Wed 04/20/2022 15:24 PM
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GWG Holdings Bankruptcy Analysis:

Relevant Documents:
Voluntary Petition
First Day Declaration
DIP Financing Motion
Press Release

GWG Holdings Inc., or GWG or GWGH, a Dallas-based financial services firm with secondary life insurance assets and economic interests in independent non-affiliated entities that operate in the alternative asset and epigenetics spaces, filed for chapter 11 protection today in the Bankruptcy Court for the Southern District of Texas. Two affiliates also filed.

GWG says in its first day papers that it “believes that it has valuable, although presently illiquid, assets that, given time, should yield substantial recoveries for the Debtors and their stakeholders.” However, the debtors entered chapter 11 amid a liquidity crisis “precipitated by external factors outside of [their] control.” The company also points to its inability to access the capital markets beginning in April 2021 and regulatory issues related to GWGH’s securities filings.

With $65 million in new-money DIP financing from National Founders as DIP agent, GWG seeks runway to negotiate a chapter 11 plan that would restructure its capital structure to “maximize the value of its Policy Portfolio and investments in [The Beneficient Company Group LP, or Ben LP, and FOXO Technologies Inc.], the eventual realization of which will form the primary funding mechanism for such restructuring.” GWG holds passive equity interests in Ben, which offers a variety of liquidity products to owners of alternative assets, and FOXO, which operates a life sciences and technology company that “employs epigenetic science and artificial intelligence to assist life insurance companies with underwriting and selling their products.”

The company says it may explore two new business ventures “as part of shaping its ultimate reorganization.” First, GWG is considering establishing a new company called Basin Asset Management, a life settlement management firm, through a co-investment with a strategic partner. The debtors have identified a “lead investor that could assist with this venture.” The company is also pursuing the development of Basin Re, a Bermuda Monetary Authority-licensed life reinsurance company. The debtors say that “over time significant synergies between BAM and BRE (both businesses require competence in longevity) can be leveraged for the benefit of both projects ultimate value.”

The first day hearing is scheduled for Thursday, April 21, at 4:30 p.m. ET.

The petition states that as of Sept. 30, 2021, the company had total assets of $3.5 billion and total debt of about $2.1 billion, with about $1.28 billion of such debt listed as secured. The company’s prepetition capital structure includes the following funded debt:

The nondebtor GWG DLP Funding IV LLC, or DLP IV, is the borrower under the DLP IV facility maturing Feb. 1, 2027, with LNV as lender and CLMG Corp. as administrative agent. The DLP IV facility is secured by a first priority lien on substantially all of DLP IV’s assets (i.e., policies with an approximate face amount as of the petition date of $1.313 billion held by DLP IV).

The nondebtor GWG DLP Funding VI LLC, or DLP VI, is the borrower under the DLP VI facility maturing Aug. 11, 2031, with National Founders LP as lender and administrative agent. The DLP VI facility is secured by a first priority lien on substantially all of DLP VI’s assets (i.e., policies with an approximate face amount of $419.8 million held by DLP VI). The DLP VI facility is guaranteed by GWGH upon the occurrence of certain events, including a bankruptcy filing.

GWGH is the issuer and obligor of the public L bonds with GWG Life as guarantor and Bank of Utah as indenture trustee. The same issuer/obligor, guarantor and indenture trustee layout applies to the seller trust L bonds. With respect to the liquidity bonds, GWG Life is the issuer and obligor, GWGH is guarantor, and Bank of Utah is indenture trustee.

The A&R indenture for the public L bonds governs the terms of all of the issued bonds except to the extent expressly provided in the 2018 supplemental indenture for the liquidity bonds and the 2020 supplemental indenture for the seller trust L bonds. Neither of the supplemental indentures alter the subordination and related provisions of the A&R indenture. As a result, all L bonds are pari passu in right of payment and in respect of collateral and are senior secured obligations of GWGH, ranking junior only to all senior debt of GWGH and senior in right of payment to all subordinated debt of GWGH.

The bonds are secured by substantially all of GWGH’s and GWG Life’s assets, including their direct and indirect interests in Ben LP (including through GWG Life's equity interest in GWG Life USA LLC). Furthermore, the bonds are secured by certain stock pledged by Beneficient Capital Co. LLC, which was formerly a main operating subsidiary of Ben LP but, as of Dec. 31, 2020, no longer holds any assets, and AltiVerse Capital Markets LLC, an entity that has certain overlapping investors with Ben LP.

