Philip Morris IV Posted April 30, 2014 Share Posted April 30, 2014 I have a structured settlement, but I need cash now. Who should I call? All the U.S. members here know this company -- it's J.G. Wentworth. Their ads of opera singers and people happily shouting out of windows have established quite the "share of mind," heh. ;D They also own Peachtree Holdings, formerly the #2 player. I saw this idea on Kerrisdale's website and thought to float it to the board. Attached below is Kerrisdale's 42-page report on JGW, which lays out everything far better than I ever could. At a cursory glance -- the economics of this business look superb, the stock clearly has a moat and is very cheap. Quick points: - Stock is low $14s now, intrinsic value reasonably between $20-30, with both organic and acquisition-related growth potentials. - By an enormous margin, the undisputed leader with 60% market share in a fragmented industry. - They are the GEICO of structured settlements: low cost model, excellent underwriting with low credit risk, best discount rates offered to annuitants and direct marketing nationwide. - Only player with established access to the securitization markets for bundled resales of settlement portfolios, with a pristine track record of high credit quality issuances. Confusing financials and a lack of good comps are likely contributing to a mispricing here at 7x Forward P/E. The closest comps, Springleaf Holdings and Santander Consumer USA, are in industries with significantly more credit risk and competition, yet trade at 14x and 10x P/Es respectively. Some hairiness is their less-than-ideal corporate history. Legacy PE owner JLL Partners retains 32% ownership and 62% voting power, and has previously levered the business to extract cash. They had a quick, pre-packaged BK event in 2009 when the credit and securitization markets froze (even for their high-quality issuances) and faced a minor liquidity crunch. They however emerged unscathed, and have since greatly diversified their access to credit. Attached is Kerrisdale's report from February when the stock was $16-17. In addition, they have been responsive to comments on their seeking alpha post: http://seekingalpha.com/article/2042363-jgwpt-dominant-franchise-in-a-lucrative-niche-has-75-percent-upside 877-CASH-NOW!JGWPT-Holdings-JGW_Kerrisdale.pdf Link to comment Share on other sites More sharing options...
gg Posted April 30, 2014 Share Posted April 30, 2014 I've followed this company a little bit since the Kerrisdale report. It seems like a truly phenomenal business, and I think the GEICO comparison is actually quite valid in this case. I believe the shares tanked after the most recent earnings release for two reasons: (1) lower than expected revenues, and (2) an announcement of a Consumer Financial Protection Bureau investigation. Regarding #2, from the 10-K: "In March 2014, the Company and certain of its affiliates were served with Civil Investigative Demands (“CIDs”) from the U.S. Consumer Financial Protection Bureau (the “CFPB”). The CIDs request various information and documents for the purpose of determining the Company’s compliance with Sections 1031 and 1036 of the Consumer Financial Protection Act of 2010, 12 U.S.C. §§ 5531, 5536; the Truth in Lending Act, 15 U.S.C. §§ 1601 et seq., or its implementing regulations, and other Federal-consumer financial laws. The CIDs appear to be designed to broadly solicit general information about the Company and its business. We believe that the Company’s practices are fully compliant with applicable law, and we intend to cooperate with the CFPB." Link to comment Share on other sites More sharing options...
Kraven Posted April 30, 2014 Share Posted April 30, 2014 Structured settlements are perhaps one notch above life settlements on the "let's attract the slimiest people in the world to work here" scale. A used car salesman looks at those guys and and says to himself "man, that's a scummy business". Link to comment Share on other sites More sharing options...
yadayada Posted April 30, 2014 Share Posted April 30, 2014 . JGW's primary business, accounting for 88% of its revenue, is acquiring structured-settlement payment streams from individuals and reselling them at a higher price to institutional bond investors. what does this mean? Explained to someone who might have been hit on the head a bit too much. @kraven: out of all the loanshark type loanes, these seem the least bad? Folks turn to JGW because the discount rates it charges are very attractive compared to the costs of alternative sources of liquidity like credit cards (19-24% for subprime borrowers), payday loans (>100%), and non-bank installment loans (18-36%). Link to comment Share on other sites More sharing options...
