Restructuring its debt obligations, yesterday CNO Financial Group Inc. (CNO) announced a new capital plan whereby the company will refinance its existing credit facility worth $652.1 million, due to mature in October 2013, and replace it with new long term senior secured credit facilities. However, the total refinancing process is subject to market conditions.

Accordingly, CNO plans to swap its existing $652.1 million credit facility with the issue of about $325 million of new senior secured credit facility due to mature in September 2016. The remaining balance is expected to be refinanced with an issuance of senior secured notes and cash on hand.

The debt extension is expected to increase the company’s capital flexibility and operating leverage by reducing CNO’s financial leverage until at least 2016. The company’s debt-to-total capital ratio improved to 20.8% as of September 30, 2010 from 21.5% at the end of December 31, 2009. As a result, the refinancing decision will also help the company concentrate, and utilize funds, on tapping growth opportunities further.

Estimate Trend Revision

Over the last 30 days, one of 7 analysts covering the stock has increased its estimate for the fourth quarter of 2010, while no downward revisions were witnessed. Currently, the Zacks Consensus Estimate for the fourth quarter is operating earnings of 16 cents per share, which would be up by 3.8% from the year-ago quarter.

The higher number of upward estimate revisions for the fourth quarter indicates a likelihood of a stable trend in the performance of the stock in the near term.

With respect to earnings surprises, the stock has been steady over the last four quarters, with three positive surprises. The average remained negative at 0.91%. This implies that CNO has lagged the Zacks Consensus Estimate by 0.91% over that period.

The upside potential for the estimate in the fourth quarter, essentially a proxy for future earnings surprises, currently stands at 6.25%.

While the issuance of long-term debt enables the company to significantly enhance its capital and support the company’s growth, we remain concerned about CNO’s pricing challenges in its long-term care business and rating downgrades, which in turn are generating losses in its investment portfolio.

Nevertheless, of late the performance of CNO’s peer group, including Principal Financial Group (PFG) and Lincoln National Corp. (LNC), has also been dampened given the low interest rate environment and sluggish insurance cycle.

 
CNO FINL GRP (CNO): Free Stock Analysis Report
 
LINCOLN NATL-IN (LNC): Free Stock Analysis Report
 
PRINCIPAL FINL (PFG): Free Stock Analysis Report
 
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