by John Darer CLU ChFC CSSC RSP CLTC
The Street.com derides the initial public offering of JGWPT Holdings with unflattering commentary on the "cash now" icon's 3rd quarter net loss and says that JGWPT Holdings, "might not be the lottery ticket that stock investors had hoped it would be after a weaker-than-expected initial public offering in November. But, as with the lottery, there's always next time".
JGWPT Holdings, which through its subsidiaries J.G. Wentworth and Peachtree Settlement Funding, buys structured settlement payment rights, lottery winnings and annuities at a discount and then sells those payment streams to debt investors through asset-backed securitizations, purportedly controls over 75% of the structured settlement secondary market.
J.G. Wentworth said in an October filing with the Securities and Exchange Commission that a sharp rise in interest rates during the third quarter was likely to push revenue lower and the company's bottom line to a net loss.
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QUESTION #1
How does an increasing interest rate environment affect the rest of the structured settlement secondary market? Will we see an interest rate squeeze?
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TheStreet painted a gloomy picture in its review of the JG Wentworth's IPO documents, "that J.G. Wentworth's business model is eerily similar to so-called originate-to-distribute mortgage lenders such as New Century and Countrywide of the bygone days of the housing boom". As Austin Powers might remark…Bold baby…Verrry Bold!"
The company uses warehouse credit lines to buy structured settlements, lottery winnings or annuities at favorable present values, and then sells those long-term payment streams to bond investors through securitization markets.
J.G. Wentworth buys structured settlement and lottery payment rights and then it distributes the future cash flows of the assets it buys to investors, collecting fees and markups in the process. The company also retains a residual interest in its securitizations.
The Street.com contends that J.G. Wentworth's current market cap of about $500 million also shows there are some investors willing to put their money behind such businesses five years after the financial crisis.
Yet TheStreet.com has these caveats about JGWPT:
- Put simply, the company is risky and should only appeal to sophisticated financial services investors who are aware of the risks inherent in businesses that rely heavily on credit facilities and securitization markets to keep their sales going.
- J.G. Wentworth carries extremely high leverage (from the third quarter of 2012 to 2013, J.G. Wentworth's term loan debt outstanding nearly quadrupled), which only adds to the underlying risks of its business. As with the third quarter, the fact that interest rates are generally expected to rise in coming years could be problematic.
- J.G. Wentworth's IPO was expected to help the company pare down its term loans, however an offering that was roughly 50% lower than the high-end of the company's initial range meant that total IPO proceeds only extinguished $123 million in term loan debt, less than the $151.9 million that the company had forecast at the mid-point of its initial range.
Consider again that JGWPT is the structured settlement receivables purchasing company that controls an overwhelming majority of the structured settlement secondary market.