Kraven Posted April 30, 2014 Share Posted April 30, 2014 . JGW's primary business, accounting for 88% of its revenue, is acquiring structured-settlement payment streams from individuals and reselling them at a higher price to institutional bond investors. what does this mean? Explained to someone who might have been hit on the head a bit too much. @kraven: out of all the loanshark type loanes, these seem the least bad? Folks turn to JGW because the discount rates it charges are very attractive compared to the costs of alternative sources of liquidity like credit cards (19-24% for subprime borrowers), payday loans (>100%), and non-bank installment loans (18-36%). Yada, it just means that they are being bundled together and securitized. Someone will be entitled to a settlement that is being paid to them over time. Think of it like a bond which amortizes over time. The company will buy the rights to that settlement and the corresponding payments for some amount which ensures that the company will get a very nice return on their money. These settlements will be packaged together and securitized with the resulting bonds sold to investors. If done properly a lot of money can be made because they will be paying less to individuals to purchase the settlement than they are sold into the securitization vehicle for. Ideally (for them), turn around is quick and they pocket the "spread" quickly. Are they the least bad? Impossible to say. It's like choosing whether you like to get kicked in the left nut or right nut better. Link to comment Share on other sites More sharing options...
yadayada Posted April 30, 2014 Share Posted April 30, 2014 yes but let's say you get a settlement paid over time, and you need money now, these guys are your best option if you dont have acces to cheap credit. Is that really a rip off? Just seems like they serve a niche. Also it seems their moat is basicly cheap financing right? Which comes with size. Link to comment Share on other sites More sharing options...
Kraven Posted April 30, 2014 Share Posted April 30, 2014 yes but let's say you get a settlement paid over time, and you need money now, these guys are your best option if you dont have acces to cheap credit. Is that really a rip off? Just seems like they serve a niche. Also it seems their moat is basicly cheap financing right? Which comes with size. I am not commenting on the business, which is fine for what it is. I am talking about the people themselves. The analogy I guess is that there is nothing wrong with buying (or selling) a used car, but the people who tend to find themselves working in that business may not be the most upstanding individuals. Link to comment Share on other sites More sharing options...
oddballstocks Posted April 30, 2014 Share Posted April 30, 2014 yes but let's say you get a settlement paid over time, and you need money now, these guys are your best option if you dont have acces to cheap credit. Is that really a rip off? Just seems like they serve a niche. Also it seems their moat is basicly cheap financing right? Which comes with size. Here's an example I found online, you can be the judge of whether this is a good or bad deal: Here's a better example: You are injured and you use a personal injury attorney who takes your case on a contingency basis. You pay nothing up front, but you pay him/her 30-35% (or sometimes more) if he wins. Okay, you win. You get a million $$. Where does it go? The attorney get his 35%, so you get $650,000. As Michael says, you're a bad risk, so you get your 650,000 paid out over 20 years at $32,500 a year. But, as the ad says, "It's my money and I want it now." Fine, says JG Wentworth, we'll give you $325,000 for your $650,000 pay out, You say okay. Now, your $1 million is down to $325,000. But, since you took a lump sum from Wentworth,you owe taxes at a high rate (I forget the max rate, but let's say 35%). So, after taxes you have $211,250. Your $1 million has turned into about 20% of the original total and everybody but you has made plenty of money. Additionally many times a settlement is paid out over a period of time because the judge and court determines that the person receiving the settlement isn't a good risk and shouldn't have a lump sum. So Wentworth comes in and does an end around giving the person the money up front to squander. I seem to remember you were Belgian or European. I don't know if this stuff exists over there, but it has a certain stigma that Kraven hit on in the US. A JG Wentworth commercial will usually be found at 11am on a Tuesday during the Price is Right, or at 1am right after get rich with real estate infomercial. These are very slimy businesses. There was a thread on life settlements here a while back and I remember it took a similar path. All of the Americans deriding the company and a few Europeans piling in because the numbers looked good. Maybe these things work out well, all I know is there is a certain reputation associated with people in this industry. I wouldn't feel safe loaning them $20, so why would I want them to manage my investment? Link to comment Share on other sites More sharing options...
racemize Posted April 30, 2014 Share Posted April 30, 2014 What does you're a "bad risk" mean? That you are likely to waste the money? Link to comment Share on other sites More sharing options...
