In a move to placate investors and rating agencies, Conseco Inc. said Tuesday that it has agreed to sell $500 million of preferred equity to Thomas H. Lee Co.
The Carmel, Ind., insurance giant also said it would slow the growth of its Conseco Finance unit, formerly Green Tree Financial Corp., cut the dividend on its common stock, and reduce its leverage.
"Collectively, these moves will lower our cost of funds and increase our earnings power over the long term by helping us to more quickly improve our debt ratings," said Conseco chairman Stephen C. Hilbert in a statement.
The deal is expected to close Dec. 15. If the shares were converted to common equity, Lee, a Boston-based private equity firm, would have about a 7% stake in Conseco.
Moody's Investors Service responded by placing its ratings for Conseco and its finance unit on review for possible upgrade. It currently has junk-bond grade Ba1 ratings on the senior notes of both the holding company and Conseco Finance.
Michael J. Barry, an analyst at Fitch IBCA, said, "When anyone throws in $500 million of equity, it can only help. It's more cushion." However, he said, "we don't anticipate taking action based on" the announcements." Fitch, Standard & Poor's, and Duff & Phelps Credit Rating Co. give Conseco an investment-grade rating of BBB-plus.
The announcements apparently pleased investors. Conseco shares rallied on the news; early Tuesday afternoon they were trading at $20.4375, up 10%.
"For someone like Lee to make that big a bet is a huge vote of confidence," said Nik Fisken, an analyst at Stephens Inc. "This could be what we all need to get the shorts to start covering." Conseco's stock is off some 46% from its 52-week high, largely because of concerns about the Minneapolis-based finance company, which the insurer bought last year.
In the statement, Mr. Hilbert said Conseco expects to build its managed receivables portfolio to $49 billion by the end of next year, $20 billion of which would be held on its balance sheet. The company had previously forecasted that its managed portfolio would grow to $53 billion next year and that its balance sheet holdings would increase to $24 billion. It also said it expects to earn $2.80 per share next year, less than the analysts' consensus estimate of $2.96.
Rating agency analysts said they had been concerned about the rapid pace of growth at Conseco Finance, a leading originator of manufactured housing loans. The rapid growth caused Conseco to have very high leverage, analysts said.
Lee is prominent in the financial services industry, having invested in such companies as the mortgage servicing giant HomeSide Lending (now part of National Australia Bank) and the credit-cared issuer Metris Cos.
Though Lee has a reputation as a leveraged buyout firm, analysts said it is highly unlikely that Conseco is looking to sell. If Lee were to attempt an LBO, they noted, the holding company would have to take on that debt - which is the exact opposite of what Conseco is trying to do now.