10-Q 1 a13-26134_110q.htm 10-Q

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to           

 

Commission File Number: 001-36170

 

JGWPT HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

46-3037859

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

201 King of Prussia
Road, Suite 501
Radnor, Pennsylvania

 

19087

(Address of principal executive offices)

 

(Zip Code)

 

(484) 434-2300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  o Yes  x  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o Yes  o  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).  o  Yes  x  No

 

At December 18, 2013, there were 11,220,358 shares of Class A common stock, par value $0.00001 per share, outstanding.

 

 

 



 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

4

 

 

 

Item 1.

Financial Statements of JGWPT Holdings Inc.

 

4

 

 

 

 

 

Balance Sheet of JGWPT Holdings Inc. as of September 30, 2013 (Unaudited)

 

4

 

 

 

 

 

Condensed Consolidated Financial Statements of J.G. Wentworth, LLC and Subsidiaries

 

 

 

 

 

 

 

Condensed Consoldiated Balance Sheet as of September 30, 2013 (Unaudited) and December 31, 2012

 

6

 

 

 

 

 

Condensed Consoldiated Statement of Operations for the Three Months and the Nine Months Ended September 30, 2013 and 2012 (Unaudited)

 

7

 

 

 

 

 

Condensed Consoldiated Statements of Comprehensive Income (Loss) for the Three Months and the Nine Months Ended September 30, 2013 and 2012 (Unaudited)

 

8

 

 

 

 

 

Condensed Consolidated Statements of Changes in Member’s Capital for the Three Months and the Nine Months Ended September 30, 2013 and 2012 (Unaudited)

 

9

 

 

 

 

 

Condensed Consolidated Statement of Changes in Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited)

 

10

 

 

 

 

 

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

12

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

38

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

50

 

 

 

 

Item 4.

Controls and Procedures

 

53

 

 

 

 

PART II. OTHER INFORMATION

 

54

 

 

 

Item 1.

Legal Proceedings

 

54

 

 

 

 

Item 1A.

Risk Factors

 

54

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

54

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

55

 

 

 

 

Item 4.

Mine Safety Disclosures

 

55

 

 

 

 

Item 5.

Other Information

 

55

 

 

 

 

Item 6.

Exhibits

 

55

 

 

 

 

SIGNATURES

 

57

 

i



 

EXPLANATORY NOTE

 

On November 14, 2013, JGWPT Holdings Inc. consummated an initial public offering whereby 11,212,500 shares of its Class A common stock were sold to the public (inclusive of 1,462,500  Class A Shares sold pursuant to the full exercise of an overallotment option granted to the underwriters which was consummated on December 11, 2013).  The aggregate net proceeds received from the offering were $141.4 million and were used to purchase 11,212,500 common interests of JGWPT Holdings, LLC, representing 37.9% of the then outstanding membership interests of JGWPT Holdings, LLC.  Concurrently with the consummation of this initial public offering, (i) the operating agreement of JGWPT Holdings, LLC was amended and restated such that, among other things, JGWPT Holdings Inc. became the sole managing member of JGWPT Holdings, LLC and (ii) related reorganization transactions were consummated. Accordingly, as of and subsequent to November 14, 2013, JGWPT Holdings Inc. will consolidate the financial results of JGWPT Holdings, LLC with its own and reflect the remaining 62.1% interest in JGWPT Holdings, LLC as a non-controlling interest in its consolidated financial statements. Therefore, this Quarterly Report on Form 10-Q presents the following financial statements:

 

(1) the condensed consolidated financial statements of J.G. Wentworth, LLC and subsidiaries as of December 31, 2012 and September 30, 2013 (unaudited)  and for the three and nine months ended September 30, 2012 and 2013 (unaudited).  J.G. Wentworth, LLC is the predecessor of JGWPT Holdings Inc. for financial reporting purposes; and

 

(2) the unaudited balance sheet of JGWPT Holdings Inc. as of September 30, 2013. Separate statements of operations, comprehensive income, changes in stockholder’s equity, and cash flows for JGWPT Holding Inc. have not been presented because there were no activities in this entity in the period presented.

 

Unless otherwise stated or the context otherwise requires, references to “we,” “us,” “our,” the “Company” and similar references refer: (i) following the consummation of the above-referenced initial public offering and related concurrent transactions on November 14, 2013, collectively, to JGWPT Holdings Inc. and, unless otherwise stated, all of its subsidiaries, and (ii) prior to the completion of the above-referenced initial public offering and related concurrent transactions on November 14, 2013, collectively, to J.G. Wentworth, LLC and, unless otherwise stated, all of its subsidiaries.

 

1



 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements which reflect management’s expectations regarding our future growth, results of operations, operational and financial performance and business prospects and opportunities. All statements, other than statements of historical fact, are forward-looking statements. You can identify such statements because they contain words such as ‘‘plans,’’ ‘‘expects’’ or ‘‘does expect,’’ ‘‘budget,’’ ‘‘forecasts,’’ ‘‘anticipates’’ or ‘‘does not anticipate,’’ ‘‘believes,’’ ‘‘intends’’ and similar expressions or statements that certain actions, events or results ‘‘may,’’ ‘‘could,’’ ‘‘would,’’ ‘‘might’’ or ‘‘will’’ be taken, occur or be achieved. Although the forward-looking statements contained in this Quarterly Report on Form 10-Q reflect management’s current beliefs based upon information currently available to management and upon assumptions which management believes to be reasonable, actual results may differ materially from those stated in or implied by these forward-looking statements.

 

A number of factors could cause actual results, performance or achievements to differ materially from the results expressed or implied in the forward-looking statements. These factors should be considered carefully and readers should not place undue reliance on the forward-looking statements. Forward-looking statements necessarily involve significant known and unknown risks, assumptions and uncertainties that may cause our actual results, performance and opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. As set forth more fully under “Risk Factors” in our Post-Effective Amendment No. 1 to Form S-1  Registration Statement filed on November 8, 2013, these risks and uncertainties include, among other things:

 

·                  our ability to continue to purchase structured settlement payments and other assets;

 

·                  our ability to complete future securitizations on beneficial terms;

 

·                 availability of or increases in the cost of our financing sources relative to our purchase discount rate;

 

·                  our dependence on the opinions of certain rating agencies;

 

·                 our dependence on the effectiveness of our direct response marketing;

 

·                 the compression of the yield spread between the price we pay for and the price at which we sell assets;

 

·                 changes in tax or accounting policies applicable to our business;

 

·                 the lack of an established market for the subordinated interest in the receivables that we retain after a securitization is executed;

 

·                 our exposure to underwriting risk;

 

·                 our ability to remain in compliance with the terms of our substantial indebtedness;

 

·                 changes in existing state laws governing the transfer of structured settlement payments or the interpretation thereof;

 

·                 the insolvency of a material number of structured settlement holders;

 

·                 any change in current tax law relating to the tax treatment of structured settlements;

 

·                 changes to statutory, licensing and regulatory regimes;

 

·                 the impact of the Consumer Financial Protection Bureau and any regulations it issues;

 

2



 

·                 adverse judicial developments;

 

·                 potential litigation and regulatory proceedings;

 

·                 unfavorable press reports about our business model;

 

·                 our access to personally identifiable confidential information of current and prospective customers and the improper use or failure to protect that information;

 

·                 the public disclosure of the identities of structured settlement holders;

 

·                 our business model being susceptible to litigation;

 

·                 our dependence on a small number of key personnel;

 

·                 our ability to successfully enter new lines of business and broaden the scope of our business;

 

·                 changes in our expectations regarding the likelihood, timing or terms of any potential acquisitions described herein;

 

·                 our computer systems being subject to security and privacy breaches; and

 

·                 infringement of our trademarks or service marks.