oddballstocks Posted April 30, 2014 Share Posted April 30, 2014 What does you're a "bad risk" mean? That you are likely to waste the money? Yes. Waste, and waste it quickly. Examples I found discussed settlements for children where the parents were likely to squander the money before the child received any. JG Wentworth provides a way for parents to get the cash to spend it before the child can receive it. Link to comment Share on other sites More sharing options...
racemize Posted April 30, 2014 Share Posted April 30, 2014 What does you're a "bad risk" mean? That you are likely to waste the money? Yes. Waste, and waste it quickly. Examples I found discussed settlements for children where the parents were likely to squander the money before the child received any. JG Wentworth provides a way for parents to get the cash to spend it before the child can receive it. Interesting. I guess the lottery works in a similar fashion? I've always thought they did the payouts over a longer period so they wouldn't have to pay it all out at once, rather than to protect the receiver. It seems like it makes more sense for the children case you mention, but when it is just protecting you from yourself, it seems like an odd thing for the legal system or payer to be in control of it. That being said, they are probably right in general. I'm just not sure it makes sense on principle. Anyway, I'll stop my side-tangent. Carry on! Link to comment Share on other sites More sharing options...
petey2720 Posted April 30, 2014 Share Posted April 30, 2014 See attached article regarding an attorney who referred his personal injury client/victim to a lender who charged a 60% interest rate in Chicago. Related_Article_4-2-2014.pdf Link to comment Share on other sites More sharing options...
ItsAValueTrap Posted April 30, 2014 Share Posted April 30, 2014 Interesting. I guess the lottery works in a similar fashion? I've always thought they did the payouts over a longer period so they wouldn't have to pay it all out at once, rather than to protect the receiver. The net present value of $1m paid out over a very long period of time is much lower than $1M paid out all at once. That's another explanation? Link to comment Share on other sites More sharing options...
Philip Morris IV Posted April 30, 2014 Author Share Posted April 30, 2014 RE: the sliminess of the business. Not denying it, but a few things to keep in mind: 1. All of JGW's transactions are individually court-approved by judges, which might raise some skepticism to the claim that JGW skirts the civil justice system. 2. JGW's average discount rate of 11% is noticeably lower than its closest competitors (16-17%) and dramatically lower than comparable sources of liquidity (CCs, payday, subprime loans etc.). 3. The combination of direct/inbound marketing (not employing a slimy outbound salesforce) and not-a-lender business model is arguably less predatory than the alternatives. While it is clear that JGW resides in a shady neighborhood, I would say they are the nicest house on the block. More like getting kicked in the gut vs. the nuts. :) RE: the moat. I see the moat coming from more than just scale/cost. There are network effects on both sides of their business: share of mind to the public, and their superior access and track record in the securitization markets to the bond investors/institutions. Their reputation in both the bond markets and court system presents a high barrier to entry for competition specifically at their level. Link to comment Share on other sites More sharing options...
racemize Posted April 30, 2014 Share Posted April 30, 2014 Interesting. I guess the lottery works in a similar fashion? I've always thought they did the payouts over a longer period so they wouldn't have to pay it all out at once, rather than to protect the receiver. The net present value of $1m paid out over a very long period of time is much lower than $1M paid out all at once. That's another explanation? yeah, that's what I meant--I didn't say it very well though. Link to comment Share on other sites More sharing options...
yadayada Posted April 30, 2014 Share Posted April 30, 2014 Interesting, allthough there will probably always be demand for? There will always be shady people, there will always be people who cannot wait and always people who want to rob their children. I see a few reasons to not invest here - just difficult to understand the underlying mechanics of the business (still can't figure out why they went chapter 11? and how that is changed now? among other things) - Moral reasons - Revenue seems to be trending down? your already paying up at 7-8 earnings. The assumption is this is a growth company with a nice moat. And not a company that is shrinking. Last year revenue went down, and the trend seems to continue so far this year. - Advertising moat? Did some googling, and their name wasnt the first that came up. ALlthough maybe they dominate other mediums? Link to comment Share on other sites More sharing options...