According to the petition, a series of trusts with MHT Financial LLC as beneficiary, a series of trusts with John Stahl as trustee and Beneficient Capital Co. LLC own 48.57%, 29.72% and 7.55% of GWG Holdings, respectively.

The debtors also have $7.3 million in unsecured debt, consisting primarily of debt in connection with maintaining and servicing the policy portfolio and from obligations owing on account of a shared services agreement, vendor claims and professional fee claims.The debtors owe less than $250,000 to prepetition general unsecured creditors that are not professionals or contract counterparties.

GWGH has equity outstanding as follows:

 

GWGH common stock ownership is as follows:

Ben or parties related to Ben own approximately 12% of GWGH’s common stock. Certain trusts owning Ben common units, or the seller trusts, own approximately 48% of GWGH’s common stock. The seller trusts’ ownership used to be approximately 78%, prior to certain custody trusts established by Ben acquiring approximately 30% of GWGH’s common stock from the seller trusts. The remaining approximately 10%, or 3.3 million common shares, is held by independent stockholders.

As previously reported, on March 31, GWGH entered into a waiver and amendment under its credit agreement. The amendment waived an event of default under the DLP VI credit agreement that had resulted from insufficient funds in a reserve account established under the DLP VI credit agreement and also provided for an additional advance by National Founders of $4 million.

The amendment also provided that a prepayment premium would be due and payable under the DLP VI credit agreement upon an acceleration of the loans, but the provision providing for such prepayment premium would not become effective unless National Founders or one of its affiliates made an initial loan of at least $10 million under a DIP credit agreement with the company and/or its subsidiary GWG Life LLC. The amendment specified that this provision would cease to be effective if a final order from a bankruptcy court approving the DIP facility is not entered because National Founders or its affiliate is unable or unwilling to perform under such DIP facility.

The GWG Holdings docket can be accessed from the Reorg site HERE.

The case has been assigned to Judge Marvin Isgur (case No. 22-90032). The debtors are represented by Mayer Brown and Jackson Walker as co-counsel. The company is also working with FTI Consulting as financial advisor and PJT Partners as investment banker. Donlin Recano & Co. is the claims and noticing agent.

Events Leading to the Bankruptcy Filing / Prepetition Restructuring Efforts

CFO Timothy Evans explains in his first day declaration that between 2019 and the petition date, GWGH has periodically voluntarily suspended the sale of the bonds, including when current financial information has not been available in the market: in April 2021 and again in January 2022.

The April 2021 suspension of bond sales occurred after GWGH submitted two accounting questions to the Office of the Chief Accountant, or OCA, of the Securities and Exchange Commission, says Evans. Although GWGH expected the two questions would take approximately three to six weeks to resolve - after which GWGH would be able to promptly issue its financial statements - the consultation did not conclude until OCA issued a final response in July 2021. In the interim period, GWGH was unable to timely file certain financial statements, and the company did not have access to liquidity from the capital markets typically provided by bond sales. As a result, the company elected to enter into the DLP VI facility and other financings to obtain supplemental liquidity until bond sales resume.

GWGH began selling bonds again in December 2021, Evans continues, but as soon as GWGH indicated its intent to restart bond sales, the SEC issued subpoenas and document requests as part of its investigation “of the Bond sales practices of its selling group members … that were selling or were considering selling GWGH Bonds.” Bond sales from December 2021 to Jan. 10, 2022 “were dramatically lower than anticipated and insufficient to cover an interest payment of approximately $10.35 million and principal payments of approximately $3.25 million due on January 15, 2022.”

As Reorg previously reported, GWGH defaulted on all interest and principal payments due Jan. 15 and engaged Mayer Brown, FTI and PJT to evaluate restructuring alternatives. As noted above, GWGH also entered into a waiver and amendment under the DLP VI credit agreement on March 31.

On Feb. 18, the declaration adds, plaintiffs filed a securities class-action complaint against GWGH and certain past and present directors and officers in the U.S. District Court for the Northern District of Texas. The complaint in Bayati, et al. v. GWG Holdings, Inc., et al. alleges that GWGH and its co-defendants violated securities laws by using funds invested by bond purchasers for “impermissible purposes (including as part of various transactions in GWGH’s investment in Ben), filing various misleading documents with the SEC since 2020, and failing to disclose to Bond investors certain investigations by the SEC that could have impacted their decision to invest in the Bonds.” Evans describes these allegations in his declaration as “baseless.”

