million is due on each
of Sept. 30, 2002 and 2003, with the remaining $1,200 due on Dec. 31,
2003. The latter can be extended a further 15 months to Mar. 31, 2005,
in return for an extension fee equal to 3.5% of the then outstanding
balance.
- $766 million 364-day facility due Dec. 31, 2001. It would appear that
$350 million of this line was permanently repaid on September 22, 2000,
thereby leaving an outstanding balance of $416 million. This line was
also amended to include the $25 million balance owing on the extendible
commercial Merrill Lynch (MER, 1H, $66.00) notes.
* Key Covenants - The suspension of the cash dividend on both Conseco's common
and preferred stock (but not Trust Preferred debt securities), was a
requirement under the agreement, and is to remain in effect until such time
as the company has both obtained investment grade credit ratings, and repaid
all bank debt maturing in 2001. In addition, Conseco must reduce its ratio
of debt to capital to 30% by March 31, 2004. While this ratio, currently at
41%, will benefit from the scheduled conversion of its $500 million of
FELINE PRIDES in February of 2001, it could become an issue were Conseco's
equity capital to be reduced by any further one-time charges, such as to
adjust the valuation of its current $3.9 billion of goodwill. Conseco is
also required to improve its interest coverage ratios from a minimum level
of 1 to 1 at year-end 2000, up to 2 to 1 by December 31, 2003. It must also
meet formalized minimum "adjusted" earnings (after adding back a variety of
items including taxes, depreciation, amortization of deferred acquisition
costs and goodwill and non-recurring charges) targets.
* Officers and Directors Loans - As of Sept. 22, 2000 Conseco guaranteed loans
totaling $570 million supporting the purchase of approximately 19 million of
its common shares by officers and directors. These loans were split amongst
three facilities equaling $144 million, $181 million and $245 million, and
the maturity on each has now been extended out to December 31, 2003. Under
the terms of its bank debt restructuring agreement, Conseco had to post an
initial cash collateral supporting these loans equaling $50 million as well
as a guarantee from CIHC. In addition, the bank agreement stipulated that
for "Director Borrowers," defined as S. Hilbert, R. Dick, D. Decatur, D.
Gongaware, J. Massey, D. Murray and J. Mutz, borrowings that exceeded a
maximum average price of $25 per share, would have to be secured by
additional cash collateral for 100% of the difference in excess of the $25
per share maximum.
* Tritel Inc. - Conseco has undertaken, on a "commercially reasonable" basis,
to sell all, or substantially all, of its minority ownership position in
Tritel Inc. (TTEL, NR, $14.31) by March 31, 2001, currently valued at
approximately $315 million.
* Lehman Agreement - Reference is made on page 10 of Schedule A to the Amended
Agreement with Lehman Brothers Inc.# (LEH, 1H, $147.75) dated September 22,
2000, relating to Conseco Finance and its affiliates and loan agreements. A
copy of this has not been filed with the SEC as of yet.
ADDITIONAL INFORMATION AVAILABLE UPON REQUEST
# Within the past three years, Salomon Smith Barney, including its parent,
subsidiaries and/or affiliates, has acted as manager or co-manager of a public
offering of the securities of this company.Securities recommended, offered, or
sold by SSB: (i) are not insured by the Federal Deposit Insurance Corporation;
(ii) are not deposits or other obligations of any insured depository
institution (including Citibank); and (iii) are subject to investment risks,
including the possible loss of the principal amount invested. (c) Salomon
Smith Barney Inc., 2000. All rights reserved. Any unauthorized use,
duplication or disclosure is prohibited by law and may result in prosecution.
Please refer to ticker SSBDISCL for important Salomon Smith Barney Disclaimer
information.
Colin Devine 212-816-1682
First Call Corporation, a Thomson Financial company.
-0- Oct/02/2000 20:42 GMT |
