Moody's Investors Service has announced a downgrade of its Corporate Family Rating (CFR) for JG Wentworth (JGW) from B3 to Caa1 and has issued the same downgrade for JGW's new $425 million senior secured term loan and $20 million senior revolving credit facility issued by Orchard Acquisition Company, a subsidiary of JGW. Moody's outlook for both the CFR and the debt ratings is "stable".
Under Moody's credit rating scale, "B3" signifies a long-term rating "judged as being speculative and a high credit risk" and "Caa1" signifies a long-term rating "rated as poor quality and very high credit risk."
Moody's CFR and debt ratings for JGW are separate and distinct from financial agency ratings applicable to JGW securitizations of structured settlement payment rights which historically have been rated as high quality and low risk investments.
Bloomberg News reported in early January 2013 that JLL Partners, owners of JGW, had abandoned plans to sell the company after bids failed to meet expectations and might consider a dividend recapitalization or an initial public offering instead.
Moody's announcement confirmed "JGW is undergoing a leveraged recapitalization that will result in a tripling of the company's corporate debt as it pays its shareholders a very substantial dividend....Net proceeds from the $425 million Senior Secured Term Loan issuance will be used to finance a $309 million capital distribution to JGW's shareholders as well as to repay an existing $142 million term loan."
Moody's identified multiple reasons for its downgrade of JGW:
- JGW's leveraged recapitalization will result in a "meaningful increase in leverage and decrease in debt service coverage."
- It also "indicates a more aggressive financial policy than was anticipated in the previous B3 rating, given the large size of the capital distribution, the notable increase in debt service requirements and accompanying high corporate leverage."
- Based upon significant capital distributions JGW's financial owners have previously taken, Moody's believes the risk of future aggressive financial policies continues despite JGW low structured settlement portfolio risk and historically strong cash flow.
- JGW's "cash flows are already highly leveraged, with the vast majority of cash flows utilized to support securitization structures' debt servicing requirements."
- "Increased interest coverage requirements will also divert resources that could otherwise be utilized to build the [JGW] franchise or support growth-related infrastructure."
- In addition to its complex organizational structure, JGW lacks clearly defined financial policies and has experienced Chief Financial Officer turnover.
- JGW is significantly dependent on the confidence-sensitive securitization market and its structured settlement payment rights are illiquid.
Moody's also identified factors whereby JGW's rating could be upgraded or downgraded:
- Upgraded - If JGW "meaningfully decreases its leverage, improves interest coverage levels and adopts a more conservative financial policy."
- Downgraded - If JGW's "liquidity risk increases, such as through a failure to renew major warehouse lines or securitize receivables, or due to reduced cash flows, such as through a decrease in net yield, loss of market share or a material adverse legal or regulatory ruling."
As S2KM reported in this prior blog post, JGW, which was founded in 1995, has experienced a tumultuous recent history:
- On June 1, 2009, JGW and two affiliated companies entered Chapter 11 bankruptcy protection after the company "encountered liquidity problems amid a tightening credit market".
- Standard & Poor's Rating Services had earlier announced, at JGW's request, that it would no longer rate JGW's counterparty credit and senior secured debt.
- During this period, JGW laid off 120 of its 200 employees and closed its office in Las Vegas.
- According to industry sources at that time, JGW's $325 million of general corporate bonds were "almost worthless" and were trading, if at all, for pennies on the dollar.
- Less than six months later, JGW emerged from bankruptcy with an announcement that owner JLL Partners had invested an additional $100 million in the company.
- By 2011, JGW had re-entered the asset-backed structured settlement securitization market.
- A June 2011 DBRS report, published prior to JGW's 23rd asset-backed structured settlement securitization, stated that JGW had previously consummated 59.000 structured settlement factoring transactions with aggregate payment streams of $4.5 billion and 0.11% of losses.
- Also in 2011, JGW merged with Peachtree Settlement Funding (Peachtree) in a stock swap, with JLL Partners retaining control of the merged companies which have each continued to participate in the secondary market.
- Industry estimates obtained by S2KM of the post-merger 2012 market share (revenue and sales) of the now-combined JGW/Peachtree vary from a low of 50% to a high of 75%.
- Some industry experts believe JGW/Peachtree's share of the estimated 2012 industry profits of $120 million was $100 million, or 83%.
Despite JGW's downgrade by Moody's and its tumultuous recent history, industry experts, including some rating agencies, maintain a positive outlook for the 2013 structured settlement secondary market.
For example, in a recent "Secondary Market Update", S2KM reported the following 2013 structured settlement secondary market projections by DBRS, a rating agency that covers various structured finance product groups: "Based on the estimated 15% increase in issuance in 2012 to $630 million, DBRS expects further 10%+ increase in issuance in 2013 amid the continuing popularity of the [structured settlement] asset class among certain investors."
- For additional S2KM reporting and commentary about the structured settlement secondary market, see the structured settlement wiki.
- For more comprehensive legal analysis about transfers of structured settlement payment rights, see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).