$2 billion in GWG junk bonds sold by advisers are under pressure

GWG Holdings Inc., an alternative asset manager that issued a series of high-yield bonds known as L Bonds, has severely stumbled of late, most recently stating it had missed $13.6 million in combined interest and principal payments for its L Bonds series.

GWG has a 30-day grace period to make the payments, according to a Jan. 18 filing with the Securities and Exchange Commission. If it fails to do so, it triggers a default.

GWG's auditor, Grant Thornton, resigned at the end of December, always a troubling signal for a financial services firm. At the time, Grant Thornton said its most recent audit did not contain an adverse opinion about the company and there was no disagreement between the auditor and GWG, according to a filing with the SEC.

GWG has been delayed in filing its financial statements with the Securities and Exchange Commission, inhibiting its ability to raise fresh capital from investors. GWG until recently had invested in life settlements, but it wasn't clear to what extent the L Bonds were backed by life settlements.

Topping off the company's woes is its stock price, which has fallen from a recent high of $10.55 per share in November to a fresh low of $3.81 in Wednesday afternoon trading, for a decline of 63.9%.

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. Last month, in an unrelated matter, the Financial Industry Regulatory Authority Inc. penalized Emerson Equity $1.7 million for years of poor supervision of short-term mutual fund trades. 

In that settlement, Finra characterized Emerson Equity as having 200 registered reps and financial advisers in 50 offices, with a focus primarily on selling private placements.

An industry source, who asked not to be named, said GWG could have issued as much as $2 billion of high-yield bonds over the past several years; the securities are 7-year bonds with yields of 8.5%, making them particularly attractive to investors in the recent low-interest-rate environment.

Along with Emerson Equity as the managing broker-dealer, which is akin to a lead underwriter in traditional investment banking terms, dozens, if not hundreds, of other broker-dealers and registered investment advisers could have sold the product.

There has 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.

When the issuer of a high-yield investment product announces it has a series of obstacles like those facing GWG, financial advisers and firms that sold the investments take notice.

GWG is looking for options but is trying to avoid a fire sale, according to a letter posted Monday on the company's website and signed by CEO Murray Holland.

The company has "paused L Bond sales retroactively to January 10, 2022, while [it] works with its advisors to identify and evaluate options available to the company," Holland wrote. "While asset sales may provide near-term liquidity, the value the company expects to receive in those transactions would likely be at a significant discount to the fair market value of the assets."

The company believes that pursuing such transactions would not be in the best interests of bond holders at the moment, Holland wrote.

GWG "is working with legal and restructuring advisors to identify and evaluate alternatives with respect to its capital structure, with a clear objective of maximizing the value of GWGH’s assets and meeting its financial obligations," a company spokesperson wrote in an email.

Messages left Wednesday for Emerson Equity's president, Tim Sullivan, were not returned.

GWG announced in the filing last Tuesday with the SEC that a few days earlier, it had missed its L Bond interest payments of $10.35 million and $3.25 million of principal payments.

In that same filing, GWG said it was looking to restructure, with its board of directors having authorized management to hire a restructuring adviser, which the company expects will be FTI Consulting Inc., with Mayer Brown as legal adviser.