 

Although we have attempted to identify important risks and factors that could cause actual actions, events or results to differ materially from those described in or implied by our forward-looking statements, other factors and risks may cause actions, events or results to differ materially from those anticipated, estimated or intended. We cannot assure you that forward-looking statements will prove to be accurate, as actual actions, results and future events could differ materially from those anticipated or implied by such statements. Accordingly, as noted above, readers should not place undue reliance on forward-looking statements. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and, except as required by law, we assume no obligation to update or revise them to reflect new events or circumstances.

 

3



 

PART 1.   FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

JGWPT Holdings Inc.

Balance Sheet

As of September 30, 2013

 

Assets

 

$

 

Commitments and Contingencies

 

 

 

Stockholder’s Equity

 

 

 

Common Stock, par value $0.00001 per share, 1,000 shares authorized, none issued and outstanding

 

 

 

Total Stockholder’s Equity

 

$

 

 

Notes to Balance Sheet

 

1. ORGANIZATION

 

JGWPT Holdings Inc., formerly known as Wentworth Financial Holdings Inc. (the “Corporation”), was incorporated as a Delaware corporation on June 21, 2013.   The Corporation was formed for the purpose of completing a public offering and related transactions in order to carry on the business of JGWPT Holdings, LLC, a Delaware limited liability company, as a publicly-traded company. Wentworth Financial Holdings Inc. changed its name to JGWPT Holdings Inc. on October 3, 2013.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Accounting — The Balance Sheet is presented in accordance with accounting principles generally accepted in the United States of America. Separate statements of operations, comprehensive income, changes in stockholder’s equity, and cash flows have not been presented in the financial statements because there have been no activities in this entity.

 

3. STOCKHOLDER’S EQUITY

 

The Corporation is authorized to issue 1,000 shares of Common Stock, par value $0.00001 per share, none of which have been issued or are outstanding.

 

4. SUBSEQUENT EVENTS

 

On November 14, 2013, the Corporation consummated an initial public offering whereby 11,212,500 shares of its Class A common stock, par value $0.00001 per share (the “Class A Shares”), were sold to the public for net proceeds of $141.4 million, after payment of underwriting discounts and estimated offering expenses. The 11,212,500 shares sold were inclusive of 1,462,500 Class A Shares sold pursuant to the full exercise of an overallotment option granted to the underwriters which was consummated on December 11, 2013.  The net proceeds from the initial public offering were used purchase 11,212,500 newly issued JGWPT Holdings, LLC common interests directly from JGWPT Holdings, LLC representing 37.9% of the then outstanding membership interests of JGWPT Holdings, LLC.  Concurrently with the consummation of the Corporation’s initial public offering, the Corporation amended and restated its certificate of incorporation to provide for, among other things, the issuance of Class A Shares, shares of Class B common stock, par value $0.00001 per share (the “Class B Shares”), and shares of Class C common stock, par value $0.00001 per share (the “Class C Shares”).  Also concurrently with the consummation of the Corporation’s initial public offering, JGWPT Holdings, LLC merged with and into a newly formed subsidiary of the Corporation and the surviving, newly formed subsidiary changed its name to JGWPT Holdings, LLC.

 

4



 

Pursuant to this merger, the operating agreement of JGWPT Holdings, LLC was amended and restated such that, among other things, (i) the Corporation became the sole managing member of JGWPT Holdings, LLC, (ii) JGWPT Holdings, LLC common interests became exchangeable for one Class A Share, or in the case of Peach Group Holdings, Inc. (“PGHI Corp.”), one share of the Corporation’s Class C Shares. Additionally, in connection with merger, each holder of JGWPT Holdings, LLC common interests, other than PGHI Corp., was issued an equivalent number of shares of the Corporation’s “vote-only” Class B Shares.  As a result of these transactions, as of and subsequent to November 14, 2013, the Corporation will consolidate the financial results of JGWPT Holdings, LLC with its own and reflect the 62.1% membership interest in JGWPT Holdings, LLC it does not own as a non-controlling interest in its consolidated financial statements.

 

5



 

J.G. Wentworth, LLC and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

December 31,

 

September 30,

 

 

 

2012

 

2013

 

 

 

 

 

(Unaudited)

 

 

 

(Dollars in thousands)

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

103,137

 

$

39,355

 

Restricted cash and investments

 

112,878

 

107,995

 

VIE finance receivables, at fair market value (1)

 

3,586,465

 

3,861,612

 

Other finance receivables, at fair market value

 

28,723

 

27,281

 

VIE finance receivables, net of allowance for losses of $3,717 and $5,348, respectively (1)

 

128,737

 

117,963

 

Other finance receivables, net of allowance for losses of $933 and $2,035, respectively

 

21,616

 

15,542

 

Notes receivable, at fair market value (1)

 

8,074

 

6,238

 

Note receivable due from affiliate

 

5,243

 

 

Other receivables, net of allowance for losses of $276 and $251, respectively

 

13,146

 

14,269

 

Fixed assets, net of accumulated depreciation of $3,128 and $4,514, respectively

 

6,321

 

7,319

 

Intangible assets, net of accumulated amortization of $14,257 and $16,899, respectively

 

51,277

 

48,760

 

Goodwill

 

84,993

 

84,993

 

Marketable securities

 

131,114

 

132,613

 

Deferred tax assets, net

 

2,455

 

1,777

 

Other assets

 

14,418

 

31,350

 

Total assets

 

$

4,298,597

 

$

4,497,067

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S CAPITAL

 

 

 

 

 

Accounts payable

 

$

8,630

 

$

7,639

 

Accrued expenses

 

12,440

 

18,776

 

Accrued interest

 

11,687

 

13,158

 

VIE derivative liabilities, at fair market value

 

121,498

 

81,125

 

VIE borrowings under revolving credit facilities and other similar borrowings

 

27,380

 

49,168

 

VIE long-term debt

 

162,799

 

154,020

 

VIE long-term debt issued by securitization and permanent financing trusts, at fair market value

 

3,229,591

 

3,437,861

 

Term loan payable

 

142,441

 

556,422

 

Other liabilities

 

8,199

 

8,289

 

Installment obligations payable

 

131,114

 

132,613

 

Total liabilities

 

$

3,855,779

 

$

4,459,071

 

Member’s capital

 

$

442,818

 

$

37,996

 

Total liabilities and member’s capital

 

$

4,298,597

 

$

4,497,067

 

 


(1) Pledged as collateral to credit and long-term debt facilities

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6



 

J.G. Wentworth, LLC and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)

 

 

 

Three-Months Ended September 30,

 

Nine-Months Ended September 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

 

 

(Dollars in thousands)

 

REVENUES

 

 

 

 

 

 

 

 

 

Interest income

 

$

43,166

 

