Beyond Structured Settlements

Structured Settlements 2013 - Secondary Market

While Berkshire Hathaway quietly assumed leadership among primary market structured settlement annuity providers during 2013, J.G. Wentworth (JGW) continued to consolidate its control of the secondary market with the same "subtlety" and ubiquitousness that have characterized its late-night television advertisements.

Various industry experts estimate JGW's secondary structured settlement market share, following its 2012 merger with Peachtree Financial Solutions (Peachtree), now totals somewhere between 50% and 75%, and the combined JGW/Peachtree's share of industry profits now exceeds 80%.

JGWPT Holdings Inc. IPO

JGW's 2013 apogee occurred November 8 when JGWPT Holdings Inc.'s IPO produced what is currently the only publicly traded structured settlement company. The IPO was poorly received with JGWPT Inc. reducing the initial offering price of its common stock from $19-$22 per share to $14.00 which then traded down to the high $12s.

The stated purposes for JGWPT's IPO were to pay down some of JGW's $572 million debt and to provide its pre-IPO equity holders (JLL Partners) an opportunity to earn additional profits. Post-IPO, JLL Partners continues to hold a 39% economic interest and a 63% voting interest in JGWPT while four of its partners sit on the company's Board of Directors.

JGWPT's common stock, however, now trades on the New York Stock Exchange (symbol: JGW) and closed Friday (December 27, 2013) at $17.10 per share. At least one analyst has informed S2KM he believes the stock is currently worth at least $20 per share based upon JGW's "dominant franchise", access to securitization markets, low costs relative to competitors and "incalculable returns on capital", among other factors.

Problems and Controversies in 2013

As S2KM reported in this prior blog post, JGW, which was founded in 1995, had experienced a tumultuous history prior to 2013 - and problems and controversies continued to plague the company during 2013:

• Abandoned Sale - Bloomberg News reported in January 2013 that JLL Partners had abandoned plans to sell the company after bids failed to meet expectations. Earlier reports had indicated that JLL Partners was seeking a $1 billion purchase price for JGW from private-equity firms.
• Ratings Downgrade - Moody's Investors Service (Moody's) announced in February 2013 a downgrade of its Corporate Family Rating (CFR) for JGW from B3 to Caa1. Under Moody's credit rating scale, "Caa1" signifies a long-term rating "rated as poor quality and very high credit risk." Moody's CFR ratings for JGW are separate and distinct from financial agency ratings applicable to JGW structured settlement securitizations which historically have been rated as high quality and low risk investments.
• Shareholder Distribution - 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."
• Falsified Court Orders - JGWPT's amended S-1 statement, filed October 28, 2013 in anticipation of its public offering, included the following statement under a section titled "RISKS RELATED TO OUR BUSINESS OPERATIONS: ... there have in the past and may be in the future deficiencies in court orders obtained on our behalf by third parties that result in those court orders being invalid, including as a result of failures to perform according to our requirements and acts of fraud,..." That statement apparently references as many as 100 falsified court orders in New York approving JGW structured settlement transfers.
• Brenston Case - The Illinois Supreme Court denied Peachtree Settlement Funding's petition for appeal of the 4th District Illinois Court of Appeals' decision in the Settlement Funding v. Cathy Brenston case. The earlier Court of Appeals decision held the Illinois state court, which had previously approved transfers requested by Brenston 1) had a duty to enforce anti-assignment provisions in Brenston's original structured settlement documentation; and 2) had no authority under the Illinois protection act to approve the transfer petitions - even though all of the relevant parties had waived the anti-assignment provisions. In an Amicus curiae brief, the National Association of Settlement Purchasers (NASP) asserted the Appellate Court decision will render the Illinois transfer statute "a practical nullity"
• Competitor Outrage - During NASP's 2013 annual conference, in remarks apparently directed at JGW, former NASP President Robin Shapiro expressed personal outrage about "troubling reports concerning the structured settlement factoring business" including:
  • Falsified transfer orders.
  • Inter-state forum shopping.
  • Short-cutting waiting periods and disclosure requirements.
  • Expediting hearing dates before preferred judges.
  • "Competing bids" from the same company.
• NASP Conference - In addition to Shapiro's comments, NASP's 2013 annual conference focused on controversial issues which have historically divided the primary and secondary structured settlement markets. In her keynote remarks, NASP President Patricia LaBorde encouraged diverse perspectives and re-inforced NASP's policy of politically unobstructed learning. "We want to hear from all structured settlement stakeholders - even if they disagree with us or don't like who we are," LaBorde stated. "We are here to listen. We are here to improve."
• METLife Split Payment Policy - During his NASP presentation, Executive Director Earl Nesbitt reported a controversial new business practice that is troubling JGW and other transfer companies. MetLife apparently is now actively opposing transfers that involve split payments as well as court-approved servicing arrangements. Under such servicing arrangements, structured settlement annuity providers typically remit the entirety of specific periodic payments to transfer companies to administer even when the original recipient/transferor only assigns a portion of the payments.
• Educational Forums - In addition to the NASP conference, JGW competitor Strategic Capital sponsored an online structured settlement "expert roundtable" which examined secondary market business practices and issues. S2KM Managing Director Patrick Hindert participated in the expert roundtable and also served as moderator for NASP's annual primary market panel discussion.
• Former Executives' Lawsuit - Another 2013 JGW nadir occurred in October when two former JGW executives and directors filed a Complaint in the Court of Chancery of the State of Delaware against current JGW CEO David Miller, three current JGW Directors and multiple JGW affiliate companies seeking to enforce a Tax Receivables Agreement (TRA) under which they claim they are owed approximately $35 million. A copy of the Complaint, which is posted on the structured settlement wiki, highlights JGW's complex organizational history as well as a shareholder focus disconnected from the welfare of its customers.

