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J.G. Wentworth’s restructuring will not disrupt servicing of its structured settlement ABS

November 20, 2017

From Credit Outlook

On 9 November, The J.G. Wentworth Company (Caa3 negative), a consumer finance company specializing in purchasing structured settlement payments, announced an agreement with a majority of its lenders to file a prepackaged Chapter 11 plan for reorganization that will significantly deleverage the company. Under the agreement, lenders will exchange their claims under a $449.5 million senior secured credit facility for a cash consideration and 95.5% of the equity in the restructured company.

Although the restructuring is a distressed exchange and default, and is credit negative for the lenders, it will not disrupt servicing of the company’s 32 Moody’s-rated assetbacked securities (ABS) transactions because the servicer, J.G. Wentworth Management Company, an indirect operating subsidiary of The J.G. Wentworth Company, is not part of the bankruptcy filing.

Similar to The J.G. Wentworth Company’s 2009 Chapter 11 bankruptcy, J.G. Wentworth Management Company is not part of the current bankruptcy filing, which should minimize the potential for any servicing disruptions in the ABS transactions, whose remaining balance exceeds $3 billion. In addition, the transactions have several features that mitigate servicing disruptions in the event of a servicer bankruptcy. The ABS benefit from having a backup servicer, Portfolio Financial Servicing Company, that will assume servicer responsibilities if J.G. Wentworth Management Company is unable to continue servicing.

The ABS transactions also benefit from having either Deutsche Bank Trust Company Americas(A2 stable, baa11) as the standby or master servicer, or U.S. Bank National Association (Aa1/A1 stable, aa3) as the servicer of last resort. These entities would be responsible for continuing servicing until they can find a successor servicer in the highly unlikely event that both the servicer and backup servicer are incapable of carrying out their responsibilities. Because the transactions are backed by structured settlements, annuities and lottery payments, which are easily serviced receivables, a successor servicer could be found relatively quickly.

The restructuring will significantly trim J.G. Wentworth’s debt, reducing the company’s interest expense over the next four years, pushing out debt maturity by two years and lowering the probability of default on its obligations during that period. Moreover, the prepackaged agreement requires that only the holding company file for bankruptcy, not the operating subsidiaries, which will limit the effect of the restructuring on day-to-day operations. However, the company will still face challenges after the restructuring owing to increased competition in the business of purchasing structured settlement payment streams. J.G. Wentworth’s purchases of structured settlement payments fell to $534 million for the first nine months of 2017 from $548 million in the same period of 2016 and $764 million in the same period of 2015. The company also is facing lower margins on its purchased assets owing to the heightened competition.

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1 The bank ratings shown in this report are the bank’s deposit rating, senior unsecured debt rating (where available) and baseline credit assessment.

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