$

45,710

 

$

132,515

 

$

126,293

 

Unrealized gains on VIE and other finance receivables, long-term debt and derivatives

 

57,726

 

50,226

 

188,621

 

214,068

 

Gain (loss) on swap termination, net

 

(831

)

525

 

(457

)

351

 

Servicing, broker, and other fees

 

2,516

 

1,156

 

7,580

 

3,691

 

Other

 

124

 

(4

)

384

 

(57

)

Realized loss on notes receivable, at fair market value

 

 

 

 

(1,862

)

Realized and unrealized gains on marketable securities, net

 

5,579

 

5,525

 

12,549

 

10,523

 

Total revenue

 

$

108,280

 

$

103,138

 

$

341,192

 

$

353,007

 

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

 

Advertising

 

$

18,463

 

$

17,862

 

$

56,232

 

$

51,665

 

Interest expense

 

39,374

 

54,005

 

118,932

 

139,974

 

Compensation and benefits

 

10,643

 

9,100

 

32,674

 

32,494

 

General and administrative

 

3,370

 

4,519

 

10,565

 

14,881

 

Professional and consulting

 

3,286

 

4,807

 

10,936

 

13,906

 

Debt issuance

 

2,345

 

2,583

 

5,968

 

5,655

 

Securitization debt maintenance

 

1,497

 

1,543

 

3,736

 

4,526

 

Provision for losses on finance receivables

 

341

 

1,690

 

1,887

 

4,374

 

Depreciation and amortization

 

1,603

 

1,467

 

4,735

 

4,231

 

Installment obligations expense, net

 

6,400

 

6,301

 

15,018

 

12,820

 

Total expenses

 

$

87,322

 

$

103,877

 

$

260,683

 

$

284,526

 

Income (loss) before taxes

 

$

20,958

 

$

(739

)

$

80,509

 

$

68,481

 

Provision (benefit) for income taxes

 

(269

)

146

 

(353

)

1,301

 

Net income (loss)

 

21,227

 

(885

)

80,862

 

67,180

 

Less noncontrolling interest in earnings (loss) of affiliate

 

$

(4

)

$

 

$

2,731

 

$

 

Net income (loss) attributable to J.G. Wentworth, LLC

 

$

21,231

 

$

(885

)

$

78,131

 

$

67,180

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7



 

J.G. Wentworth, LLC and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 

 

 

Three-Months Ended September 30,

 

Nine-Months Ended September 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

 

 

(Dollars in thousands)

 

Net income (loss)

 

$

21,227

 

$

(885

)

$

80,862

 

$

67,180

 

Other comprehensive gain (loss):

 

 

 

 

 

 

 

 

 

Reclassification adjustment for loss included in net income

 

 

 

 

 

1,862

 

Unrealized gains on notes receivable arising during the year

 

230

 

3

 

279

 

502

 

Total other comprehensive gain

 

230

 

3

 

279

 

2,364

 

Total comprehensive income (loss)

 

21,457

 

(882

)

81,141

 

69,544

 

Less: Net income (loss) allocated to noncontrolling interest in earnings (loss) of affiliate

 

(4

)

 

2,731

 

 

Comprehensive income (loss) attributable to J.G. Wentworth, LLC

 

$

21,461

 

$

(882

)

$

78,410

 

$

69,544

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

8



 

J.G. Wentworth, LLC and Subsidiaries

Condensed Consolidated Statement of Changes in Member’s Capital (Unaudited)

 

 

 

Member’s
Capital

 

Accumulated
Other
Comprehensive
Gain (Loss)

 

Total Member’s
Capital

 

 

 

(Dollars in thousands)

 

Member’s capital December 31, 2012

 

$

443,095

 

$

(277

)

$

442,818

 

Net income

 

67,180

 

 

67,180

 

Share-based compensation

 

1,511

 

 

1,511

 

Capital distributions

 

(475,877

)

 

(475,877

)

Amounts reclassified from accumulated other comprehensive income

 

 

1,862

 

1,862

 

Unrealized gains on notes receivable arising during the period

 

 

502

 

502

 

Member’s capital September 30, 2013

 

$

35,909

 

$

2,087

 

$

37,996

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

9



 

J.G. Wentworth, LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Nine-Months Ended September 30,

 

 

 

2012

 

2013

 

 

 

(Dollars in thousands)

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

80,862

 

$

67,180

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Provision for losses on receivables

 

1,887

 

4,374

 

Depreciation

 

1,183

 

1,589

 

Amortization of finance receivables acquisition costs

 

12

 

8

 

Amortization of intangibles

 

3,552

 

2,642

 

Amortization of debt issuance costs

 

1,055

 

3,173

 

Change in unrealized gains/losses on finance receivables

 

(346,749

)

(197,429

)

Change in unrealized gains/losses on long-term debt

 

157,998

 

23,769

 

Change in unrealized gains/losses on derivatives

 

130

 

(40,408

)

Loss on notes receivable, at fair market value

 

 

1,862

 

Net proceeds from sale of finance receivables

 

7,881

 

473

 

Purchases of finance receivables

 

(284,764

)

(315,058

)

Collections of finance receivables

 

341,998

 

359,308

 

Gain on sale of finance receivables

 

(977

)

(20

)

Recoveries of receivables

 

558

 

1

 

Accretion of interest income

 

(131,784

)

(125,759

)

Accretion of interest expense

 

(25,044

)

(33,094

)

Share-based compensation expense

 

1,841

 

1,511

 

Change in marketable securities, net

 

(12,549

)

(10,523

)

Installment obligations expense, net

 

15,018

 

12,820

 

Change in fair value of life settlement contracts

 

517

 

22

 

Premiums and other costs paid, net of proceeds from the sale and maturity of life settlement contracts

 

2,982

 

(189

)

Deferred income taxes

 

(154

)

678

 

(Increase) decrease in operating assets:

 

 

 

 

 

Restricted cash and investments

 

46,248

 

4,883

 

Other assets

 

(2,111

)

(1,965

)

Other receivables

 

(1,647

)

(519

)

Increase (decrease) in operating liabilities:

 

 

 

 

 

Accounts payable

 

4,619

 

(991

)

Accrued expenses

 

(7,059

)

6,336

 

Accrued interest

 

(77

)

1,471

 

Other liabilities

 

(5,276

)

835

 

Net cash used in operating activities

 

$

(149,850

)

$

(233,020

)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

10



 

J.G. Wentworth, LLC and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(continued)

 

 

 

Nine-Months Ended September 30,

 

 

 

2012

 

2013

 

 

 

(Dollars in thousands)

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of intangible assets

 

(159

)

(125

)

Receipts from notes receivable

 

3,453

 

2,338

 

Purchase of fixed assets, net of sale proceeds

 

(2,110

)

(2,587

)

(Issuance of) collections on notes receivable from affiliate

 

(5,000

)

5,243

 

Net (used in) cash provided by investing activities

 

$

(3,816

)

$

4,869

 

Cash flows from financing activities:

 

 

 

 

 

Distributions of member’s capital

 

 

(459,612

)

Issuance of VIE long-term debt

 

414,940

 

406,241

 

Payments for debt issuance costs

 

(5,873

)

(19,864

)

Payments on lease obligations

 

(736

)

