In better times you would expect financial services companies to pounce on a chance to buy a consumer finance operation with $16.5 billion of receivables at a distress price and instantly add scale.
But in this economy a subprime loan shop with that kind of scale may be too big for even the giants of banking to swallow.
After several failed attempts, Conseco Inc. disclosed yesterday that it had finally found a buyer for its troubled lending unit, Conseco Finance Corp.
The buyer is not an operating company but a consortium of opportunistic investment firms -- which analysts said suggests not only that Conseco Finance's days as a going concern are numbered, but that even steeply discounted lenders are a tough sell.
"It's indicative of the relatively low risk appetite potential strategic buyers have today toward the manufactured housing business," said Blaine Frantz, a vice president and senior analyst at Moody's Investors Service. Manufactured housing represents the largest part of Conseco Finance's operation; the unit services $25 billion of prefab home loans, of which it carries $7.5 billion on its books.
The price for the unit is the value of its secured debt, Conseco Inc. of Carmel, Ind., disclosed Wednesday as part of its declaration of Chapter 11 bankruptcy. It did not give a figure.
The finance unit would be sold to CFN Investment Holdings, a joint venture of New York-based Fortress Investment Group, J.C. Flowers & Co., and Cerberus Capital Management.
Lehman Brothers, which has approximately $1 billion of loans outstanding to Conseco Finance, has agreed to lend the consortium part of the purchase price, according to a person familiar with the New York investment bank. Lehman wants to make sure it gets "taken out," the source said. A Lehman spokesman declined comment.
Analysts said they would expect CFN to try to sell Conseco Finance in pieces rather than try to salvage it as an ongoing business.
Calls to the partners in CFN were not returned. Mary Beth Schwartz, a spokeswoman for Conseco Finance in St. Paul, insisted that the firm has no liquidation plans.
Conseco Finance stopped originating manufactured housing loans a few weeks ago, she said, though it continues to service them. However, she said, Conseco's home equity origination and servicing business and its credit card business "are expected to continue without interruption."
But Mr. Frantz at Moody's said it would make sense for the buyer to break up the unit and sell the components.
"My sense is that for some of these pieces it may be better to just sell them off," Mr. Frantz said.
For example, Conseco Finance is "in a weak position" in its private-label credit card business, he said. It is "hard to maintain existing relationships, let alone find new relationships, for that business unless you're a reasonably strong company."
Merrion Group analyst David Erb said CFN may have bought a lot of Conseco's asset-backed securities, which trade at steep discounts, and may plan a controlled liquidation of the firm once it gets bankruptcy protection.
Under this scenario, the consortium would keep Conseco Finance's servicing platform running to service the colossal $25 billion of manufactured housing loans, thereby milking as much as possible out of the distressed debt.
"I would be surprised if in advance of this newfound interest they weren't very active purchasers in open market of asset-backed paper that was created and is underlying many of the various securitization trusts of Conseco Finance," Mr. Erb said.
In so doing CFN would be taking a page from Berkshire Hathaway and Leucadia, which last year jointly bought up a huge part of Finova Group's debt, took over the company, and are liquidating it now.
Mr. Erb added that there could be a big profit in this type of strategy.
"You buy these securities at 30 to 50 cents on the dollar, ride on a white horse, [and] marshal the company through controlled liquidation, protecting the integrity of the investment," he said. "You ensure that the servicing operation continues to function -- continues to make calls and throw people who don't pay out of their mobile homes -- and realize the appropriate value for that collateral every time something goes into default."
Mr. Erb said that the buyers could sell off Conseco Finance's $2.9 billion credit card receivables portfolio and $6 billion home equity loan portfolio without much difficulty, but that Conseco's manufactured housing portfolio -- much larger than others on the market -- may be too unwieldy to unload.
For example, he said, J.P. Morgan Chase & Co., which services a $10 billion manufactured housing portfolio, would be hard-pressed to add the $25 billion of prefab home loans serviced by Conseco.
This would explain why Chase, which after Conseco is the top player nationwide in manufactured housing, would not seize the opportunity to grow further in that business at a fire-sale price, Mr. Erb said. It would be an "enormous task" for Chase to gear up its special servicing operations to take on Conseco Finance's manufactured housing portfolio, he said.
A Morgan Chase spokeswoman did not return a reporter's call.
"If I were David Coulter [the vice chairman of Morgan Chase and the head of its consumer banking business] and I found these Conseco guys coming down the hallway holding up servicing saying, 'Have we got a deal for you! Why don't you help us run off our servicing portfolio?' I would hold up a cross and make them explode like vampires," Mr. Erb said.
But even if that is the attitude in the boardrooms of the biggest banks, CFN may be hoping it will change.
Manufactured housing, said Mr. Frantz at Moody's, "is a fairly significant piece of the housing industry and of affordable housing," but there are "no significant players remaining in the market.
"You could imagine that perhaps there will be a good profit potential in the business at some point, which is why you're seeing financial buyers step into the void," he said. CFN "may perhaps wait to the market to turn and then flip it."
