The Wall Street Journal reports today that J.G. Wentworth (JGW), the dominant purchaser in the structured settlement secondary market, is pursuing an initial public offering expected to raise approximately $300 million in the next few months.
JGW, which claims to have purchased $4 billion of future periodic payments since 1992, has experienced a volatile corporate history since JLL Partners purchased the company in 2005:
- 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.
- 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%.
- Bloomberg News reported in early January 2013 that JLL Partners 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. Earlier reports had indicated that JLL Partners was seeking a $1 billion purchase price for JGW from private-equity firms with Moelis & Co. and Deutsche Bank AG acting as investment bankers.
- Moody's Investor Services announced on January 30, 2013 that "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." As a result of this recapitalization, Moody's downgraded JGW's Corporate Family Rating (CFR) from B3 to Caa1 and issued the same downgrade for JGW's $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 at that timr was "stable".
The Wall Street Journal article also reported "companies focused on consumers have done well in the IPO market this year. A number of consumer lenders are pursuing offerings that could come in the next few months, according to public filings."
Based upon interviews with industry experts and DBRS' June 8, 2011 Pre-Sale Report for J.G. Wentworth's Fixed Rate Asset-Backed Notes Series 2011-1, S2KM previously estimated and reported the following historic (1986-2012) structured settlement secondary market metrics:
- 136,000 transfers - involving 68,000 structured settlement recipients.
- $4 billion - aggregate sums paid to transferor structured settlement recipients. For comparison, S2KM estimates the primary market has sold $134 billion of structured settlement annuities since 1975.
- $10.4 billion - aggregate periodic payments purchased by secondary market companies.
In contrast to anticipated 2012 sales declines in the U.S structured settlement primary market, industry experts interviewed by S2KM agree the U.S. structured settlement secondary market achieved record sales and profits in 2012 and expect that trend to continue in 2013.
S2KM secondary market estimates for 2012 - as previously reported and based on interviews with industry experts:
- 12,000 secondary market transfers - with less than 120 contested by annuity owners and/or providers.
- $360 million of total secondary market purchases (money paid to transferors).
- $30,000 average individual transfer.
- Average discount rates in the low double digits - with the lowest average discount rates (high single digits) provided by Allstate's commutations.
- Total industry profit of $120 million calculated as follows:
- $1 billion received from investors;
- Less: $360 million paid to transferors;
- Equals: $640 million of revenue;
- Less: $520 million of expenses;
- Equals: $120 million of profits.
DBRS, a rating agency that covers various structured finance product groups including structured settlement payment rights, included the following observations and projections for the structured settlement secondary market in its 2013 Outlook for commercial asset-backed securities:
- "From the structural and rating perspective, implementation of the restructuring plan for Executive Life Insurance Company of New York provides a rare and valuable glimpse into the insurer liquidation process and adds evidence to the expected recovery proceeds assumptions in case of default by an insurer in the future."
- "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 asset class among certain investors."
- "Expected steady collateral performance in 2013 will be supported by low delinquencies and improving condition of the insurance industry."
For additional S2KM reporting about the structured settlement secondary market, see the structured settlement wiki.
For more detailed legal analysis of "Transfers of Structured Settlement Payment Rights", see Chapter 16 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).