(745

)

Repayment of long-term debt and derivatives

 

(185,258

)

(195,641

)

Gross proceeds from revolving credit facility

 

274,149

 

301,640

 

Repayments of revolving credit facility

 

(296,789

)

(279,884

)

Issuance of installment obligations payable

 

 

2,687

 

Purchase of marketable securities

 

 

(2,687

)

Repayments of installment obligations payable

 

(37,218

)

(14,008

)

Proceeds from sale of marketable securities

 

37,218

 

14,008

 

Repayments under term loan

 

(22,515

)

(144,941

)

Net proceeds from new term loan

 

 

557,175

 

Redemption of share-based awards

 

(300

)

 

Noncontrolling interest investors’ distributions, net

 

(20,991

)

 

Net cash provided by financing activities

 

$

156,627

 

$

164,369

 

Net increase (decrease) in cash

 

$

2,961

 

$

(63,782

)

Cash and cash equivalents at beginning of period

 

70,171

 

103,137

 

Cash and cash equivalents at end of period

 

$

73,132

 

$

39,355

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

143,306

 

$

169,693

 

Capital distributions

 

$

 

$

459,612

 

Supplemental disclosure of noncash items:

 

 

 

 

 

Issuance of note receivable from sale of finance receivables held for sale

 

$

606

 

$

 

Non-cash asset distribution of member’s capital

 

$

 

$

16,265

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

11



 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

(Dollars In Thousands, Unless Otherwise Noted)

 

1. Background and Basis of Presentation

 

Organization and Description of Business Activities

 

J.G. Wentworth, LLC was formed on July 1, 2005 as a wholly-owned subsidiary of JGW Holdco, LLC (“Holdco”). Holdco is currently owned by its members, JLL JGW Distribution, LLC, a Delaware limited liability company, and J.G. Wentworth, Inc.

 

In July 2011, the Company, Orchard Acquisition Company, LLC (“OAC”) and its subsidiaries and PGHI Corp., formed JGWPT Holdings, LLC, a Delaware limited liability company.   JGWPT Holdings, LLC then formed JGW Holdings Merger Sub, LLC (“Merger Sub”), a Delaware limited liability company, as its wholly-owned subsidiary. Merger Sub was merged with and into the Company, with the Company continuing as the surviving entity in the merger, and as a result of this merger (i) all of the outstanding equity interests of the Company were converted into identical corresponding equity interests in JGWPT Holdings, LLC, (ii) all of the outstanding equity interests in JGWPT Holdings, LLC held by the Company were cancelled, and (iii) each outstanding equity interest in Merger Sub was converted into one common interest in the Company. As a result, the Company became a wholly-owned subsidiary of JGWPT Holdings, LLC, with all outstanding equity interests formerly held in the Company held in JGWPT Holdings, LLC. Subsequently, as part of the merger, OAC became a wholly-owned subsidiary of the Company (the “OAC Merger”).

 

The Company, operating through its subsidiaries and affiliates, has its principal office in Radnor, Pennsylvania. The Company provides liquidity to individuals with financial assets such as structured settlements, annuities, lottery winnings, and others by either purchasing these financial assets for a lump-sum payment, issuing installment obligations payable over time, or serving as a broker to other purchasers of financial assets.  The Company also provides pre-settlement funding to people with pending personal injury claims. The Company engages in warehousing and subsequent resale or securitization of these various financial assets.

 

The Corporation was incorporated as a Delaware corporation on June 21, 2013.   The Corporation was formed for the purpose of completing an initial public offering and related transactions in order to carry on the business of JGWPT Holdings, LLC as a publicly-traded company.

 

Concurrently with the initial public offering of the Corporation on November 14, 2013, JGWPT Holdings, LLC’s operating agreement was amended and restated such that, among other things, JGWPT Holdings Inc. became the sole managing member of JGWPT Holdings, LLC as of that date. These transactions are described in Note 17.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and Article 10 of Regulation S-X and do not include all of the information required by GAAP for complete financial statements.  In the opinion of management, the unaudited financial statements reflect all adjustments which are necessary for a fair presentation of financial position, results of operations, and cash flows for the interim periods presented. All such adjustments are of a normal, recurring nature.  The results of operations for interim periods are not necessarily indicative of the results for the entire year.

 

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts reported in the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.  The most significant balance sheet accounts that could be affected by such estimates are variable interest entity (“VIE”) and other finance receivables, at fair market value, VIE derivative liabilities at fair market value, VIE long-term debt issued by securitization and permanent financing trusts at fair market value, intangible assets and goodwill. Actual results could differ from those estimates and such differences could be material. These interim financial statements should be read in conjunction with the Company’s 2012 audited consolidated financial statements that are included in our Post-Effective Amendment No. 1 to Form S-1 Registration Statement filed on November 8, 2013.

 

12



 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, including those entities that are considered VIEs, and where the Company has been determined to be the primary beneficiary in accordance with Accounting Standards Codification (“ASC”) 810, Consolidation (“ASC 810”).  Excluded from the consolidated financial statements of the Company are those entities that are considered VIEs and where the Company has been deemed not to be the primary beneficiary according to ASC 810.  The December 31, 2012 consolidated financial statements also included the accounts of American Insurance Strategies Fund II, LP (“AIS Fund II”) for which the Company was the general partner.  The limited partners’ interests are reflected as non-controlling interests in the Company’s consolidated financial statements.  In 2012, the assets of the AIS Fund II were liquidated and distributed to the partners.

 

All material inter-company balances and transactions are eliminated in consolidation.

 

2. Recently Issued Accounting Statements

 

Effective January 1, 2013, the Company adopted ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The ASU requires disclosures that affect all entities with financial instruments and derivatives that are either offset on the balance sheet in accordance with ASC 210-20-45 or ASC 815-10-45, or subject to a master netting arrangement, irrespective of whether they are offset on the balance sheet.  Entities should provide the disclosures required by ASU No. 2011-11 retrospectively for all comparative periods presented.   Adoption of ASU 2011-11 did not impact the Company’s financial statements.

 

Effective January 1, 2013, the Company early adopted ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The ASU requires entities to report, either on the face of the income statement or in the notes, the effect of significant reclassifications out of accumulated other comprehensive income (“AOCI”) on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety from AOCI to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts.  The Company did not record any reclassifications out of accumulated other comprehensive income during the three-months ended September 30, 2013.  The Company did record the following reclassifications out of accumulated other comprehensive income during the nine-months ended September 30, 2013 as a result of the associated notes maturing during the period:

 

Details about accumulated other
comprehensive income components

 

Amount reclassified
from accumulated
other
comprehensive
income

 

Affected line item in the
statement of operations

 

Unrealized gains and losses on available-for-sale securities

 

$

1,862

 

Realized loss on notes receivable, at fair market value

 

 

As discussed more fully in Note 3 of the Company’s 2012 audited consolidated financial statements, the notes receivable are treated as debt securities, classified as available-for-sale, and carried at fair value.  The remaining $6,238 of notes receivable, at fair market value at September 30, 2013, are expected to mature in 2018.

 

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 requires, unless certain conditions exists, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. ASU 2013-11 is effective prospectively for reporting periods beginning after December 15, 2013, with early adoption permitted. Retrospective application is permitted. The Company does not anticipate the adoption of this amendment will have a material impact on its financial statements.