beerbaron Posted May 1, 2014 Share Posted May 1, 2014 - just difficult to understand the underlying mechanics of the business (still can't figure out why they went chapter 11? and how that is changed now? among other things) Haven't read the prospectus but I can easily speculate how it happened. 1- They make promises to pay their customers fully expecting to access capital market (by Securitization) 2- They keep no cash in the bank because they can securitize. 3- Capital market freeze. They can't pay their customers. 4- They are deep s***. 5- They file chapter 11. Protecting them from their customer while they search for a loan. 6- They get a loan at an usury rate 7- They pay their customer and return to business. Credit freeze are not likely to happen any time soon. BeerBaron Link to comment Share on other sites More sharing options...
matjone Posted May 1, 2014 Share Posted May 1, 2014 What is so risky about these things that they get such a high discount rate? Link to comment Share on other sites More sharing options...
beerbaron Posted May 1, 2014 Share Posted May 1, 2014 What is so risky about these things that they get such a high discount rate? Nothing, illiquidity itself makes the possibility for "arbitrage". I suggest you read the Kerrisdale Capital document. Very informative but way too optimistic for me. Still an interesting training on an industry I had never heard of before today. BeerBaron Link to comment Share on other sites More sharing options...
Philip Morris IV Posted May 1, 2014 Author Share Posted May 1, 2014 The bankruptcy is reviewed on p. 32 of Kerrisdale's report. The basic story is as follows: - Because JGW only issues 3-4 securitizations per year, it relies on its secured credit facilities to finance the day-to-day, including the cash outflows to purchase settlements. - In typical PE fashion, shortly after JLL acquired its controlling interest in 2005, it extracted dividends from the business by levering it up with a term loan. - In early 2009 as the credit and securitization markets both froze, JGW faced a double-whammy. Despite its still-highly creditworthy issuances, it could not securitize on schedule, and its single credit financier, Deutsche Bank (then facing its own problems) decided to mark down their collateral, alter the facility terms, and issue margin calls. - The resulting margin calls left JGW short on cash just in time for an interest payment on their term loan, therefore marshaling it into Ch. 11. - In Ch. 11, the lenders simply exchanged their debt for equity, JLL returned $100M to JGW, and business resumed with little disruption. In my opinion, JGW was a victim of circumstance. The reasons and events leading into the BK appear to be external to their regular operations and earnings power. Nonetheless, they now utilize five lenders for financing with no provisions for mark-down margin calls or on-the-fly term changes. It is also worth noting that throughout this saga, their issuances never missed a payment, keeping their sterling track record in tact. @matjones - The settlements are actually very low-risk because they are funded by insurance companies, and JGW is also an effective underwriter. As beerbaron noted, the higher discount rates reflect a liquidity premium. The beauty of JGW's business model is that by purchasing settlements outright (instead of loaning against them), they absolve all parties of the credit risk of the customer. This allows them to offer and resell at lower and lower discount rates. I have to review the revenue trends deeper, but at the moment I see a strong moat, great economics, cheap valuation and "necessary evil"-type business. I won't comment further on morality as I believe that is a decision we all make individually. Link to comment Share on other sites More sharing options...
investor-man Posted May 15, 2014 Share Posted May 15, 2014 JGW is down 20% today so I thought I'd search for this thread, and found it. Anyone have any insight into why this dropped so much? Link to comment Share on other sites More sharing options...
Gamecock-YT Posted May 15, 2014 Share Posted May 15, 2014 Someone wanted their money and they wanted it now. Link to comment Share on other sites More sharing options...
no_thanks Posted May 15, 2014 Share Posted May 15, 2014 Someone wanted their money and they wanted it now. Ha, this has to be a contender for post of the year :) But seriously, that was a really bad day yesterday. Link to comment Share on other sites More sharing options...
bizaro86 Posted May 15, 2014 Share Posted May 15, 2014 Someone wanted their money and they wanted it now. So, I only read the headlines...Is there a reason the 25% decrease in revenue and 60% decrease in profits isn't a really bad thing? Link to comment Share on other sites More sharing options...
yadayada Posted May 15, 2014 Share Posted May 15, 2014 I think if you have to ask, better not invest :D Link to comment Share on other sites More sharing options...
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