Ultimately, the debtors filed for chapter 11 as a result of the strain on liquidity caused by “GWGH’s voluntary suspension of Bond sales, the logistical aspects of the Company business and the constraints imposed by the provisions of the DLP IV Facility and DLP VI Facility,” says the declaration.

On the latter point, Evans explains that there is a “significant delay” between the time that a policy matures and when DLP IV or DLP VI, as applicable, can collect proceeds from that maturity. When an insured person dies, death benefits are not immediately paid to the beneficiary, and this process can take 60 days or longer, the filing notes. Moreover, proceeds received on account of maturities under a policy are not immediately available to DLP IV and DLP VI to fund the company’s operations; instead, they are first deposited in controlled accounts at Wells Fargo under the terms of account control agreements for the benefit of the senior secured lenders, which then sweep the controlled accounts for payment of principal, interest, premiums and fees. As of the petition date, Evans emphasizes, substantially all of the company’s funds were held in the controlled accounts, access to which was restricted by the express provisions of the DLP IV facility and DLP VI facility.

The company solicited proposals for bridge financing and DIP financing, Evans continues, but under “extraordinarily difficult liquidity constraints,” it was unsuccessful in its attempts to obtain medium- or long-term prepetition bridge financing. However, PJT’s efforts yielded four DIP financing proposals, and the debtors accepted the $65 million multi-draw term loan DIP facility proposal from National Founders as DIP agent (described further below).

Background

The debtors hold “two principal types” of assets: (i) secondary life insurance assets and (ii) economic interests in independent non-affiliated entities that operate in the alternative asset and epigenetics spaces.

GWGH began with a focus on secondary life insurance. It expanded its financial services scope through investments in two entities: Ben LP and FOXO Technologies Inc. Ben LP was formerly a consolidated subsidiary of GWGH that, as a result of a recent series of decoupling transactions with GWGH, is now a fully independent entity in which GWGH retains a substantial, albeit passive, investment. After the decoupling, Ben was able to obtain a license to operate as a Kansas Technology Enabled Fiduciary Financial Institution, and as a result, Ben is able to refine and expand the services it provides to its current and future customers, “which GWGH anticipates will continue to generate substantial value that will inure to the benefit of the Debtors’ estates through GWGH’s retained investment,” the debtors say.

With respect to FOXO, in February, Delwinds Insurance Acquisition Corp. announced that it had entered into a definitive merger agreement with FOXO, which develops epigenetic technology (that is, technology used to assist in the actuarial modeling of life insurance policy maturities), which, if fully consummated, would allow FOXO to trade publicly. “The unrealized value that GWGH holds in the interests of Ben and FOXO should yield substantial recoveries for the Debtors and their stakeholders,” the debtors say, “however, such realization requires proper monetization timing, which cannot be achieved, as a preliminary matter, without the protections of chapter 11.”

With respect to their secondary life insurance assets, the debtors own and manage a portfolio of near-duration, intermediate-duration and long-duration life insurance policies. The approximate face amount of the policy portfolio is $1.7 billion. Policies with an approximate face amount of $1.3 billion are held by nondebtor affiliate GWG DLP Funding IV LLC, and policies with an approximate face amount of $419.8 million are held by nondebtor affiliate GWG DLP Funding VI LLC. The approximate direct monthly cost to maintain the policy portfolio is $5 million to $7 million, primarily consisting of premiums payable on the policies, salaries and fees owed to various third-party professionals necessary to maintain and manage the portfolio and the cost of software and other infrastructure. “Ensuring that the Policy Portfolio is properly maintained is critical to the Debtors’ business because the failure to timely pay premiums on a given Policy risks that Policy lapsing and losing all of its value,” the debtors say.

GWGH and GWG Life have “at all times” used proceeds from the issuance of bonds for various purposes, including (i) to address liquidity in the event that monthly policy maturities were insufficient to provide the necessary funding to maintain the policy portfolio, (ii) to pay required interest on the bonds and refinance maturing bonds and (iii) for additional corporate purposes, including investment in Ben LP.