 

13



 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars In Thousands, Unless Otherwise Noted)

 

3. Variable Interest Entities

 

In the normal course of business, the Company is involved with various entities that are considered to be VIEs.  A VIE is an entity that has either a total investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support or whose equity investors lack the characteristics of a controlling financial interest under the voting interest model of consolidation.  The Company is required to consolidate any VIE for which it is determined to be the primary beneficiary.  The primary beneficiary is the entity that has the power to direct those activities of the VIE that most significantly impact the VIEs’ economic performance and has the obligation to absorb losses from or the right to receive benefits from the VIE that could potentially be significant to the VIE.  The Company reviews all significant interests in the VIEs it is involved with including consideration of the activities of the VIEs that most significantly impact the VIEs’ economic performance and whether the Company has control over those activities.  On an ongoing basis, the Company assesses whether or not it is the primary beneficiary of a VIE.

 

As a result of adopting ASC 810, the Company was deemed to be the primary beneficiary of the VIEs used to securitize its finance receivables (“VIE finance receivables”).  The Company elected the fair value option with respect to assets and liabilities in its securitization VIEs as part of their initial consolidation on January 1, 2010.

 

The debt issued by the Company’s securitization VIEs is reported on the Company’s consolidated balance sheets as long-term debt issued by securitization and permanent financing trusts, at fair market value (“VIE securitization debt”).  The VIE securitization debt is recourse solely to the VIE finance receivables held by such special purpose entities (Note 5 and 6) and thus is non-recourse to the other consolidated subsidiaries. The VIEs will continue in operation until all securitization debt is paid and all residual cash flows are collected. As a result of the long lives of many finance receivables purchased and securitized by the Company, most consolidated VIEs have expected lives in excess of twenty years.

 

4. Fair Value Measurements

 

ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a three-level valuation hierarchy for disclosure of fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  The three levels are defined as follows:

 

·                  Level 1 — inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date.

 

·                  Level 2 — inputs to the valuation methodology include quoted prices in markets that are not active or quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

·                  Level 3 — inputs to the valuation methodology are unobservable, reflecting the entity’s own assumptions about assumptions market participants would use in pricing the asset or liability.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  Fair value is a market based measure considered from the perspective of a market participant who holds the asset or owes the liabilities rather than an entity specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the assets or liabilities at the measurement date.  The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company also evaluates various factors to determine whether certain transactions are orderly and may make adjustments to transactions or quoted prices when the volume and level of activity for an asset or liability have decreased significantly.

 

14



 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

The above conditions could cause certain assets and liabilities to be reclassified from Level 1 to Level 2/Level 3 or Level 2 to Level 3.  The inputs or methodology used for valuing the assets or liabilities are not necessarily an indication of the risk associated with the assets and liabilities.

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

Marketable securities — The estimated fair value of investments in marketable securities is based on quoted market prices.

 

VIE and other finance receivables and VIE long-term debt issued by securitization and permanent financing trusts, at fair market value — The estimated fair value of VIE and other finance receivables and VIE long-term debt issued by securitization and permanent financing trusts, at fair value is determined based on a discounted cash flow model using expected future collections discounted at a calculated rate.

 

For guaranteed structured settlements and annuities, the Company allocates the projected cash flows based on the waterfall of the securitization and permanent financing trusts (collectivity the “Trusts”).  The waterfall includes fees to operate the Trusts (servicing fees, administrative fees, etc.), note holder principal and note holder interest.  Many of the Trusts have various tranches of debt that have varying subordinations in the waterfall calculation. The remaining cash flows, net of those obligations, are considered a residual interest which is projected to be paid to the Company’s retained interest holders.

 

The projected finance receivable cash flows used to pay the obligations of the Trusts are discounted using a calculated rate derived from the fair value interest rates of the debt in the Trusts.  The fair value interest rate of the debt is derived using a swap curve and applying a calculated spread using the Company’s most recent securitization as a benchmark.  The calculated spread is adjusted for the specific attributes of the debt in the Trusts, such as years to maturity and credit grade.   The debt’s fair value interest rates are applied to the projected future cash payments paid on the principal and interest to derive the debt’s fair value.   The debt’s fair value interest rates are blended using the debt’s principal balance to obtain a weighted average fair value interest rate; this rate is used to determine the value of the finance receivables’ asset cash flows.  In addition, the Company considers transformation cost and profit margin associated with its securitizations to derive the fair value of its finance receivables’ asset cash flows.  The finance receivables’ residual cash flows remaining after the projected obligations of the Trusts are satisfied are discounted using a separate yield based on an assumed rating of the residual tranche.  The finance receivables’ residual cash flows remaining after the projected obligations of the Trusts are satisfied are discounted using a separate yield based on an assumed rating of the residual tranche (9.34% and 7.71% as of December 31, 2012 and September 30, 2013, respectively, with a weighted average life of 20 years as of both dates).

 

The residual cash flows are adjusted for a loss assumption of 0.25% over the life of the finance receivables in its fair value calculation.  Finance receivable cash flows, including the residual asset cash flows, are included in finance receivables, at fair market value in the Company’s consolidated balance sheets.  The associated debt’s projected future cash payments for principal and interest are included in VIE long-term debt issued by securitization and permanent financing trusts, at fair market value.

 

For finance receivables not yet securitized, the Company uses the calculated spreads, as well as considering transformation costs and profit margin, from its most recent securitization to determine the fair value yield adjusting for expected losses and applying the residual yield for the cash flows the Company projects would make up the retained interest in a securitization.

 

For the Company’s life contingent structured settlement (“LCSS”) receivables and long-term debt issued by its related permanent financing trusts, the blended weighted average discount rate of the LCSS receivables at the time of borrowing (which occurs frequently throughout the year) is used to determine the fair value of the receivables’ cash flows.  The residual cash flows relating to the LCSS receivables are discounted using a separate yield based on the assumed rating to the residual tranche reflecting the life contingent feature of these receivables.

 

VIE and other finance receivables, net of allowance for losses — The fair value of structured settlement, annuity, and lottery receivables was estimated based on the present value of future expected cash flows using discount rates

 

15



 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

commensurate with the risks involved.  The fair value of pre-settlement funding transactions and attorney cost financing was based on expected losses and historical loss experience associated with the respective receivables using management’s best estimates of the key assumptions regarding credit losses.

 

Life settlement contracts, at fair market value — The fair values of life settlement contracts are determined by reference to the transfer price of similar life settlement contracts under a discounted cash flow calculation that takes into account the net death benefit under the policy, estimated future premium payments and the life expectancy of the insured, as well as other qualitative factors regarding market participants assumptions.  Life expectancy is determined on a policy-by-policy basis using the results of medical underwriting performed by independent agencies.

 

Notes receivable, at fair market value — The fair values of notes receivables are determined based on the discounted present value of future expected cash flows using management’s best estimates of the key assumptions regarding credit losses and discount rates determined to be commensurate with the risks involved. The Company does not expect prepayment on the finance receivables underlying the notes receivable and accordingly, no significant change in the fair value is expected as a result of prepayment.  The fair value and amortized costs of these notes receivable are as follows:

 

 

 

December 31, 2012

 

September 30, 2013

 

Amortized cost

 

$

8,297

 

$

6,175

 

Fair market value

 

$

8,074

 

$

6,238

 

 

Note receivable due from affiliate — The estimated fair value of note receivable due from affiliate is assumed to equal its carrying amount.  The note receivable was repaid in full in February 2013.

