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Asset Manager GWG's $1.3 Billion Bond Pitch Ends in Bankruptcy
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Good day and welcome to WSJ Pro Bankruptcy's Daily Briefing. It's Friday, June 24. Today we unpack the decline of GWG Holdings, an asset-management business that started out investing in life insurance before a detour into startup funding. Now it's a shell operation, bankrupt and facing questions about the $1.3 billion of investors' money it took in, Pro Bankruptcy's Alexander Gladstone reports.
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L Bond investor Brooke Halpin. He said he was unaware GWG changed its business model in 2019 to invest in other assets.
PHOTO: KOVI KONOWIECKI FOR THE WALL STREET JOURNAL
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Retail investors face $1.3 billion hit after asset manager’s detour into startups. Bond salesmen working out of strip malls across America pitched GWG Holdings Inc. as a good investment. The company would use money raised from bond sales to buy life-insurance policies from people who wanted cash up front, then collect the payouts when those people died. Investors, many of them elderly and retired individuals, put $1.3 billion into the bonds.
What many of them didn’t know was that GWG’s founders and a board director would each use the money to fund and launch their own startup ventures, then move them out of the investors’ reach, according to people familiar with the matter. The roughly 27,000 individuals who bought GWG’s unique debt securities, known as L Bonds, are now facing losses.
Since 2018, GWG has invested at least $230 million into former chairman Brad Heppner’s alternative-finance startup, the Beneficient Group Co LP, which helps wealthy people and institutions convert illiquid assets into cash. The company also put $28 million into FOXO Technologies Inc., a biotech venture backed by GWG founder Jon Sabes.
But GWG no longer controls either of the startup ventures. Mr. Heppner, Mr. Sabes, and their associates carved out both ventures as independent entities shortly before the company collapsed into bankruptcy in April.
The judge overseeing the court proceedings in Houston said he had never before seen a company give up control of everything it owns before seeking chapter 11 protection. GWG, which employed 160 people as of December 2020, is now a shell operation with just two employees remaining and a Securities and Exchange Commission probe.
Read our deep dive on the decline of GWG.
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U.S., European growth stalls. The U.S. and European economies slowed sharply in June as surging prices of energy and food weakened demand for other goods and services, increasing the risk of recessions around the world.
Indicators point to a slowing in the world’s largest economy as U.S. consumers and businesses face rising prices and higher interest rates. New figures on manufacturing and services activity underline how dark the outlook has become in both Europe and the U.S. as Russia’s war in Ukraine hits global growth and central banks raise rates to combat inflation.
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Fed Chairman Jerome Powell said there are some concerning signs that inflation expectations are rising.
PHOTO: WIN MCNAMEE/GETTY IMAGES
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New York's biggest mall avoids default. The owner of the Destiny USA shopping center received a five-year extension for the loans backed by the shopping mall known as New York's largest, averting a potential default by the property.
Since last spring, Pyramid Management Group has sought a restructuring of $430 million in commercial mortgage-backed securities tied to its Destiny USA mall in Syracuse, N.Y., hiring legal and financial advisers for the effort.
The two loans — $130 million and $300 million — were transferred in April to special servicers because of imminent payment default at the upcoming maturity date of June, according to Morningstar. But the company said Thursday that it has "successfully worked with its lender" to extend the loans' maturity by five years.
"Now more than ever, lenders and municipalities are realizing the importance of the operator behind these properties," said Pyramid Chief Executive Stephen J. Congel, who added that the extension allows Pyramid to continue to reinvest in the shopping center.
In addition to the $430 million loans, Destiny USA is also obligated on about $286 million in municipal bond debt that was downgraded deeper into junk territory by Fitch Ratings in May. Pyramid didn't immediately return a request for comment Thursday. — Akiko Matsuda
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Ector County plant goes for $145 million at chapter 11 auction. Texas-based private equity firm Rockland Capital LLC won a bankruptcy auction for a 330-megawatt power plant in western Texas for $144.75 million, according to a notice filed with the U.S. Bankruptcy Court in Wilmington, Del., on Thursday.
Rockland Capital had initially agreed to be the leading bidder, or stalking horse, with a $91.25 million offer for the gas-fired plant owned by Invenergy's Ector County Energy Center LLC. But the firm later increased its bid amount to beat the competition from LS Power Equity Advisors LLC, which submitted a $144.5 million bid.
The sale is subject to court approval. Ector filed for chapter 11 in April, citing financial stress from a breach-of-contract lawsuit as well as 113 pending personal-injury claims in Texas court brought on by the power blackouts that followed a winter storm in February 2021. — Akiko Matsuda
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Latam Airlines exit loan approved. A bankruptcy judge approved $2.75 billion in new loans for Latam Airlines Group SA to partially fund its exit from chapter 11. The $2.75 billion loans consist of a $500 million revolver, a $750 million term loan and two $750 million bridge loans. The debt package was arranged with a consortium of banks, including JP Morgan Chase & Co., Goldman Sachs Group Inc., Barclays PLC, BNP Paribas SA and Natixis SA.
Judge James Garrity of the US Bankruptcy Court in Manhattan authorized the financing following his recent approval of Latam's chapter 11 restructuring plan, which is set to put $5.44 billion of fresh capital into the Chilean airline. — Akiko Matsuda
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Biden administration to cancel $6 billion in student debt over fraud claims. The Biden administration has reached a settlement with more than 200,000 students who said they were defrauded, mostly by for-profit colleges, paving the way for the immediate cancellation of around $6 billion in student loans. The proposed settlement covers a group of borrowers who sued the Education Department in 2019 during the Trump administration, saying their fraud claims were being ignored.
The borrowers had applied for relief using an Obama-era regulation known as the borrower defense to repayment, which allows the Education Department to decide if schools have deceived students about their job prospects or otherwise harmed them financially.
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Cryptocurrency futures exchange CoinFLEX has temporarily halted withdrawals due to the extreme volatility in the cryptocurrency market, as well as "continued uncertainty involving a counterparty," Chief Executive Officer Mark Lamb said in a blog post. (Reuters)
A group of lenders to Bally’s Corp. have hired law firm Willkie Farr & Gallagher LLP to represent their interests after the gaming company asked them to consent to a $1 billion sale-leaseback of two Rhode Island casinos. (Bloomberg)
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