SEC Addresses Structured Settlement Transfers

Responding in part to concerns about secondary market business practices, the Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy issued an Investor Bulletin in 2013 titled "Pension or Settlement Income Streams: What You Need to Know Before Buying or Selling Them".

The Investor Bulletin highlights questions potential sellers and investors should ask before proceeding with proposed structured settlement transfers and includes a number of additional warnings and resource links.

A responding article , written by two industry leaders, characterized the SEC Bulletin as "misleading and in some cases inaccurate concerning the sale of structured settlement payment streams and factored structured settlements as an investment vehicle." The authors assert the SEC Investor Bulletin should have clarified the following features of structured settlement factoring transactions:

• "Always court ordered"
• "No negative tax consequences to the seller"
• "Investors' rights"

Secondary Market Growth

Despite problems and controversies, the U.S. structured settlement secondary market appears to have experienced additional growth during 2013. Based upon various industry sources, and subject to future revisions based upon subsequent information, S2KM estimates the 2013 structured settlement secondary market has increased approximately 7% compared with 2012 resulting from approximately 12,800 transfers and $385 million PV of secondary market purchases.

Adding these 2013 numbers to prior historic estimates, S2KM estimates:

• Approximately 149,000 structured settlement transfers have occurred since 1986;
• Involving approximately 74,000 recipients - many of whom have made multiple transfers;
• With approximately $4.4 billion PV in aggregate sums paid to those recipients.
• For an average of approximately $30,000 per transfer.

For comparison, S2KM estimates the primary market has sold approximately $139 billion PV of structured settlement annuities to approximately 800,000 recipients since 1975 with an average premium of approximately $174,000.

For additional S2KM reporting about the secondary market, see the structured settlement wiki. For additional S2KM 2013 annual reports, see:

• Part 1 - Primary market.
• Part 2 - Settlement planning.

J.G. Wentworth Abandons Sale Plan

Bloomberg News reported earlier this week that JLL Partners, owners of J.G. Wentworth (JGW), have abandoned plans to sell the company after bids failed to meet expectations and may now 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.

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%.

For S2KM's summary evaluation of the structured settlement secondary market in 2012, see this prior blog post.

For S2KM's complete reporting 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).

Garamendi v. Altus Finance S.A.

As Executive Life of New York (ELNY) stakeholders and structured settlement industry participants await the outcome of the ELNY appeal , challenging the ELNY Order of Liquidation and Approval of the ELNY Restructuring Agreement, they may be surprised to learn the ultimate fate of Executive Life of California (ELIC), ELNY's sister company, likewise continues to be litigated.