 

Other receivables, net of allowance for losses — The estimated fair value of advances receivable and certain other receivables, which are generally recovered in less than three months, is assumed to equal to the carrying amount.  The carrying value of other receivables which have expected recoverability of greater than three months, which consist primarily of a note receivable, have been estimated based on the present value of future expected cash flows using management’s best estimate of the key assumptions, including discount rates commensurate with the risks involved.

 

VIE derivative liabilities, at fair value — The fair value of interest rate swaps is based on dealer quotes that are corroborated with pricing models that utilize current interest rates and the timing and amount of cash flows.

 

Installment obligations payable — Installment obligations payable are reported at contract value determined based on changes in the measuring indices selected by the obligees under the terms of the obligations over the lives of the obligations.  The fair value of installment obligations payable is estimated to be equal to carrying value.

 

Term loan payable — The carrying value of the term loan approximates its fair value.  In February 2013, the term loan was refinanced with a new senior secured credit facility and subsequently, in May 2013, the new credit facility was amended to provide an additional term loan with the same terms as the new credit facility.

 

VIE borrowings under revolving credit facilities and other similar borrowings — The estimated fair value of borrowings under revolving credit facilities and other similar borrowings is based on the borrowing rates currently available to the Company for debt with similar terms and remaining maturities.  The Company estimates that the carrying value of its lines of credit, which bear interest at a variable rate, approximates fair value.

 

VIE long-term debt — The estimated fair value of VIE long-term debt is based on fair value borrowing rates available to the Company based on recently executed transactions with similar underlying collateral characteristics, reflecting the specific terms and conditions of the debt.

 

16



 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

The following table sets forth the Company’s assets and liabilities that are carried at fair value on the Company’s condensed consolidated balance sheets as of December 31, 2012 and September 30, 2013:

 

 

 

Quoted Prices in
Active Markets for
Identical Assets

 

Significant Other
Observable Inputs

 

Significant
Unobservable
Inputs

 

Total

 

 

 

Level I

 

Level II

 

Level III

 

at Fair Value

 

December 31, 2012:

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

US large cap

 

$

40,446

 

$

 

$

 

$

40,446

 

US mid cap

 

8,472

 

 

 

8,472

 

US small cap

 

9,224

 

 

 

9,224

 

International

 

22,651

 

 

 

22,651

 

Other equity

 

789

 

 

 

789

 

Total equity securities

 

81,582

 

 

 

81,582

 

Fixed income securities

 

 

 

 

 

 

 

 

 

US fixed income

 

36,047

 

 

 

36,047

 

International fixed income

 

5,963

 

 

 

5,963

 

Other fixed income

 

11

 

 

 

11

 

Total fixed income securities

 

42,021

 

 

 

42,021

 

Other securities

 

 

 

 

 

 

 

 

 

Cash & cash equivalents

 

4,789

 

 

 

4,789

 

Alternative investments

 

483

 

 

 

483

 

Annuities

 

2,239

 

 

 

2,239

 

Total other securities

 

7,511

 

 

 

7,511

 

Total marketable securities

 

131,114

 

 

 

131,114

 

VIE and other finance receivables, at fair market value

 

 

 

3,615,188

 

3,615,188

 

Notes receivable, at fair market value

 

 

 

8,074

 

8,074

 

Life settlement contracts, at fair market value (1)

 

 

 

1,724

 

1,724

 

Total Assets

 

$

131,114

 

$

 

$

3,624,986

 

$

3,756,100

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

VIE long-term debt issued by securitization and permanent financing trusts, at fair market value

 

$

 

$

 

$

3,229,591

 

$

3,229,591

 

VIE derivative liabilities, at fair market value

 

 

121,498

 

 

121,498

 

Total Liabilities

 

$

 

$

121,498

 

$

3,229,591

 

$

3,351,089

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013:

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

US large cap

 

$

44,765

 

$

 

$

 

$

44,765

 

US mid cap

 

9,125

 

 

 

9,125

 

US small cap

 

10,481

 

 

 

10,481

 

International

 

22,233

 

 

 

22,233

 

Other equity

 

821

 

 

 

821

 

Total equity securities

 

87,425

 

 

 

87,425

 

Fixed income securities

 

 

 

 

 

 

 

 

 

US fixed income

 

33,263

 

 

 

33,263

 

International fixed income

 

5,303

 

 

 

5,303

 

Other fixed income

 

30

 

 

 

30

 

Total fixed income securities

 

38,596

 

 

 

38,596

 

Other securities

 

 

 

 

 

 

 

 

 

Cash & cash equivalents

 

3,754

 

 

 

3,754

 

Alternative investments

 

645

 

 

 

645

 

Annuities

 

2,193

 

 

 

2,193

 

Total other securities

 

6,592

 

 

 

6,592

 

Total marketable securities

 

132,613

 

 

 

132,613

 

VIE and other finance receivables, at fair market value

 

 

 

3,888,893

 

3,888,893

 

Notes receivable, at fair market value

 

 

 

6,238

 

6,238

 

Total Assets

 

$

132,613

 

$

 

$

3,895,131

 

$

4,027,744

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

VIE long-term debt issued by securitization and permanent financing trusts, at fair market value

 

$

 

$

 

$

3,437,861

 

$

3,437,861

 

VIE derivative liabilities, at fair market value

 

 

81,125

 

 

 

81,125

 

Total Liabilities

 

$

 

$

81,125

 

$

3,437,861

 

$

3,518,986

 

 


(1) Included in other assets on the Company’s condensed consolidated balance sheets.

 

17



 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

The following table sets forth the Company’s quantitative information about its Level 3 fair value measurements as of December 31, 2012 and September 30, 2013, respectively:

 

December 31, 2012:

 

Fair Value

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted Avg)

 

Assets

 

 

 

 

 

 

 

 

 

VIE and other finance receivables, at fair market value

 

$

3,615,188

 

Discounted cash flow

 

Discount rate

 

2.68% - 12.52% (3.99%)

 

Notes receivable, at fair market value

 

8,074

 

Discounted cash flow

 

Discount rate

 

9.78% (9.78%)

 

Life settlement contracts, at fair market value

 

1,724

 

Model actuarial pricing

 

Life expectancy Discount rate

 

16 to 260 months (147) 18.50% (18.50%)

 

Total Assets

 

$

3,624,986

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

VIE long-term debt issued by securitization and permanent financing trusts, at fair market value

 

$

3,229,591

 

Discounted cash flow

 

Discount rate

 

0.53% - 12.38% (3.43%)

 

Total Liabilities

 

$

3,229,591

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013:

 

Fair Value

 

Valuation Technique

 

Unobservable Input

 

Range (Weighted Avg)

 

Assets

 

 

 

 

 

 

 

 

 

VIE and other finance receivables, at fair market value

 

$

3,888,893

 

Discounted cash flow

 

Discount rate

 

2.59% - 12.98% (3.99%)

 

