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Wednesday's credit downgrades and stock decline show that investors are still fretting about


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cash flow situation.

Those worries aren't without foundation, as a look at the data will show. No matter how you sort out the numbers, Conseco's parent company could have trouble meeting as much as $1.39 billion in assorted debt payments next year. So investors are anxious to see just what sort of cash flows its core businesses -- lending and insurance -- will likely produce in 2002.

Alas, a

recent Detox column made certain mistaken assumptions about these cash flows. Apologies to anyone misled. But the reality of the Conseco case is that the company's debt burdens are so heavy that recalculating the numbers doesn't change Detox's assessment: Even at its recent price of $4.13, the stock has a long way to fall. Conseco shares slid 13% Wednesday.

Mountain of Worries
Conseco's debt weighs on stock

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The aforementioned Nov. 16 Detox mistakenly said Conseco executives expected to make a total of $3 billion in new loans made through 2002. In fact, the company expects to add

an average

of $2.6 billion in new loans in 2002, which almost certainly means adding far more than a total of $3 billion through the entire year. From these $2.6 billion of average loans, Conseco expects to earn $150 million in net interest income.

So what's the issue? Well, the company appears to be factoring in substantial growth in its portfolio that looks hard to achieve. Unless the company lends massive amounts in the first half, Conseco would have to add $4 billion to $5 billion in loans throughout 2002 to get to an average of $2.6 billion for the year. This year, it will probably add something north of $3 billion in new loans (excluding loans in discontinued lines). Despite requests, the company didn't give a breakdown of its expected loan production total in 2002.

Conseco would have trouble making $4 billion to $5 billion in new loans because most of the growth this year has come from lending lines that have started to show heavy losses. These lines are mobile home loans and retail credit card loans. Loan losses in new mobile homes are way higher than those on older loans for equivalent periods, and these losses are eating into the fatter interest margins that Conseco now books. The credit card loans showed loan losses of 7.8% in the third quarter, up from 5.4% in the year-ago quarter. The credit card lending is financed with deposits from Conseco Bank, which operates under strict capital constraints and the beady eye of federal bank regulators.

Don't believe Detox on the cash flow problems? Well, the rating agency Fitch Wednesday downgraded the Conseco parent's debt three notches to B-minus, from BB-minus. It slashed its rating on Conseco Finance, the lending arm, to CCC. The reason? Deepening concerns that Conseco won't be able to meet debt repayments scheduled for 2002.

Know any companies that the market may be misvaluing? Detox would like to hear about them. Please send all feedback to

In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.