Conseco announces bankruptcy

US insurance and finance company Conseco Inc became the third largest bankruptcy in US history last night after filing for protection from its creditors.

Conseco - based in the Indianapolis suburb of Carmel - is $6.5bn (?4.06bn) in debt and facing a federal investigation of its accounting practices. The company negotiated terms before filing for chapter 11 protection at a US bankruptcy court in Chicago, said Conseco spokesman Mark Lubbers.

Chapter 11 bankruptcy frees a company from the threat of creditors' lawsuits while it reorganises its finances. The debtor usually retains control of the business and its assets.

The filing follows a year-long tailspin after the conglomerate's aggressive acquisition strategy in the 1990s backfired. Company founder Stephen Hilbert was ousted in April 2000 after piling up $8.2bn in debt. Federal regulators are investigating the company's accounting around the time of Mr Hilbert's resignation and his replacement by Gary Wendt.

The decline in Conseco's financial condition accelerated in recent months, leading to Mr Wendt's resignation on October 3. He had received a $45m signing bonus when he was hired.

Mr Wendt, who remained board chairman, said as recently as May 1 that Conseco's short-term debt problems were behind it, and that he was confident about next year's prospects. Those statements and other reassurances from Conseco executives led to the filing of a string of shareholder lawsuits.

Although the bankruptcy filing was not surprising given Conseco's recent woes, it marked a dramatic downfall for a company whose stock was once a Wall Street darling. From 1988 to 1998, the company's stock averaged a total return of 47% per year and Conseco shares traded as high as $58.

Today, the stock trades at less than five cents per share.

Conseco has also suffered a series of downgrades by Wall Street credit rating agencies. Those downgrades, combined with bankruptcy fears, have hurt the ability of Conseco's insurance and finance subsidiaries to keep existing customers and attract new ones.

Company officials have said Conseco's insurance subsidiaries have remained fundamentally sound despite the parent company's debt problems. However, the finance division, Conseco Finance, is insolvent after failing to make a $4.7m payment due December 4.

The filing covers Conseco Inc, the parent company, as well as St Paul, Conseco Finance Corp and its consumer finance subsidiaries. Conseco's insurance operations are not included in the filing, Mr Lubbers said.

Details of the tentative agreement reached with two of three investor groups must still be resolved and approved by group members before a reorganisation plan can be submitted for the court's approval. A filing outlining specifics of the plan could be submitted within four to six weeks.

Banks and bondholders who took part in the talks reached terms with Conseco, but holders of preferred securities did not, Mr Lubbers said. Talks will continue with those investors, he added.

Bondholders, who submitted a proposal in the talks to take full equity ownership of Conseco, are owed $2.5bn in public debt. Banks are due $1.5bn, with more than $2bn owed to holders of preferred stock.

Under the most commonly used measure to rank bankruptcies, Conseco's ranks third in the US based on the $52.3bn in assets the company and its subsidiaries reported as of September 30.

WorldCom's total assets at its July filing were $104bn, followed by Enron's $64bn.

Before Conseco's filing, the third-largest bankruptcy was the 1987 filing by Texaco, which had nearly $36bn in assets at the time. Adjusted for inflation, that amount would be more than $56bn today, according to the research website BankruptcyData.com.

Conseco maintains the use of assets to measure bankruptcies is inappropriate in its case because its insurance operations are not included in the bankruptcy filing. Also, Conseco says its debt entering bankruptcy is much smaller than several other companies' debts at the time they filed.