Notes receivable, at fair market value

 

6,238

 

Discounted cash flow

 

Discount rate

 

7.71% (7.71%)

 

Life settlement contracts, at fair market value

 

 

Model actuarial pricing

 

Life expectancy Discount rate

 

7 to 251 months (140) 18.50% (18.50%)

 

Total Assets

 

$

3,895,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

VIE long-term debt issued by securitization and permanent financing trusts, at fair market value

 

$

3,437,861

 

Discounted cash flow

 

Discount rate

 

0.74% - 12.67% (3.60%)

 

Total Liabilities

 

$

3,437,861

 

 

 

 

 

 

 

 

A significant unobservable input used in the fair value measurement of all of the Company’s assets and liabilities measured at fair value using unobservable inputs (Level 3) is the discount rate.  Significant increases (decreases) in the discount rate used to estimate fair value in isolation would result in a significantly lower (higher) fair value measurement of the corresponding asset or liability. An additional significant unobservable input used in the fair value measurement of the life settlement contracts, at fair value, is life expectancy. Significant increases (decreases) in the life expectancy used to estimate the fair value of life settlement contracts in isolation would result in a significantly lower (higher) fair value measurement.

 

18



 

 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

The changes in assets measured at fair value using significant unobservable inputs (Level 3) during the nine-months ended September 30, 2012 and 2013 were as follows:

 

 

 

VIE and other
finance receivables,
at fair market value

 

Life settlement
contracts, at fair
market value

 

Notes receivable, at
fair market value

 

Total

 

Balance at December 31, 2011

 

$

3,041,090

 

$

6,214

 

$

12,765

 

$

3,060,069

 

 

 

 

 

 

 

 

 

 

 

Total gains (losses):

 

 

 

 

 

 

 

 

 

Included in earnings / losses

 

346,746

 

(517

)

 

346,229

 

Included in other comprehensive gain

 

 

 

279

 

279

 

Purchases

 

259,005

 

 

 

259,005

 

Premiums paid

 

 

935

 

 

935

 

Sales

 

(447

)

(3,917

)

 

(4,364

)

Lapsed policies

 

 

 

 

 

Interest accreted

 

111,798

 

 

 

111,798

 

Payments received

 

(303,721

)

 

(3,453

)

(307,174

)

Maturities

 

 

 

 

 

Transfers in and/or out of Level 3

 

 

 

 

 

Balance at September 30, 2012

 

$

3,454,471

 

$

2,715

 

$

9,591

 

$

3,466,777

 

The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at:

 

 

 

 

 

 

 

 

 

September 30, 2012

 

$

346,155

 

$

(132

)

$

 

$

346,023

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2012

 

$

3,615,188

 

$

1,724

 

$

8,074

 

$

3,624,986

 

 

 

 

 

 

 

 

 

 

 

Total gains (losses):

 

 

 

 

 

 

 

 

 

Included in earnings / losses

 

197,429

 

(22

)

 

197,407

 

Included in other comprehensive gain

 

 

 

502

 

502

 

Purchases

 

300,452

 

 

 

300,452

 

Premiums paid

 

 

241

 

 

241

 

Sales

 

 

 

 

 

Lapsed policies

 

 

 

 

 

Interest accreted

 

107,784

 

 

 

107,784

 

Payments received

 

(322,345

)

 

(2,338

)

(324,683

)

Maturities

 

 

(51

)

 

(51

)

Asset distribution

 

(9,615

)

(1,892

)

 

(11,507

)

Transfers in and/or out of Level 3

 

 

 

 

 

Balance at September 30, 2013

 

$

3,888,893

 

$

 

$

6,238

 

$

3,895,131

 

The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at:

 

 

 

 

 

 

 

 

 

September 30, 2013

 

$

197,429

 

$

31

 

$

 

$

197,460

 

 

19



 

 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

The changes in liabilities measured at fair value using significant unobservable inputs (Level 3) during the nine-months ended September 30, 2012 and 2013 were as follows:

 

 

 

VIE long-term debt issued
by securitizations and
permanent financing trusts

 

Balance at December 31, 2011

 

$

2,663,873

 

Total (gains) losses:

 

 

 

Included in earnings / losses

 

157,998

 

Issuances

 

400,881

 

Interest accreted

 

(25,207

)

Repayments

 

(169,693

)

Transfers in and/or out of Level 3

 

 

Balance at September 30, 2012

 

$

3,027,852

 

 

 

 

 

The amount of total (gains) losses for the period included in earnings attributable to the change in unrealized gains or losses relating to long- term debt still held at:

 

 

 

September 30, 2012

 

$

157,998

 

 

 

 

 

Balance at December 31, 2012

 

$

3,229,591

 

Total (gains) losses:

 

 

 

Included in earnings / losses

 

23,769

 

Issuances

 

406,240

 

Interest accreted

 

(35,863

)

Repayments

 

(185,876

)

Transfers in and/or out of Level 3

 

 

Balance at September 30, 2013

 

$

3,437,861

 

 

 

 

 

The amount of total (gains) losses for the period included in earnings attributable to the change in unrealized gains or losses relating to long- term debt still held at:

 

 

 

September 30, 2013

 

$

23,769

 

 

20



 

 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

Realized and unrealized gains and losses included in earnings in the accompanying condensed consolidated statements of operations for the three and nine-months ended September 30, 2012 and 2013 are reported in the following revenue categories:

 

 

 

VIE and other finance
receivables and long-
term debt

 

Life settlement
contracts income

 

 

 

 

 

 

 

Total gains (losses) included in earnings in the three months ended September 30, 2012

 

$

57,142

 

$

183

 

 

 

 

 

 

 

Change in unrealized gains (losses) in the three months ended September 30, 2012 relating to assets still held at the reporting date

 

$

57,142

 

$

183

 

 

 

 

 

 

 

Total gains (losses) included in earnings in the three months ended September 30, 2013

 

$

46,020

 

$

51

 

 

 

 

 

 

 

Change in unrealized gains (losses) in the three months ended September 30, 2013 relating to assets still held at the reporting date

 

$

46,020

 

$

51

 

 

 

 

 

 

 

Total gains (losses) included in earnings in the nine months ended September 30, 2012

 

$

188,748

 

$

(517

)

 

 

 

 

 

 

Change in unrealized gains (losses) in the nine months ended September 30, 2012 relating to assets still held at the reporting date

 

$

188,157

 

$

(132

)

 

 

 

 

 

 

Total gains (losses) included in earnings in the nine months ended September 30, 2013

 

$

173,660

 

$

(22

)

 

 

 

 

 

 

Change in unrealized gains (losses) in the nine months ended September 30, 2013 relating to assets still held at the reporting date

 

$

173,660

 

$

31

 

 

21



 

 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

The Company discloses fair value information about financial instruments, whether or not recognized at fair value in the Company’s condensed consolidated balance sheets, for which it is practicable to estimate that value.  As such, the estimated fair values of the Company’s financial instruments are as follows:

 

 

 

December 31,

 

September 30,

 

 

 

2012

 

2013

 

 

 

Estimated

 

 

 

Estimated

 

 

 

 

 

Fair

 

Carrying

 

Fair

 

Carrying

 

 

 

Value

 

Amount

 

Value

 

Amount

 

Financial assets

 

