The inevitable finally occurred the Friday before last, when Conseco Inc. announced that it would miss a coupon payment, adding, the "gradual financial restructuring that was the goal of the turnaround plan is no longer the best course," in its statement. While the company's stock dipped to $0.34 before being de-listed and long-dated unsecured bonds headed to single-digit levels on the dollar, spreads for Conseco manufactured housing paper were all over the map last week, as some investors exited the sector altogether. Others, however, saw some good value on the triple-A classes from older vintages.

While Conseco's stated intent is to restructure in order to avoid bankruptcy, the general market sentiment is that, following the $1.5 billion debt restructuring this March, and given its current debt load, "both equity and debt (markets) appear to be anticipating bankruptcy," Merrill Lynch researchers noted. The good news in this mess is that lending unit Conseco Finance has no outstanding debt, and could emerge from any restructuring, notes Credit Suisse First Boston researcher Rod Dubitsky in last week's Market TABS.

Bid lists hit the Street last week, not only loaded with Conseco/Green Tree paper, but with Vanderbilt Mortgage paper as well. Spreads for triple-A rated notes offered returns of more than 200 basis points over swaps for two-year tenures, and 225 basis points over swaps for three-year paper from the 2000 vintages, which is currently considered most dangerous.

For the 1996 vintage - already past the most troublesome first four years of seasoning - spreads were seen in the 300 basis point area versus swaps for six-year notes and 325 basis points over swaps for 10-year paper.

Despite the worry, most feel as though, when all is said and done, ABS holders will make it out unscathed in a bankruptcy, once the servicing is transferred. Additionally, with the relatively strong performance of the issuer's home equity and home improvement loan portfolio, "It is manufactured housing-backed ABS you are really worried about here, not home equity," commented Merrill Lynch structured finance research head Dan Castro.

In fact, the relatively long period of time it took for Conseco to miss a debt payment allowed investors time to carefully assess the situation and "get their houses in order in regards to their Conseco exposure," adds Merrill research director Glenn Costello.

Once a proud company, sporting an investment-grade rating, things have gone downhill since the 1998 acquisition of GreenTree Finance for $7.3 billion. Accounting irregularities uncovered in GreenTree's books led to earnings re-statements and ratings downgrades. Ever since, Conseco has seen its access to debt markets shrink.

In March of 2000, Kathy Shanley, senior analyst for Gimme Credit, an independent corporate debt research firm aimed at institutional investors, added Conseco to its Bottom Ten list of names to avoid. Shanley said at the time "Conseco (then rated Baa3/BBB+) says it's on track to meet earnings estimates, but given AFS's recent decision to quit manufactured housing lending, we worry losses could spike at CNC's finance unit, potentially derailing its plans to reduce debt."

While the various scenarios of a potential bankruptcy are debated in research pieces, the ABS market expects to pass this most recent test. As Merrill's Castro notes, numerous subprime and home equity lenders have either gone under or exited the business over the past three years; and while none have been of the magnitude of Conseco, disruption has been limited once a servicer is found.

Conseco's $21 billion of manufactured housing loans is the largest in the industry, according to CSFB, twice its closest competitor, GreenPoint Finance, which is no longer in the MH lending business. This leads Merrill to view special servicers - Litton Loan Servicing, Fairbanks Capital, Wilshire Financial Services or Ocwen Financial - as potential acquirers. Within the industry, however, Vanderbilt, with a history of assuming distressed loan packages, would "be an excellent candidate to assume the servicing," if the price is right, adds Merrill.

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