The company’s corporate organizational structure is below:

 
The debtors' largest unsecured creditors are listed below:












































































10 Largest Unsecured Creditors
Creditor Location Claim Type Amount
The Beneficient Company
Group (USA) LLC
Dallas Outside
Services
$    2,991,412
Willkie Farr & Gallagher LLP New York Legal
Services
1,588,359
Houlihan Lokey Financial
Advisors Inc.
Los Angeles Professional
Services
1,370,000
Computershare Inc. Palatine, Ill. Outside
Services
426,764
US Bank Corporate
Real Estate
Minneapolis Landlord 185,395
KLDiscovery Ontrack LLC Dallas Professional
Services
182,852
Vedder Price PC Chicago Legal
Services
100,244
Quinn Emanuel Urquhart
& Sullivan LLP
Los Angeles Legal
Services
83,632
Atomic Data LLC Minneapolis IT Services 74,936
Locke Lord LLP Dallas Legal
Services
71,916


The case representatives are as follows:



 

















































































Representatives
Role Name Firm Location
Debtors' Co-Counsel Charles S. Kelley Mayer
Brown
Houston
Thomas S. Kiriakos Chicago
Louis S. Chiappetta
Adam C. Paul New York
Lucy F. Kweskin
Debtors' Co-Counsel Kristhy M. Peguero Jackson
Walker
Houston
Matthew D. Cavenaugh
Debtors' Financial
Advisor
NA FTI NA
Debtors' Investment
Banker
Peter Laurinaitis PJT New York
Counsel to National
Founders
Michael Fishel Sidley
Austin
Houston
Matthew A. Clemente Chicago
William E. Curtin New York
U.S. Trustee Hector Duran Jr. Office of the
U.S. Trustee
Houston
Debtors' Claims
Agent
Nellwyn Voorhies Donlin,
Recano &
Company
Brooklyn, N.Y.



DIP Financing Motion

The DIP financing was an “eleventh hour” proposal, the debtors say, that consists of new-money commitments for new-money term loans not to exceed in the aggregate $65 million, plus any “discretionary DIP overadvance” of which $18 million would be funded on an interim basis. The debtors may obtain a single supplemental loan if the final order has not been entered after 36 days from the petition date, which could only be used to pay premiums on the policy portfolio during June. This supplemental loan would count against the DIP commitment. The remaining DIP commitment would be available upon entry of a final order and would permit the debtors to obtain delayed draw term loans. Upon entry of a final order, the DIP agent would be permitted to make a “discretionary DIP overadvance” - or, provide any DIP loan in excess of the delayed draw commitment in an aggregate amount not to exceed $10 million.

The motion says that after the debtors secure funding on an interim basis, the company will seek court approval of the DLP VII option held by the DIP lenders under which the DIP lenders may elect to refinance in full the SPV credit facility - held at nondebtors - by entering into a new credit facility at (and transfer the entire policy portfolio, pursuant to section 363 of the Bankruptcy Code, to) a newly formed nondebtor subsidiary special purpose vehicle, DLP VII. The debtors say that this option would be expected to result in payment in full of the amounts then owing under the DIP facility while allowing the debtors to retain the DIP facility proceeds to fund the cases.

According to the motion, the debtors have entered chapter 11 with “minimal cash in their bank accounts, unable to (a) access the capital markets for liquidity as they have traditionally done or (b) use cash inflows (i.e., Policy proceeds from maturities) from non-debtors GWG DLP Funding IV, LLC (‘DLP IV’) and GWG DLP Funding VI, LLC (‘DLP VI’) operations to fund their expenses due to the restrictions set forth in the DLP IV Documents and DLP VI Documents.” The motion states that absent immediate financing, the debtors would face “immediate liquidation.”

The debtors stress that the DLP VII transaction, a long-term refinancing of the SVP credit facilities, provides $65 million of needed liquidity and “solves the current mismatch of assets and liabilities in the DLP IV Facility (~75% of the Policy Portfolio) by providing fixed rate, matched duration financing.” The debtors would continue to hold the equity interests in the nondebtor special purpose vehicles and would receive cash flow over the term of the transaction (expected to total hundreds of millions of dollars) and would subsequently receive all cash flows of the “significant” residual interest in the policy portfolio after the corresponding term loan debt is repaid. “In short,” the motion adds, “the DLP VII Option provides the Debtors with essential liquidity and maximizes the value of the Debtors’ assets” through a transaction that “combines the Policy Portfolios under one non-debtor special purpose vehicle subsidiary (as opposed to two).”

