Conseco's Wild And Woolly Loans

Execs borrowed vast sums to buy stock--which sank. Who'll pay?

Insurance conglomerate Conseco Inc. has long lavished riches on its top brass. In 1998, its most recent year for which compensation data are available, Chief Executive Stephen C. Hilbert collected $117 million. The year before that, BUSINESS WEEK's annual survey on executive compensation identified Hilbert as the CEO who gave shareholders the least value relative to his pay. Hilbert's lieutenants have also been highly rewarded with generous salaries and bountiful options packages.

Over the past few years, Conseco execs saw another way to pick up some chump change: buy stock in the Carmel (Ind.) company. After all, Conseco was a highflier and sure to rise in price. Since 1996, the top 10 executives and board members accumulated some 12 million shares--4% of those outstanding (table). Less well known is that these stock purchases were financed with 6% loans--a very favorable interest rate--from a syndicate of banks led by Bank of America and Chase Manhattan Corp. Conseco guaranteed the loans.

That's not all. The borrowers have not had to make periodic interest payments. Instead, they've borrowed sums to pay the interest, rolling that cost into their debt. "It is by far the most aggressive loan program I've ever seen," says expert Bob Gabele of FirstCall/Thomson Financial, who tracks stock purchases and sales by corporate insiders.

All told, executives borrowed $480 million to purchase stock at prices ranging between $19 and $40 per share, with the average price over the entire loan program being $35. On Mar. 7, Conseco shares hit a 52-week low of $12.63 (chart), which makes the whole bundle worth just $159 million. This raises sticky questions: If the banks called the loans, could the execs make good? Would Conseco, as guarantor of the loans, be held responsible if borrowers couldn't pay? Bank of America and Chase declined to comment.

BULLISH. An additional 170 employees have bought about 7 million shares under the same program, but the bulk of the loans are in the hands of the board and top executives. The amounts that individuals owe are staggering. Outside director Dennis E. Murray was so bullish that he borrowed more than $100 million to purchase the stock at an average price of $35. That puts him about $68 million in the hole. CEO Hilbert would owe more than $114 million.

Those sums give pause to some Conseco institutional shareholders. "Given the share price, sure we have some concerns about the leverage the top executives of the firm have taken on," says Kevin R. McCloskey, portfolio manager at Federated Investors, a Pittsburgh fund company.

Hilbert did not respond to BUSINESS WEEK's request for comment on the loans. Through a company spokesman, Murray said: "No one is more motivated than Conseco's officers and directors to see Conseco stock appreciate over time."

All this still begs the question: Would the company step in to make good on its executives' debts? "Conseco has no plans to forgive any loans," says John A. Dolphin, a company spokesman. But the company still is on the hook because it has guaranteed them. Dolphin would give no details about when the loans were due, but one institutional investor said the company had told him at least some of the loans are due next year.

"Investors should be aware of this type of exposure not currently on the balance sheet," says accounting expert Abe Mastbaum, CFO of American Securities in New York, a money management firm. As contingent liabilities, the loan guarantees are disclosed only in the footnotes to the annual report.

Conseco's Dolphin downplays the company's role in the loan program. He says borrowers had to furnish financial statements to the bank before receiving the loans. "The banks have full recourse to the general assets of the participants, which are quite substantial, to repay the loans," says Dolphin.

Arranging executive loans to buy stocks is not an uncommon practice, but the dollar amounts involved in Conseco's case are unusually high. Why would a company back such a program when executives are already given ownership through options programs? Company filings say the program was designed to "encourage direct, long-term ownership of Conseco stock by directors, executive officers, and certain senior officers."

But others have a more wary view of the company's intentions--that Conseco is trying to build a record of insider buying to entice Wall Street to follow suit. Many investors believe insider buying and selling is a leading indicator of future stock-price action. The thinking is that if insiders--who have in-depth knowledge of their companies--are buying stock, the business outlook is bright, and share prices will climb.

Companies must file reports of insider purchases and sales with the Securities & Exchange Commission. Companies usually mail these reports on the 10th day of the month following the purchase. But Conseco doesn't use the mail. It posts insider purchases on the SEC's online system--as if to make sure everyone knows that insiders are loading up.

That's not all. "Most every time an insider buys at Conseco, there's a press release heralding the event," says First Call's Gabele. "And executives' motives become cloudy with a loan program of this magnitude. It's hard to assume there's no peer pressure." Dolphin denies the company hypes sales. He says: "We think it's important that investors know that, [since insiders own] nearly 20 million shares, we are firmly on the same page as the outside shareholders."

GLORY DAYS. Hilbert's insider share-purchase program shouldn't be surprising, coming from one of the most aggressive CEOs in financial services. Conseco has bought more than 40 life and health insurers since going public in 1985. For a long time, Hilbert's acquisitions paid off big. From 1988 to 1998, Conseco's revenue grew at an average annual rate of 29%, while its operating earnings grew 35%. Its stock soared as well, appreciating at a compounded rate of 46% in the same time period.

But in April, 1998, Hilbert bombed out. He bought Green Tree Financial (now Conseco Finance Corp.), one of the country's largest sub-prime lenders, for $7.6 billion--an 80% premium to its stock market value. Green Tree faced increasing loan losses, and its problems were aggravated by aggressive accounting. Conseco's stock hit an all-time high of $57.75 the day before the deal was struck in April, 1998.

Conseco observers wonder if the executives will ever have to pay back their loans if the stock remains depressed. "Conseco has been unusually generous to its executives, especially Hilbert," says David Schiff, editor of Schiff's Insurance Observer. "The company won't allow its executives to lose their shirts." If Hilbert and his team don't, the public shareholders just might.

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