Why Conseco's Still So Popular With Some on Wall Street

The insurer's had its ups and downs, but its relationships with analysts endure.
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You wouldn't think

Conseco

(CNC) - Get Report

, the insurance and lending concern, could have that many friends left.

The Carmel, Ind., company's stock is 44% off its 1999 high. In a bid to boost cash flow and reduce leverage,

last Tuesday it announced plans to cut its dividend, slash loan growth and sell convertible preferred shares at a scant premium to buyout firm

Thomas H. Lee

. The equity dilution from the convertible issue and the lending slowdown will cause 2000 profits to drop below expectations, the company added.

Matt Mueller, head of insurance research at

SNL Securities

, says Tuesday's transactions "pretty much prove that Conseco has a lack of cash." (SNL is an independent financial services research firm that does no brokerage work or investment banking.) A number of investors had been

warning of a cash shortage at Conseco for some months.

Yet, despite all this, the company has retained a powerful, if small, band of admirers. They're analysts at Wall Street firms who've been unremittingly positive on Conseco through a difficult year.

Some of these analysts published research saying that Conseco's leverage and cash flow didn't pose a problem. They pooh-poohed suggestions that the firm would have to resort to the sort of measures announced Tuesday. What's more, they're still bullish on the company.

Of course, the employers of these same analysts have recently handled securities issues for Conseco that generated valuable fees and commissions. And Conseco in the past has responded aggressively to critical analysts and the banks they work for.

"You can obviously say that the

bullish analysts weren't on top of the Conseco story," says Jonathan Iseson, manager of

Bluewater Partners

, a Long Island, N.Y.-based hedge fund that has no position in Conseco.

Fan Club

Conseco's most ardent and vocal analyst fans are

Credit Suisse First Boston's

Caitlin Long, who rates the stock a strong buy,

Merrill Lynch's

Edward Spehar, who labels it a buy, and

Lehman Brothers'

Eric Berg, who joined Lehman in late October and hasn't yet issued a rating. (Berg was previously employed at

CIBC World Markets

, where he had a strong buy recommendation.) The analysts' three banks -- four, including CIBC -- all have done recent underwriting for Conseco.

Berg insists that a cash flow shortage wasn't the main reason behind Tuesday's actions, saying instead that the firm's chief goal was lower borrowing costs. And he rejects any suggestion that investment banking considerations or pressure from Conseco underlie his bullishness. "I'm in the business of doing serious, independent, disinterested research," he says.

Long and Spehar didn't return calls seeking comment, but in recent research they have also contended liquidity wasn't a problem. Conseco declined to comment.

For the record, here are some published remarks on Conseco by Berg, Long and Spehar that now appear less than prescient.

"We believe Conseco has more than ample funding to finance what we expect to be continued rapid growth at Green Tree," Berg wrote in January while at CIBC, referring to the old name for Conseco's lending unit.

Long explored the possibility that Conseco would slow growth at its lending unit, but then dismissed it. "We don't believe Conseco will pursue this option," she wrote in October.

Spehar did say in October that Conseco would have downshift growth at its lending unit, but the extent of that reduction was significantly greater than he expected.

The Bigger Picture

There have been many well-documented cases of investment banks or companies pressuring Wall Street analysts to refrain from, or temper, negative analyses. Companies have threatened to pull banking business in retaliation for unfavorable research.

And Conseco has given Merrill, Lehman and First Boston quite a bit of business recently. Just one recent transaction they had a role in was a $1 billion notes issue in October that paid out $5.5 million in fees in total.

Conseco has shown it'll move business because of analysts. The company apparently ditched Merrill as its underwriter in 1994 after Spehar downgraded the company, according to a 1995

Wall Street Journal

story. Conseco rehired Merrill as its banker after Spehar left the firm in 1995, the

Journal

said. He rejoined Merrill in 1997, according to a spokeswoman.

Conseco also hasn't been afraid to take the gloves off when faced with criticism.

After Colin Devine, a

Salomon Smith Barney

analyst, published an unfavorable report on Conseco earlier this year, the company stopped sending the bank's asset-backed-securities division data on its loan portfolio that was used to more accurately value Conseco's asset-backed bonds, according to two people at Salomon who requested anonymity. (Devine rates Conseco shares a hold. He didn't respond to requests seeking comment.)

In September, a Conseco spokesman confirmed the company no longer provides this data to Salomon, though he said Conseco does send it to other investment banks "who we feel adequately cover our asset-backed securities underwriting needs."

Oh, and Salomon hasn't performed investment banking for Conseco since September 1998.