Silence is not golden for GWG bondholders

No news is bad news for the financial advisers and brokers who sold $1.3 billion of GWG's so-called L Bonds to their clients over the past several years.

Last month, InvestmentNews reported that GWG Holdings Inc., which sold the high-yield bonds through a series of independent contractor broker-dealers, had missed $13.6 million in payments to investors on the L bond series.

Emerson Equity, a San Mateo, California-based broker-dealer, is the lead or managing broker-dealer for the GWG L Bonds, which raised money to finance the acquisition of life insurance policies on the secondary market, or life settlements.

It's not clear how many other broker-dealers also sold the L Bonds, but products of this type are typically sold through a network of a few dozen firms, with Emerson Equity acting as the distributing broker-dealer.

Emerson and GWG are separate companies, but GWG needs Emerson in order to sell its securities to a broader marketplace.

The company offers L Bonds in 2-, 3-, 5- and 7-year maturities that pay annual interest ranging from 5.5% on the short end to 8.5% for the 7-year, according to GWG. The 3-year pays 6.25% and the 5-year pays 7.5%.

As of Jan. 15, GWG Holdings gave itself a 30-day grace period to make the missed payments to bondholders, according to a filing with the Securities and Exchange Commission. Failing to do so would trigger a default.

A month has passed and the company's keeping mum, sending a red alert to clients who bought the bonds and financial advisers who sold them.

In a notice filed with the SEC on Valentine's Day Monday, GWG Holdings CEO Murray Holland said the company was still trying to figure out a plan for its future. In the meantime, investors just have to sit tight and wonder when they're going to get paid.

"While we continue this process, GWG paused L Bond sales and will not make monthly interest and maturity payments on its L Bonds, or dividends on the Redeemable Preferred Stock and Series 2 Redeemable Preferred Stock, while continuing to defer requests for redemptions," Holland wrote. "We know many will have questions, and we don’t yet have all the answers, but we are committed to finding the best path forward."

Clearly, Holland failed to deliver the billet-doux GWG's bondholders were hoping for.

When I asked a company spokesperson earlier this week whether GWG bonds were in default, he declined to comment.

The question overhanging the L bonds, which are backed by life settlements, is what these investments are worth.

It's now two months and counting that L Bond investors, many likely elderly and needing cash, will not get paid.

Another indication of the risk for investors is GWG Holdings' struggles over the past couple of years to report financial statements in a prompt manner as it worked with auditors and the Securities and Exchange Commission to resolve accounting questions. It finally caught up with its missed quarterly reports in December and said at the time that it was going to raise further capital and reopen sales of L Bonds, which it had shut down earlier in 2021.

That didn't work out. The company quickly reversed course last month and stopped selling bonds when it said it was missing its dividend payments to current bondholders.

So confusion reigns regarding GWG's L Bonds. And when a product fails to make interest payments, clients and advisers get nervous.

"GWG in January defaulted on L Bond payments and the grace period was up on Feb. 15," said Jake Zamansky, a plaintiff's attorney. "This was sold as being a relatively safe investment with modest returns. We've been contacted by at least half-a-dozen investors with hundreds of thousands of dollars each invested in this product who plan to file [Financial Industry Regulatory Authority Inc.] arbitration claims."

It's getting ugly very quickly for the GWG L bonds, their investors, and the financial advisers and brokers who sold them.