Further, the motion provides that “pursuant to the A&R Indenture, the Bonds are subordinated to any ‘Senior Debt,’ which, as of the Petition Date, includes the SVP Credit Facilities - i.e., the loans extended to nondebtor special purpose vehicle subsidiaries and secured by the Policy Portfolios.” If the DIP lender elects to exercise the DLP VII option, then the bonds would still be subordinated to the senior debt but “this time to the DLP VII Facility as opposed to the SPV Credit Facilities - i.e., the loans extended to a non-debtor special vehicle subsidiary secured by the Policy Portfolio.” As a result, the debtors say that exercise of the DLP VII option places the bonds in “substantially the same position relative to the Policy Portfolio as they are now.”

According to the motion, though the refinancing of the DLP IV facility will require payment of a make whole call premium to DLP IV of approximately $30 million, the DLP VII facility will permit policy premiums to be paid from proceeds of policy maturities, and the DIP lenders have agreed to a structure allowing for lending at “significantly higher loan to value” ratios than what is currently in place under the existing SPV credit facilities. “The value of the structure is a drastic improvement for the Debtors compared to the terms of the existing SPV Credit Facilities - under which the Debtors currently have no ability to use cash generated by Policy maturities outside of a straight waterfall,” the debtors add.

The terms of the new financing under the DLP VII facility include yield maintenance protection which reduces over the term of the facility, the debtors say, “but could theoretically result in a make-whole call premium amounting to no more than 43% of the DLP VII Facility size at issuance (and reducing significantly to no more than 15% after year 3).” This is because the lenders “would be funding the entire Policy Portfolio to term with fixed rate funding, thereby eliminating the significant rate risk in the current rising interest rate environment.”

Term SOFR DIP loans would bears interest at “Adjusted Term SOFR (i.e., Term SOFR, 1% floor, and 0.11448%) plus 10%.” Base rate DIP loans would accrue interest at the greater of the prime rate, the federal funds effective rate plus half of 1% per annum, and the term SOFR for a one-month tenor plus 1%, plus 9%. The loan matures on Oct. 20.

To secure the DIP financing, the debtors would grant a priming lien senior to the indenture trustee’s liens on the bond collateral. Adequate protection for the bonds is not required, the debtors assert, because “pursuant to the Indenture, Bondholders are deemed to consent to the additional incurrence of Senior Debt and have agreed to turn over any adequate protection of their interest in any SPV Collateral to the holders of Senior Debt.” The DIP liens would be junior to the carve-out and “Priority Liens.” The DIP collateral would include the proceeds of avoidance actions, subject to the entry of a final order.

The facility includes various fees, including a 4% closing fee, 1% to 2% exit fee on the DIP VII option, and an undrawn commitment fee of 0.5%.

In support of the proposed DIP financing, the debtors filed the declaration of Peter Laurinaitis of PJT Partners, the debtors’ investment banker, who states that the debtors entered bankruptcy “with essentially no funds in their bank accounts and meaningful amounts owed to vendors.” Laurinaitis also details the prepetition DIP marketing process, including the receipt of three competing proposals. The first required several weeks of diligence, “which was difficult for the Debtors to accommodate, given their precarious liquidity position.”

The second proposal was viable, Laurinaitis says, but had a “high cost of capital.” The second proposal would have required repayment of the DLP IV facility and DLP VI facility with proceeds from the proposed $500 million DIP facility upon entry of the interim order and would have also required a further refinancing upon the termination or maturity of the DIP financing. The third proposal, the debtors say, required an “immediate and potentially non-value-maximizing sale of the Policy Portfolio.”

The debtors were pursuing negotiation of the second proposal when the debtors received the “eleventh hour” proposal from the DIP lenders. The debtors also received a fifth proposal for DIP financing for less funding and requiring the sale of the policy portfolio for a “yet-to-be determined value” in the “days before the filing” but say that the proposed DIP facility remains their best option.

Subject to the final order, the debtors propose a waiver of the estates’ right to seek to surcharge DIP collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).

The post-termination carve-out for professional fees is $1.5 million.

The proposed budget for the use of the DIP facility is HERE.

The DIP financing is conditioned on entry of a final order within 35 days after entry of the interim order.

Other Motions

The debtors also filed various standard first day motions, including the following:




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