(CNO) CNO Financial Group Recapitalization and Third Quarter Buyback

On Friday, CNO Financial Group Inc. (CNO) announced the completion of various financial transactions that were a part of a recapitalization plan commenced in the beginning of September. Additionally, the company publicized the buyback of approximately 4.8 million shares at an average price of $8.62 per share in the third quarter of 2012.

CNO Financial spent $41.4 million in aggregate for the buybacks in the third quarter, thus bringing its expenditure on share repurchase for the first nine months of 2012 to $99.5 million. The company repurchased 12.89 million shares at an average price of $7.72 in the first three quarters of 2012. This corresponds to 5.3% of the outstanding shares at the end of the 2011. Total amount spent on share buybacks in 2012 is expected to be around $150–$170 million.

Coming back to the recapitalization plan, CNO Financial has entered into a new senior secured credit agreement and completed a private offering of new 6.375% senior secured notes due October 2020, worth $275 million. Further, the company has obtained a three-year unfunded revolving credit facility worth $50 million to meet its general corporate needs, per the plan.

The senior secured credit agreement comprises a $250 million four-year term loan facility and a $425 million six-year term loan facility. The amounts raised under the six-year term loan facility and senior secured notes offering were recently increased to $425 million and $275 million, respectively, from $400 million and $250 million announced initially. This increase was driven by the favorable response from lenders, which also helped CNO Financial achieve better pricing and other terms of borrowing, leading to reduced weighted average cost of capital.

Upon completion of the borrowings, CNO Financial used the net proceeds from the senior secured notes and new credit agreement for the repayment of the $224 million loans outstanding under the old senior secured credit agreement and redemption of $275 million worth of 9% senior secured notes due 2018 at a premium value of $323 million. Further, the proceeds were used for buying back the outstanding 7% convertible senior debentures due 2016, worth $200 million, from certain associates of Paulson & Co. Inc. at a premium price of $355 million.

The amount raised was also used to shell out fees and expenses associated with the recapitalization. CNO Financial is retaining the residual proceeds as excess holding company funds to be used for general corporate expenses.

However, as a result of the costs related to the buyback of $200 million 7% convertible senior debentures, redemption premium paid on the 9% senior secured notes and the write-off of unamortized discount and issuance costs, the company projects a one-time charge of $180 million, to be recorded in the third quarter of 2012. Additionally, the cost of extinguishing the beneficial conversion feature associated with the repurchased 7% convertible senior debentures is estimated to shrink shareholders’ equity by $24 million.

Despite these costs, the recapitalization is expected to be beneficial for CNO Financial. It has boosted the company’s financial flexibility and improved its debt maturity profile. The cost of debt has also reduced by about 210 basis points (bps), thereby bringing down the cost of capital.

Moreover, the debt-to-total capital ratio, excluding accumulated other comprehensive income, has increased 520 bps from 16.6% as of June 30, 2012. The plan is also expected to enhance the growth rate of the company’s earnings per share and return on equity. The success of the recapitalization plan also lies in the fact that it has neither affected the company’s strong credit ratings nor acted as an impediment in its share repurchase plans.

CNO Financial, which competes with AFLAC Inc. (AFL) and Torchmark Corp. (TMK), currently carries a short-term Zacks #2 Rank (Buy). We maintain our long-term ‘Outperform’ recommendation on the stock.

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