The most recent ELIC-related development occurred October 29, 2012, in Garamendi v. Altus Finance S.A., when a federal jury in Los Angeles rejected a claim by California's Insurance Commissioner that, but for a conspiracy by French investor group Artemis S.A.:

• ELIC's original conservator (then California insurance commissioner John Garamendi) would have accepted an alternative bid in 1991 by state insurance guaranty associations; and
• The alternative bid would have retained profits from ELIC's junk bond portfolio for the benefit of policyholders including ELIC structured settlement recipients.

The actual 1991 ELIC sales agreement was a two-part sales agreement with New California Life Holdings, Inc. (NCLH) and Altus Finance (Altus), an affiliate of the French Bank Credit Lyonnais. That agreement was subsequently modified and approved by a California Superior Court on August 13, 1993 as part of the ELIC rehabilitation plan.

Under the 1991 agreement, Altus paid $3.25 billion and acquired ELIC's $6.4 billion junk bond portfolio. The Altus purchase price included $300 million of capital for a newly formed company, Aurora National Life Assurance Company, Inc. (Aurora) which assumed ELIC's remaining assets and liabilities including its structured settlement obligations. Also, as part of the actual sales agreement, the Artemis S.A. joint venture acquired a controlling interest in NCLH.

 A California Court of Appeals previously summarized these complex ownership relationships as follows: "Artemis S.A. is the parent of Aurora S.A. Aurora S.A. owns a controlling interest in NCLH. NCLH owns 100 percent of Aurora."

In retrospect, many critics claimed the 1991 agreement substantially undervalued ELIC's junk bond portfolio. Although the junk bond market was depressed and thinly traded in 1991, it was among the best performing investment markets in 1992 and 1993. Even in 1991, a substantial percentage of the junk bonds owned by First Executive Corporation (FEC) and its two Executive Life subsidiaries were current on interest payments and ultimately fulfilled their investment obligations.

ELIC-related legal developments between 1993 and the October 29, 2012 jury decision in Garamendi v. Altus Finance have also been complex. Relevant historical highlights:

• Subsequent to its NCLH purchase, Artemis learned of a conspiracy by Altus/MAAF Group, an investment group which previously controlled NCLH, to evade the prohibition under California law on foreign entities controlling California insurers. Rather than disclose this conspiracy to the California Insurance Commissioner, Artemis submitted multiple filings that contained false or misleading information.
• In 1999, the California Insurance Commissioner learned from a whistleblower about the Altus S.A./MAAF Group conspiracy and filed conspiracy lawsuits against multiple defendants including French bank Credit Lyonnais.
• In 2005, some of the defendants in the conspiracy lawsuits, including Credit Lyonnais, settled for $730,500,000, most of which was distributed to former ELIC policyholders and payees.
• The conspiracy lawsuit against the two remaining defendants, Artemis S.A. and Francois Pinault (Artemis' controlling shareholder), was conducted in Federal Court in 2005. The jurors found Artemis and Pinault liable for engaging in a conspiracy and awarded $0 in compensatory damages and $700 million in punitive damages. The trial court awarded an additional $241 million in equitable restitution.
• On August 25, 2008, the Ninth Circuit Court of Appeals vacated the damage awards against Artemis and Pinault and remanded the case for a new trial on the issue of damages.

For a more detailed background case summary, see S2KM's 2011 blog post "Aurora S.A. v. Poizner".

 In an article published October 30, 2012, Bloomberg Businessweek wrote that, following the most recent Garamendi v. Altus Finance SA verdict, U.S. District Judge Gary Klausner said "he was inclined to reinstate the restitution that the judge presiding over the 2005 trial had awarded the insurance commissioner" and "[Judge] Klausner ordered both sides to file briefs on the restitution including what amounts they thought were appropriate."

 For a background summary of ELIC, see S2KM's blog post "Executive Life of California" and, for greater detail, section 3.05[12] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

For S2KM's complete and continuing Executive Life reporting, see the structured settlement wiki.