 

 

 

 

 

 

 

 

Marketable securities

 

$

131,114

 

$

131,114

 

$

132,613

 

$

132,613

 

VIE and other finance receivables, at fair market value

 

3,615,188

 

3,615,188

 

3,888,893

 

3,888,893

 

VIE and other finance receivables, net of allowance for losses (1)

 

145,155

 

150,353

 

127,413

 

133,505

 

Life settlement contracts, at fair market value

 

1,724

 

1,724

 

 

 

Notes receivable, at fair market value

 

8,074

 

8,074

 

6,238

 

6,238

 

Notes receivable, due from affiliate (1)

 

5,243

 

5,243

 

 

 

Other receivables, net of allowance for losses (1)

 

13,146

 

13,146

 

14,269

 

14,269

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

VIE derivative liabilities, at fair market value

 

121,498

 

121,498

 

81,125

 

81,125

 

VIE borrowings under revolving credit facilities and other similar borrowings (1)

 

28,198

 

27,380

 

50,655

 

49,168

 

VIE long-term debt (1)

 

158,801

 

162,799

 

149,954

 

154,020

 

VIE long-term debt issued by securitization and permanent financing trusts, at fair market value

 

3,229,591

 

3,229,591

 

3,437,861

 

3,437,861

 

Installment obligations payable (1)

 

131,114

 

131,114

 

132,613

 

132,613

 

Term loan payable (1)

 

142,441

 

142,441

 

556,422

 

556,422

 

 


(1) These represent financial instruments not recorded in the condensed consolidated balance sheets at fair value.  Such financial instruments would be classified as Level 3 within the fair value hierarchy.

 

5. VIE and Other Finance Receivables, at Fair Market Value

 

The Company has elected to fair value newly originated guaranteed structured settlements in accordance with ASC 810.  Additionally, as a result of the Company including lottery winning finance receivables in its 2013-1 asset securitization, the Company also elected to fair value newly originated lottery winnings effective January 1, 2013. As of December 31, 2012 and September 30, 2013, VIE and other finance receivables for which the fair value option was elected consist of the following:

 

 

 

December 31, 2012

 

September 30, 2013

 

Maturity value

 

$

5,335,328

 

$

5,784,472

 

Unearned income

 

(1,720,140

)

(1,895,579

)

Net carrying amount

 

$

3,615,188

 

$

3,888,893

 

 

22



 

 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

Encumbrances on VIE and other finance receivables, at fair value are as follows:

 

Encumbrance

 

December 31, 2012

 

September 30, 2013

 

VIE securitization debt (2)

 

$

3,550,394

 

$

3,773,189

 

$100 million credit facility (1)

 

230

 

19,014

 

$200 million credit facility (1)

 

7,059

 

13,924

 

$300 million credit facility (1)

 

8,277

 

19,480

 

$50 million permanent financing related to 2011-A

 

20,505

 

36,005

 

Total VIE finance receivables at fair value

 

3,586,465

 

3,861,612

 

Not encumbered

 

28,723

 

27,281

 

Total VIE and other finance receivables at fair value

 

$

3,615,188

 

$

3,888,893

 

 


(1) See Note 7

(2) See Note 9

 

Notes receivable, at fair market value and residual cash flows from finance receivables, at fair market value held in securitizations are pledged as collateral for the residual term debt (Note 8) at December 31, 2012 and September 30, 2013.

 

The Company is engaged to service certain finance receivables it sells to third parties.  Servicing fee revenue related to those receivables are included in servicing, broker, and other fees in the Company’s unaudited condensed consolidated statements of operations, and for the three and nine-months ended September 30, 2013 and 2012 were as follows:

 

 

 

Three-Months Ended September 30,

 

Nine-Months Ended September 30,

 

 

 

2012

 

2013

 

2012

 

2013

 

Servicing fees

 

$

258

 

$

239

 

$

803

 

$

714

 

 

23



 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

6. VIE and Other Finance Receivables, net of Allowance for Losses

 

VIE and other finance receivables, net of allowance for losses, as of December 31, 2012 and September 30, 2013 consist of the following:

 

 

 

December 31, 2012

 

September 30, 2013

 

Structured settlements and annuities

 

$

79,653

 

$

76,640

 

Less: unearned income

 

(53,398

)

(50,552

)

 

 

26,255

 

26,088

 

Lottery winnings

 

97,204

 

89,232

 

Less: unearned income

 

(33,768

)

(29,500

)

 

 

63,436

 

59,732

 

Pre-settlement funding transactions

 

62,775

 

55,460

 

Less: deferred revenue

 

(4,296

)

(2,872

)

 

 

58,479

 

52,588

 

Life insurance premium financing

 

3,807

 

 

Less: deferred revenue

 

(43

)

 

 

 

3,764

 

 

Attorney cost financing

 

3,072

 

2,480

 

Less: deferred revenue

 

(3

)

 

 

 

3,069

 

2,480

 

VIE and other finance receivables, gross

 

155,003

 

140,888

 

Less: allowance for losses

 

(4,650

)

(7,383

)

VIE and other finance receivables, net

 

$

150,353

 

$

133,505

 

 

Encumbrances on VIE and other finance receivables, net are as follows:

 

Encumbrance

 

December 31, 2012

 

September 30, 2013

 

VIE securitization debt (2)

 

$

80,826

 

$

79,193

 

$40 million pre-settlement credit facility (1)

 

25,859

 

23,463

 

$45.1 million long-term presettlement facility (2)

 

19,389

 

12,775

 

$2.4 million long-term facility (2)

 

2,663

 

2,532

 

Total VIE finance receivables, net of allowances

 

128,737

 

117,963

 

Not encumbered

 

21,616

 

15,542

 

Total VIE and other finance receivables, net of allowances

 

$

150,353

 

$

133,505

 

 


(1) See Note 7

(2) See Note 8

 

24



 

J.G. Wentworth, LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited) (continued)

(Dollars in Thousands, Unless Otherwise Noted)

 

Activity in the allowance for losses for VIE and other finance receivables for the three and nine-months ended September 30, 2012 and 2013 was as follows:

 

 

 

Structured
settlements and
annuities

 

Lottery

 

Pre-settlement
funding
transactions

 

Life insurance
premium financing

 

Attorney cost
financing

 

Total

 

Three-months ended September 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(381

)

$

(1

)

$

(1,644

)

$

 

$

(482

)

$

(2,508

)

Provision for loss

 

 

55

 

(504

)

2

 

106

 

(341

)

Charge-offs

 

49

 

18

 

65

 

 

19

 

151

 

Recoveries

 

 

(72

)

(479

)

(2

)

 

(553

)

Balance at end of period

 

$

(332

)

$

 

$

(2,562

)

$

 

$

(357

)

$

(3,251

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-months ended September 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(182

)

$

 

$

(6,282

)

$

 

$

(293

)

$

(6,757

)

Provision for loss

 

51

 

85

 

(1,836

)

 

10

 

(1,690

)

Charge-offs

 

85

 

 

1,064

 

 

 

1,149

 

Recoveries

 

 

(85

)

 

 

 

(85

)

Balance at end of period

 

$

(46

)

$

 

$

(7,054

)

$

 

$

(283

)

$

(7,383

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine-month