Kevin
under current condition the spread payments over the period of 3 to 5 years may
be high but in no way decisive. All of the conditions are known as you are
asking about something that is not part of the conditions yet.
here is very negative review of cnc deal (just to prove that I am fair).
Take a good hard look at the reasoning and what it might imply good or bad.....
Regards
-Albert
08:19am EDT 25-Sep-00 Salomon Smith Barney (Colin Devine 212-816-1682) CNC LEH
CNC: DEBT RESTRUCTURING DETAILS DISCLOSED
SALOMON SMITH BARNEY
Conseco, Inc. (CNC)#
CNC: DEBT RESTRUCTURING DETAILS DISCLOSED 3H (Neutral, High Risk)
Mkt Cap: $2,820.8 mil.
September 25, 2000 SUMMARY
* As anticipated, CNC announced restructuring of its
INSURANCE--LIFE $2.8B bank credit facility and suspension of common
Colin Devine dividend. Terms include immediate $650m payment with
212-816-1682 further $571m due at Dec. 31, 2001, while $570m of
colin.devine@ssmb.com loans backing employee stock purchases, subject to
William H. Ryan revised terms, extended to Dec. 2003. Cost of
212-816-0130 modification to Lehman Brothers agreement was not
william.ryan@ssmb.com disclosed.
* Cash flow constraints remain as CNC also faces public
debt repayments of $131m in Dec. 00 and $668m in June
01, coupled with annual holding company debt service,
preferred, and operating expenses in $500m range.
* While CNC plan proposes reducing debt:capital to 25%
vs. current 41% by YE 2003, skeptical can occur absent
significant dilutive recapitalization to replace
expected writedowns to current goodwill and deferred
acquisition cost values at life units, as well
receivable related assets at finance unit. Also need
to consider earnings impact of proposed $3B asset sale
tied to debt repayment.
FUNDAMENTALS
P/E (12/00E) 13.4x
P/E (12/01E) 8.7x
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) $0.20/2.3%
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 (9/25/00) $8.69 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 $0.19E $0.25E $0.65E
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 $0.65; 12/01E $1.03; 12/02E NA
OPINION
While Conseco's restructuring of its $2.4 billion of bank credit facilities, as
well as the suspension of its common dividend, came in as expected and
represent an important first step, the company is far from being out of the
woods. While the restructuring of its bank facilities gives the company a
little breathing room, from the banks' perspective, just the repayment of the
immediate $650 million was a significant win. It was also the most preferable
scenario, as opposed to forcing Conseco into a Chapter 11 filing that would
also likely have led to its insurance operations being placed into a multi-
jurisdictional regulatory rehabilitation, a process that could easily last more
that eight years. The onerous terms extracted by its banks will require the
repayment of an immediate $650 million, plus a further $571 million by the end
of 2001, for a combined $1.2 billion over the next 15 months. In addition, in
the next 9 nine months, the company will need to repay $799 million of maturing
public debt. The press release announcing the bank debt restructuring made no
reference to the cost or terms involved in Conseco's getting Lehman Brothers
(LEH, $141.25, 1H) to agree to modify its existing agreement controlling cash
flow distribution from Conseco Finance. We believe investors also need to
consider the potential dilutive effect on income, even if the company is able
to reduce its operating expenses by $150 million, of its proposed $3 billion of
asset sales by the end of 2003, to fund the repayment of its $1.52 billion of
bank debt and $1.56 billion of public debt maturing during the period.
Beyond this, on an ongoing basis, Conseco will continue to face considerable
challenges associated with:
* negative operating cash flows at its holding company, which will
continue to require an estimated $500 million annually to service
debt, preferred and operating expenses;
* rising credit quality problems at the consumer finance operations
tied to aggressive lending activities carried out during the second
half of 1998 and throughout 1999, as well as narrower margins going
forward tied to the reduction in the company's credit ratings and
increased borrowing costs; and
* declining life insurance earnings, where operating ratios have
deteriorated significantly over the past year, as well as increased
lapse ratios and slower sales due to the reduction in the company's
claims paying ability ratings.
As such, with Conseco's shares trading at almost 9x our "upside" 2001E of
$1.00, a valuation on par with companies such as John Hancock Financial (JHF,
$26.13, 1M) or Nationwide Financial Services (NFS, $36.19, 2M) both of whom
possess far superior operating fundamentals and earnings outlooks, we continue
to regard CNC shares, on a relative basis, as unattractive and highly
speculative. Our existing 3H rating is unchanged along with our $5 price
target, which reflects the likelihood of negative future earnings revisions
tied to an expected recapitalization, as well as Conseco's overall much less
favorable operating earnings outlook.
Debt - Management's stated objective to reduce Conseco's current $5.9 billion
of debt by more than $3 billion by the end of 2003, so as to lower its total
debt (excluding preferred debt) to capital leverage to a more prudent 25%,
versus its current 41%, is clearly a positive move. However, we do not believe
this ratio can be achieved absent a dilutive recapitalization to reflect the
expected write-downs to the current $3.9 billion of goodwill and $4.5 billion
of deferred acquisition cost assets associated with its life insurance
operations, as well as some recognition of the $875 million difference between
the estimated "fair-value" and book value of Conseco Finance as reported in the
company's recent 2Q00 10-Q.
Conseco's pending $3.1 billion of bank and public debt maturing by the end of
2003 is distributed as follows:
2000:
* Total of $781 million split between $650 million of bank debt repaid on
September 22, 2000 and $131 million of public debt due December 2000.
2001:
* Total of $1,239 million split between payment of $571 million of bank debt
on December 31, 2001 and $668 million of public debt in June 2001.
2002:
* Total of $600 million split between payment of $150 million of bank debt in
September 2002 and $450 million of public debt in October 2002.
2003:
* Total of $460 million split between payment of $150 million of bank debt in
September 2003 and $310 million of public debt in February 2003. A further
$1.2 billion of bank debt is due in September 2003, however Conseco has an
option to extend it to September 2005. In addition, in December 2003 the
$570 million of loans and related Conseco guarantees comprising the Conseco
directors and officers stock purchase program are due. |
