S&P Notes Conseco Inc.’s $3B Shelf Assigned Preliminary Ratings

Standard & Poor’s assigned its preliminary ‘B-‘ senior unsecured debt, ‘CCC’ subordinated debt, and ‘CCC-‘ preferred stock ratings to Conseco Inc.’s $3 billion universal shelf registration, which was filed with the SEC on Dec. 5, 2003.

If securities are issued from this shelf, the proceeds are anticipated to be used for a recapitalization of the holding company. If a recapitalization does occur, Standard & Poor’s will analyze the resulting structure to determine if any rating actions are warranted. Conseco’s current capital structure was settled upon to allow the company to emerge from bankruptcy, which it did on Sept. 10, 2003. Although the structure achieved its purpose, with what Standard & Poor’s projects to be a statutory fixed-charge coverage run rate of about 1.4x in 2004, it has left the company with little margin for error and susceptible to any economic or business downturns. The debt-servicing requirements associated with the current capital structure clearly serve as an impediment to any upward movement in the ratings.

Another ratings constraint is the current lack of an earnings track record for the new Conseco. Reported results since bankruptcy emergence have been generally positive. However, it will take three to five quarters of actual results to determine how effective management has been at re-attracting the independent agent force to sell Conseco products and if the products are priced appropriately to deliver a stream of statutory earnings sufficient to generate the capital needed to fund additional growth.

The major weakness in Conseco’s insurance operations is its long-term care business at Conseco Senior Health Insurance Co. (CCC/WatchNeg/–), and it remains to be seen how the ongoing earnings losses at this entity will ultimately be rectified.Ratings ListConseco Inc.’s $3 billion universal shelf registration Preliminary senior unsecured debt rating B- Preliminary subordinated debt rating CCC Preliminary preferred stock rating CCC-.