L Bond

What Was a L Bond?

A L bond was a high-yielding debt instrument that financed the purchase of life insurance policies on the secondary market. A type of privately issued, alternative investment, L bonds were the creation of Dallas-based financial services firm GWG Holdings, which stopped selling them on April 16, 2021.

How L Bonds Worked

Life insurance bought from an insurance provider is intended to safeguard the policyholder's beneficiaries in the event of the policyholder's death. An insured party with a life insurance contract can likewise sell the policy in the insurance secondary market. The most common explanations behind this are that they can't bear the cost of the premium payments, are needing cash, or never again need coverage. The investor who purchases the life insurance policy turns into the beneficiary after the transaction is settled. The buyer is responsible for making the premium payments to the insurance company, and when the original policyholder bites the dust, the buyer gets the payout from the insurer.

Life settlement investors buy life insurance policies for more than their surrender value yet not exactly the death benefit of the policies, a strategy known as a viatical settlement. These investors aim to create a gain by adjusting their expected returns to the life expectancy of the seller. In the event that the seller passes on before the expected period, the investor makes a higher return since they will not need to make premium payments any longer. In any case, in the event that the seller lives surprisingly lengthy, the investor procures a lower return. Most investors that invest in these life insurance assets are institutional investors.

On account of L bonds, the issuer utilized the funds to purchase life insurance contracts that were listed on the secondary market, normally because of a life insurance settlement, and assumed responsibility for the associated premium payments. A L bond tried to give a high yield to the bondholder in exchange for bearing the risk that insurance policy premiums or benefits may not be paid.

Companies issue bonds to secure money to conduct a number of tasks. Lenders who purchase bonds are regularly paid a coupon rate (semiannually or annually) however long the bond's life might last. At maturity, the face value of the bond is paid out to the bondholder by the responsible company.

Investors that purchased life insurance policies some of the time financed the initial purchases and comparing premium payments with L bonds. In terms of life insurance settlement transactions, the money raised from giving the L bond was utilized to make the required premium payments to the seller of the life insurance policy.

GWG Holdings and the L Bond

The L bond was a private placement, a specialty high-yield bond made and issued by GWG Holdings (GWGH), a financial services firm situated in Dallas that specializes in alternative assets. The company purchases life insurance contracts from seniors at a discount to their benefit value. In a viatical settlement, for instance, the company could pay a senior $250,000 for their $1 million life insurance policy and assume control more than premium payments of $30,000 every year. At the point when the senior kicks the bucket, the insurance company pays GWG the $1 million benefit. The funds raised from the L bond were utilized to purchase and finance extra life insurance assets.

As of Sept. 30, 2020, the firm's portfolio held 1,081 insurance policies valued at $1.92 billion in benefits. Of that, generally half (46%) — $882 million — was in policies covering individuals 85 and more established.

GWG Holdings had been selling L Bonds starting around 2012. On June 3, 2020, GWG offered a $1 billion L bond issue, and afterward on July 1, 2020, announced a $2 billion offering. Maturity terms of the new bonds ran somewhere in the range of two and seven years. Interest rates were 5.50%, 6.25%, 7.50%, and 8.50% for its two-, three-, five-, and seven-year bonds, individually.

Characteristics of the L Bond

• The bonds were sold in sections of $1,000 and the base investment value for any one investor was $25,000.
• The bonds could be purchased either straightforwardly from GWG Holdings or a Depository Trust Company (DTC) participant.
• A L bondholder had a similar interest rate for the entirety of the bond term. Assuming GWG changed its interest rate for the bond, the investor would have the new rate applied to their bond in the event that they decide to recharge the bond upon maturity.
• At the point when the L bond matured, it was automatically restored to a comparable offering except if it was elected to be redeemed by the investor or the issuer.
• The bonds were callable. The firm maintained whatever authority is needed to call and reclaim any or each of the L bonds whenever without penalty.
• Bondholders couldn't reclaim the bond prior to maturity except if in the event of death, insolvency, or disability. Because of reasons other than the critical conditions referenced above, on the off chance that GWG agreed to reclaim a bond, a 6% penalty fee would be applied and deducted from the amount recovered.
• L bonds were illiquid investments: There was no secondary public market for these offerings. In this manner, the ability to resell these bonds was highly far-fetched. The illiquid characteristic of L bonds intended that on the off chance that the bond performed ineffectively, the bondholder actually needed to hold onto it until maturity or pay a 6% redemption fee to sell it.
• L bonds were not correlated to the market. Accordingly, the volatility of the financial market typically didn't influence the value of the bond.
• In the event of default, claims for payment among the holders of L bonds and other secured debt holders would be dealt with equally and without preference.

Additionally, the interest payments on the bonds were linked to the payout assuming the life insurance policies are purchased in the secondary market. Assuming the insured party carried on with past their life expectancy, or the insurance company that holds the policy becomes bankrupt, the value of GWG's portfolio could drop, leading to a situation in which GWG Holdings may not be able to make its interest payments to its L bondholders.

Special Considerations

GWG failed to file its annual report for the year ending Dec. 31, 2020, and a Form 10-Q for the quarter ending March 31, 2021. In the wake of neglecting to ideal file its 2020 annual report, GWG suspended its offering of L Bonds. Further, several individuals from the Board of Directors reportedly surrendered in the second quarter of 2021.

On Aug. 1, 2021, GWG announced that its board of directors determined that certain recently issued financial statements including its annual report for the year ended 2019, and the quarterly reports for the initial 3/4 of 2020 "ought to never again be depended upon."

Highlights

• A private placement, the L bond financed the purchase of life insurance policies on the secondary market — paying policyholders more than the policy's surrender value.
• L Bonds were highly illiquid — it was basically impossible for bondholders to resell them, besides back to GWG Holdings at a redemption fee.
• The L bond was a specialty high-yield bond made and issued by GWG Holdings (GWGH) from 2012 through 2021.
• GWG Holdings suspended L bond sales in April 2021.
• Highly speculative, the L bond tried to give a high yield to the bondholder in exchange for the risk that insurance policy premiums or benefits may not be paid.

FAQ

Are L Bonds Safe?

L bonds are (or alternately were) unrated by any bond ratings agency. Their issuer, GWG Holdings, stated in plans that: "Investing in our L Bonds might be thought of as speculative and implies a high degree of risk, including the risk of losing your whole investment."

What Is a Private Placement?

A private placement is a sale of stock shares or bonds to pre-chosen investors and institutions instead of on the open market. Somewhat unregulated, it is an alternative to an initial public offering (IPO) for a company seeking to raise capital for expansion. In the event that the issuer is selling a bond, private placement evades the time and expense of getting a credit rating from a bond agency.

Do Bonds Pay Dividends?

No, bonds don't pay dividends-just shares of stock do. Dividends are a portion of a company's profits, distributed on a per-share basis. Notwithstanding, bonds really do make standard payments to the individuals who hold them. Called coupons, these are interest payments — normally at a fixed rate — on the principal amount of the bond.