GWG Holdings Inc. which sold $1.6 billion in bonds backed by life settlements through a network of independent broker-dealers, is getting ready to file for Chapter 11 bankruptcy protection, potentially as early as the middle of this week, according to sources.
GWG, an alternative asset manager that issued the series of high-yield bonds known as L Bonds, has struggled as of late and repeatedly missed the deadline to file audited financial statements in the past couple years. In January, it failed to make $13.6 million in combined interest and principal payments for its L Bonds series, ultimately defaulting on those bonds.
An industry source who asked not to be named confirmed the company's preparation for bankruptcy, which was first reported Monday morning by the Wall Street Journal.
At the end of last week, GWG Holdings signaled that the next potential step for the company was to file for bankruptcy protection. In a filing with the Securities and Exchange Commission Friday, GWG said it was unable to file its 2021 annual report and additional financial statements because it hadn't yet hired an auditor to replace Grant Thornton, which resigned at the end of last year.
Not having an auditor on board after three months indicates that a likely next step for the company would be to file for bankruptcy.
A GWG spokesperson declined to comment about the company's preparation to file for Chapter 11 bankruptcy protection.
Investors in the $1.6 billion of bonds will face dire consequence if GWG files for bankruptcy; one GWG investor, who asked not to be named, said he estimated the L Bonds are worth 20 cents to 30 cents on the dollar.
A few minutes after noon on Monday, shares of GWG Holdings had fallen more than 16% to trade at $4.48 per share. The most recent share price high was $10.90 in October.
Broker-dealers who sold the GWG L Bonds will likely be the target of lawsuits from investors who used retirement savings to buy the product.
"We find the potential bankruptcy off GWG Holdings very disappointing for the retail investors who put their life savings in these L Bonds," said Scott Silver, a plaintiff's attorney who is also counsel in a potential class-action lawsuit filed in March against the company in federal court in Texas.
"Those investors now face the risk of substantial losses of their principal and retirement savings," Silver said. "We look forward to continuing to investigate this matter, the individuals at GWG and the small broker-dealers who sold this incredibly risky product to retail investors."
According to GWG’s website, Emerson Equity, a San Mateo, California-based broker-dealer that primarily sells private placements, is the managing broker-dealer for the GWG issuer. The managing broker-dealer is akin to a lead underwriter in traditional investment banking terms. Along with Emerson Equity, dozens of other broker-dealers and registered investment advisers could have sold the product.
There's been a growing demand for life settlements as institutional investors search for higher yields in the current low-interest-rate environment and look for diversification. Because of that increased demand, life settlement payouts are generally higher than they have been in the past.
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