When crisis-hit Conseco ( CNC) said a week ago that its parent company wouldn't make its debt payments for the month, CEO Gary Wendt said he was "comfortable" that Conseco's main operating subsidiaries would have "more than ample liquidity" to maintain normal business through the tough months ahead. But an internal company memo written over two weeks before Wendt's assurances shows Merrill Lynch making a big cut in the amount of credit it was prepared to grant Conseco Finance, the company's lending subsidiary. Merrill reduced credit availability on a so-called warehouse line to $300 million from $500 million, according to the memo, and told the company that it would no longer fund mobile home loans, Conseco Finance's biggest, and most troubled, business line. Financial companies rely heavily on short-term credit lines to fund their day-to-day lending. If such lines shrink, the borrower may have to find other sources of liquidity in the market. Conseco, whose other business is insurance, warned this week that a bankruptcy filing could result if its creditors don't agree to a "consensual restructuring." Since the Aug. 9 announcement, trading in Conseco stock has been halted on the New York Stock Exchange, where it last changed hands for 34 cents. Conseco is in trouble because its lending and insurance businesses haven't produced enough cash to service the $4 billion of parent company debt. Merrill didn't comment. Conseco Finance's general counsel, Brian Corey, didn't comment beyond requesting that TheStreet.com destroy its copy of the memo, which consists of the minutes of a July 23 meeting of Conseco Finance's executive committee.
Corey attended that meeting. His name heads up a section of a memo that contains a proposal to change the name of Conseco Bank to "differentiate itself from its debt-laden parent" company. Federally-insured Conseco Bank takes deposits and uses them to fund store-card loans. A spokesman at Conseco Bank's regulator, the Officer of the Comptroller of the Currency, declined to comment on the potential name change proposal. Conseco Finance was the name given to Green Tree Financial after Conseco bought it for $7 billion in 1998. The large amount of debt owed by Green Tree weighed heavily on Conseco's balance sheet, and the unit started to show serious credit problems after it was combined with Conseco. The company disclosed this week that the Securities and Exchange Commission is probing accounting-related issues at Conseco Finance that took place in and before spring 2000. It's hard to get a full picture of Conseco Finance's liquidity position. It had $344 million of cash in hand at the end of June and produced $310 million of cash from operations in the year's first six months. In its second-quarter 10-Q SEC filing, released on Aug. 14, Conseco Finance does refer to a contraction in short-term credit lines, saying borrowing capacity on them had been reduced to $2.9 billion at Aug. 14 from $3.8 billion at June 30. Perhaps referring to Merrill, it states that "certain of our banks have recently further restricted our borrowing capacity related to manufactured housing loans within the committed facilities."
In the July 23 memo, the funding details are contained in a section under the name of Cheryl Collins, Conseco Finance's treasurer. It says the Merrill Lynch warehouse line was a $1.2 billion facility with an actual commitment of $500 million. The memo adds: "They have now capped us at $300 million. They have also determined that they will no longer fund MH paper. They still have the option to take it down to nothing." MH stands for manufactured housing, more commonly known as mobile homes. However, the memo appears to show that another creditor, Credit Suisse First Boston, was taking a softer stance. The memo says that debt outstanding to CSFB is $50 million, adding that the bank had agreed to keep funding Conseco's manufactured housing "Community Portfolio." CSFB, according to the memo, agreed to fund an additional $100 million of manufactured housing and home equity loans, and it renewed a conduit line to Conseco Bank. CSFB didn't immediately comment. Warehouse lines are typically secured by loans they help fund and are therefore a lot less risky than unsecured lines. Lehman has been a big provider of warehouse credit to Conseco, but the bank's name doesn't appear in the memo. Conseco has $40 billion of loans but has had to slow the growth of its $25 billion mobile home division because of credit problems.
Bullets Over Broadway
Elsewhere in the memo, bullet points under the name of Chuck Cremens, Conseco Finance's CEO, include a sentence that says "numbers are not near plan with the exception" of the store-card business. Cremens' section also says "Salomon Smith Barney sent out announcement bringing up our loss mitigation practices again." This is a reference to a July 18 research note from Salomon's insurance analyst Colin Devine, a frequent critic of Conseco. "Loss mitigation practices" is Conseco's term for actions that allow distressed borrowers to skip payments on their loans. Loans receiving this treatment are typically classified as current in Conseco's books. Some loan collectors at Conseco felt these practices were actually used to artificially suppress bad-loan numbers, a charge Conseco consistently denied. Devine's July note argued that Conseco earnings could've been given a big boost by loss mitigation tactics. Conseco reported a net loss in the second quarter of $1.3 billion, chiefly due to a $1 billion writedown in a deferred tax asset, compared with a $30 million loss in the year-earlier period. In its second-quarter earnings release, Conseco also said it had taken a $2.9 billion charge to write down goodwill on its balance sheet. The company says accounting rules dictate that the charge to be booked retroactively in first-quarter financials. CEO Wendt, who pledged Conseco's books were clean this week, had long maintained a big goodwill writedown was unnecessary because an actuarial firm had looked at the goodwill and not considered it impaired.