Conseco shares soar on hedge-fund investment

  • Comments
  • Print
Listen to this story

Subscriber Benefit

As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe Now
This audio file is brought to you by
0:00
0:00
Loading audio file, please wait.
  • 0.25
  • 0.50
  • 0.75
  • 1.00
  • 1.25
  • 1.50
  • 1.75
  • 2.00

Wall Street loves Conseco Inc.’s deal to get a $278 million shot in the arm from a New York hedge fund.

Shares of the Carmel-based life insurer soared as much as 26 percent, to $6.30 apiece, in morning trading after New York-based Paulson & Co. agreed to buy $78 million in Conseco stock and $200 million in company bonds.

Paulson chief John Paulson is well-known today for betting in 2007 that subprime mortgages would plummet. According to Bloomberg News, his main fund returned 37 percent last year, compared with an average 19-percent loss for hedge funds. Now he’s betting on financial firms, including Bank of America Corp., Goldman Sachs Group Inc. and now Conseco, to come roaring out of the recession.

"Paulson has about as gold-plated a reputation as you’ll find these days," David Haynes, managing director at investment bank Hexagon Securities LLC, told Bloomberg.

The deal with Paulson allows Conseco to clear up the main cloud hanging over its stock: $293 million in bonds that creditors could have traded in for cash in September 2010.

By exchanging that debt for new bonds, Conseco "removes the primary roadblock that has been standing in the way of the company returning to a more normalized valuation," Randy Binner, an analyst at FBR Capital Markets, told his clients today, according to Bloomberg.

Paulson would own 9.9 percent of Conseco, marking a significant bet in a company that only six months ago was on the brink of financial disaster.

In March, Conseco renegotiated its bank loans to make sure it did not breach debt-to-capital ratios required by its lenders. Just the risk of breaching the ratios led Conseco’s auditor, PricewaterhouseCoopers, to threaten to issue a warning about the insurer’s ability to stay in business.

Amid that crisis, Conseco’s shares plummeted to just 26 cents apiece.

But now Conseco has been posting profits for the first time in two years. And after its deal with Paulson, the credit ratings agency Standard & Poor’s raised its outlook on Conseco’s financial strength from negative to stable.

Conseco expects to complete the stock and bond sales by March. The bonds would pay 7-percent interest and come due in 2016. Paulson has agreed to buy 16.4 million shares of common stock and warrants to acquire another 5 million shares. in a separate transaction, Conseco will sell $200 million of new common stock in a secondary public offering.

Please enable JavaScript to view this content.

Story Continues Below

Editor's note: You can comment on IBJ stories by signing in to your IBJ account. If you have not registered, please sign up for a free account now. Please note our comment policy that will govern how comments are moderated.

Get the best of Indiana business news. ONLY $1/week Subscribe Now

Get the best of Indiana business news. ONLY $1/week Subscribe Now

Get the best of Indiana business news. ONLY $1/week Subscribe Now

Get the best of Indiana business news. ONLY $1/week Subscribe Now

Get the best of Indiana business news.

Limited-time introductory offer for new subscribers

ONLY $1/week

Cancel anytime

Subscribe Now

Already a paid subscriber? Log In

Get the best of Indiana business news.

Limited-time introductory offer for new subscribers

ONLY $1/week

Cancel anytime

Subscribe Now

Already a paid subscriber? Log In

Get the best of Indiana business news.

Limited-time introductory offer for new subscribers

ONLY $1/week

Cancel anytime

Subscribe Now

Already a paid subscriber? Log In

Get the best of Indiana business news.

Limited-time introductory offer for new subscribers

ONLY $1/week

Cancel anytime

Subscribe Now

Already a paid subscriber? Log In