I don't consider the publishing of unattributed quotations from short sellers to be either good journalism or good analysis
Short-sellers are often forced to request that their names not be revealed. If you wonder why - the secret CC is just one example of bias in favor of cheerleaders. If you reveal that you are short a stock, management teams often refuse to speak to you. It is better to be anonymous if your short position runs in millions of dollars (for some hedge funds). Why would they voluntarily cut off an information pipeline?
I have attached an article written by the same thestreet.com person. This is from November, 1999 - don't forget to check the stock price at that time. My guess is that the same unnamed hedge-fund manager was quoted in the recent article too. And I wonder why the mutual fund manager declined to be named.
Regards,
Rajiv
--------------------------------------------------------------------------------
Cash-Flow Leak Threatens Debt-Heavy Conseco
By Peter Eavis
Senior Writer
11/11/99 8:45 PM ET
Conseco's (CNC:NYSE) parent company could be in the grips of a cash-flow squeeze that threatens to throw the financial-services firm off its fast-growth strategy, according to three observers.
The problem is that in aggressively trying to build a financial-services giant offering insurance and lending products to middle America, Chairman Stephen Hilbert took on too much debt, these people say.
Conseco is no stranger to unfavorable analyses of its financial health and strategy. In fact, in the early '90s the company shrugged off a barrage of criticism of its accounting methods and grew rapidly. Investors who stuck by the company have been awarded with a 1,000%-plus return on Conseco stock since 1990.
But now, investors appear to be listening to the bears: At recent levels around 20, the company's stock is down nearly 40% from its 1999 high of 34 3/8, posted March 12. And just this week the stock has slipped nearly 3 from Friday's close of 22 7/8.
Carmel, Ind.-based Conseco responded to only one query from a list of questions about cash flow and declined to say whether figures used in this article are accurate.
Skeptical Stance
Prominent among the skeptics is Colin Devine, an insurance analyst at Salomon Smith Barney.
Devine calculates that each quarter Conseco's parent company spends about $100 million more than it makes. (Salomon last helped underwrite a securities issue for Conseco in October 1998, and Devine rates Conseco a hold.) Conseco declined to comment on the cash-flow deficit alleged by Devine. (Conseco's cash flow wouldn't be a source of disagreement if the company's financial documents showed how much cash is used separately by the parent company and its Green Tree lending unit. Instead, the cash-flow table in Conseco's public accounts is consolidated.)
Investors closely monitor cash flow at Conseco's parent because that's where the firm takes on most of its debt. And after a burst of capital markets activity starting this summer, the parent's debt obligations are up considerably, rising nearly 20% to $3.45 billion now, from $2.91 billion in June.
The post-June financing, which consisted of $550 million in two debtlike securities issues and $1 billion in bonds, also increased servicing costs for the parent. The three issues have added an estimated $110 million to the parent's payments on debt and debtlike securities, taking the total to about $470 million a year.
Faced with heavier and more expensive leverage, Conseco may have to slam on the brakes at its Green Tree subprime lending division, say Devine, the ratings agency Moody's Investors Service and one New York-based hedge fund manager who's short Conseco (a position that would allow him to profit from a decline in the company's shares).
Moody's gives Conseco and Green Tree a Ba1 rating, and since September has had both entities on positive outlook, which signals to investors that it's more likely to award Conseco a better rating than keep it the same or lower it.
But the ratings agency now is reassessing its optimism. "We believe that Conseco will slow down growth at Green Tree," says Patrick Finnegan, insurance analyst at Moody's. "If they don't, the positive outlook won't be sustained." This would be a blow to Conseco, which has stated that it's counting on better ratings to lower debt costs.
Defenders of the Faith
Conseco does have plenty of defenders. One is Jon Reichert, an analyst at the ratings agency Standard & Poor's. He disputes the assertion that the Conseco parent company has a cash-flow deficit. Instead, he estimates that the parent company is running a $20 million surplus, with its revenue totaling around $723 million a year and its costs at $702 million. (S&P rates Conseco triple-B-plus, three notches above Moody's.)
And two mutual fund managers say the debt concerns are unwarranted, arguing that the higher borrowing is being used to fund the fast growth at Green Tree, which made $553 million in pretax operating earnings in the year's first nine months.
Green Tree needs to expand aggressively to snatch market share from its competitors, many of which are faltering, says Robert Rodriguez, manager on the FPA Capital fund, which holds Conseco shares.
And if there comes a need to reduce parent company leverage, "Conseco can always upstream earnings from Green Tree," adds Rodriguez.
Indeed, Reichert estimates that Green Tree could pay up $400 million in dividends this year, a sum that includes the $200 million paid by Green Tree to the parent in the year's second quarter.
"Leverage is going up with the growth in receivables at Green Tree," says the other mutual fund manager, who declined to be named. He believes that Conseco's shares are poised to soar when the fears over liquidity are proven baseless. (This manager's fund owns Conseco shares.)
Fall Foliage
But the New York hedge fund manager who's short thinks Conseco's stock has further to fall. He reckons that Green Tree doesn't have enough spare cash to give the parent because it needs that money itself to fund the rapid expansion of its loan book.
In the third quarter, Green Tree's loan origination was up a hefty 23% to over $7 billion from the year earlier period.
"The Conseco story is all about liquidity," says the hedge fund manager. He doesn't believe that Green Tree is generating much excess cash. If it is, why didn't the Conseco parent company use the cash to pay off debt since June, rather than issue more obligations that added significantly to debt costs? "If Conseco's generating free cash flow, its interest costs should not be going up," he remarks.
The mutual fund manager who didn't want to be identified isn't worried by higher servicing costs. True, he says, the $1 billion in bonds were more expensive, but they also have a longer maturity than much of the debt they replaced, meaning Conseco is less exposed to any possible reduction in demand for lower-rated corporate debt.
Clearly, the battle lines between Conseco fans and detractors are drawn. A useful task for undecided investors is to look closer at the methods used by each side to arrive at their cash-flow numbers. For an attempt to do just that, see TSC's other story on Conseco.
-------------------------------------------------------------------------------- |
