On April 20, 2022, GWG Holdings filed for bankruptcy leaving many GWG L Bond holders worried about the future of their investments. GWG Works in alternative investments and holds a portfolio of life insurance assets, acquired primarily through life settlements. GWG Holdings provided liquidity through the sale of its so-called “L Bond”—a high-risk, high-yield debt instrument used to finance GWG Holdings’ life settlement purchases.
GWG Holdings voluntarily ceased sales of its L Bonds in 2019. It did so again on April 16, 2021, for eight months as a result of the late-filing of its Annual Report Form 10-K. The late filing was allegedly due to difficulties in resolving accounting issues. Its auditor, Grant Thornton LLP, resigned in December 2021. Since then, GWGH has failed to retain another auditor, thereby continuing to fail to file its Form 10-K on time.
The auditors publicly stated in their 8-K that they did not have any disagreements with GWGH’s management on any matters of accounting principles or practices, or any matters of disclosure.
The Nasdaq has since informed GWGH that its failure to file a Form 10-K means it is in violation of Nasdaq Listing Rule 5250(c)(1). This does not result in immediate disqualification from being listed in the Nasdaq, but GWG must submit a plan within 60 calendar days to regain its compliance to continue to be listed on the Nasdaq. If the plan is accepted, the Nasdaq can grant GWGH up to 180 days from the due date of the Form 10-K for GWGH to regain compliance.
During the 2021 cessation of L Bond sales, GWG Holdings funded operations and serviced its debt obligations through reserves and financing its assets.
In January 2022, GWG Holdings once again announced a pause in selling its L Bonds. On January 15, 2022, GWG failed to meet its interest and maturity payments. It also announced that it was deferring redemptions.
In total, GWGH’s missed interest and principal payments for its defunct L Bonds came to $13.6 million.
In a letter to investors on January 24, GWGH said it was looking to “restructure” with regard to its capital assets and liquidity.
Filing for bankruptcy could spell disaster for many investors in GWGH’s junk bonds, potentially dropping them to a value of as little as 20 cents on the dollar.
GWG Holdings’ bankruptcy will likely open up the door to an onslaught of lawsuits against broker-dealers who used retirement savings to buy the junk bonds.
The demand for life settlements has grown to a hundred-billion-dollar industry in recent years as institutional investors looked for higher-yield investments in the face of rising interest rates.
A life settlement is when a company offers to buy a life insurance policy off of a policyholder for less than the total value of the policy but for more than the policyholder would receive if they surrendered the policy to the issuer. Life settlements can be a source of immediate cash for policyholders, or a solution to an inability to keep up premium payments.
But the massive increase in competition has made companies more cutthroat as they hunt for potential sellers.
The business model of life settlement businesses depends on aligning their investment with the policyholder’s life expectancy. If the seller dies earlier than the life expectancy, the new owner makes a profit. If they die later, the owner makes a loss.
The owner must pay all the premiums of the obtained policy. GWG Holdings appears to have been funding these entirely through sales of its L Bonds alone.
The L Bond was a creation of GWG Holdings. Broker-dealers could allegedly earn up to 5% on the market price for every bond sold, leading to potential conflicts of interest when selling them to clients. They were touted as high-yield investments offering up to an 8.5% yield.
The L Bond was a highly illiquid product. There was no way for bondholders to resell the product except in the case of redemptions. For these redemptions, there was a fee. But as of January 24, 2022, the company is not even paying for redemptions anymore.
So, bondholders are stuck with junk bonds that are rapidly decreasing in value and which they are unable to offload.
If you invested in GWG L bonds and have questions about the bankruptcy, you should contact investor attorneys Marc Fitapelli or Jeffrey Saxon at MDF Law.