Rating Action: Moody’s assigns definitive ratings to a J.G. Wentworth securitization of structured settlements
Approximately $158 million of asset-backed securities affected
New York, July 28, 2015 — Moody’s Investors Service has assigned definitive ratings to Notes issued by J.G. Wentworth XXXV LLC (the Issuer), an indirect wholly owned subsidiary of J.G. Wentworth Originations LLC (the Sponsor), collateralized by a pool of structured settlement payments, assignable annuity streams and lottery payments.
The complete rating action follows:
Issuer: J.G. Wentworth XXXV LLC, Series 2015-2
$142,126,000 Class A Fixed Rate Asset Backed Notes, Definitive Rating Assigned Aaa (sf)
$16,350,000 Class B Fixed Rate Asset Backed Notes, Definitive Rating Assigned Baa2 (sf)
It should be noted that final amounts of each class are slightly higher than the amounts that were assigned provisional ratings on 20 July 2015. Specifically, the Class A Notes were increased by approximately $2,954,000 and the Class B Notes were increased by approximately $340,000, resulting in an increase in the total issuance of approximately $3,294,000. Nevertheless, the deal’s structure and the subordination levels were not changed and the definitive ratings of the Notes with these higher balances are based on the same methodology that was used to assign the provisional ratings (see below). The higher amounts are due to the lower final interest rate on the notes when priced as compared to the assumed rate that was used for the provisional ratings.
Moody’s ratings on the Notes reflect its assessment of the quality of the court-ordered structured settlement payment streams, annuity receivables and lottery payments, the creditworthiness of the obligors, the servicing arrangement, and the structural and legal features. The structure of this securitization is very similar to that of the Sponsor’s previous transactions, except that this one, like all the Sponsor’s transactions issued since 2013, includes a small pool of lottery receivables constituting around 4.01% of the present value of the receivables.
These lottery receivables are from lottery winnings in eight states. The origination procedures of lottery receivables in these states are similar to those of structured settlements: The purchase of a lottery payment is subject to a state-specific transfer statute and to court approval. Moody’s believes that the lottery receivables in this transaction have legal protections and assurances about the irreversibility of the acquisition of payments that are similar to a court-ordered structured settlement.
The main driver of credit risk in this transaction is the obligor base. As in the Sponsor’s previous securitizations, the pool of obligors is primarily highly rated life insurance companies, of which approximately 78% (based on the present value of the securitized receivables) have an insurance financial strength rating of A3 or higher.
The Issuer’s assets include court-ordered structured settlement payments (around 91.76% of the present value of the receivables), annuity receivables (around 4.22% of the present value of the receivables), and lottery receivables (around 4.01% of the present value of the receivables), a reserve account with around $1,006,199, a capitalized interest account with approximately $629,000, and a prefunding account with approximately $63,390,561. The prefunding account constitutes approximately 40% of the balance of the Notes. Amounts on deposit in the prefunding account will be used to acquire additional receivables within ninety days after closing. The addition of new receivables will be subject to eligibility criteria and to a Rating Agency Condition from Moody’s stating that it will not downgrade, place under review for possible downgrade or withdraw its ratings of the Notes solely as a result of the acquisition of additional receivables. Any amount remaining in the prefunding account at the end of the ninety days prefunding period will be deposited into the collection account and distributed, on a pro rata basis, to the Class A Notes and the Class B Notes. Please see Moody’s 2010 Special Comment, “Moody’s Clarifies Policy for the Issuance of RACs,” which makes clear that the provision of a RAC remains entirely within Moody’s discretion, and it may be that Moody’s will not provide a RAC even if the transaction documents (to which Moody’s is not a party) require it.
The servicing arrangement reduces the risk of a servicing disruption. J.G. Wentworth Management Company, LLC (JGW Management) will act as the master servicer. In addition, Portfolio Financial Servicing Company (PFSC) will act as hot back-up servicer. We believe that servicing disruption risk is adequately mitigated by US Bank National Association (US Bank; Aa1 Stable, aa3, P-1), as the trustee, assuming responsibility for finding a successor servicer. If US Bank is unable to find a successor servicer, then US Bank will act as Master Servicer.
The transaction has a turbo structure in which the trustee acting as paying agent distributes all collections, net of certain fees and expenses, to, first, pay interest payments on the Notes and, second, pay down the Notes’ outstanding principal balance until paid in full.
The Class A Notes benefit from 15.25% subordination in the form of the Class B Notes and Issuer Interest. Note that this is an increase from the 14.75% subordination in the Sponsor’s most recent securitization. The Class A subordination is expected to increase over time as the Class B Notes will not receive any principal payments in the first 48 months after the closing date and the Issuer Interest will not receive any principal until all the Notes are paid in full. Performance triggers provide additional protection to the Class A Notes.
The Class B Notes benefit from 5.50% subordination provided by the Issuer Interest. In addition, the ratings of the Class B Notes take into account that Class B noteholders will not receive principal payments in the first four years and the possibility that, due to structural features, Class B noteholders may cease to receive any payments until the Class A interest and principal are paid in full.
Finally, the Notes benefit from a non-declining reserve account equal to 1% of the initial present value of the receivables; if additional receivables are added to the pool during the prefunding period, the amount on deposit in the reserve account and the target reserve account balance will increase accordingly.
The principal methodology used in this rating was “Moody’s Approach to Rating Transactions Backed by Structured Settlements” published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
For the lottery receivables that constitute a small percentage of the total pool in this transaction (around 4.01% of the present value of the receivables), Moody’s used a quantitative approach similar to the one the agency uses for structured settlements, with different assumptions. Moody’s assumed (1) a probability of default consistent with high-investment-grade securities for the lottery obligors (i.e., the lottery commissions); (2) a very low recovery rate in the event of the lottery obligor’s default; (3) payments of tax withholdings on the lottery payments in the third quarter of the subsequent year; and (4) a high correlation of default among the lottery obligors and a lower correlation of default between the lottery obligors and the other obligors in the pool.
In addition, for this transaction, Moody’s qualitative analysis focused primarily on evaluating (1) servicing disruption risk; (2) cash management; and (3) payment diversion risk.
Servicing disruption risk
Under the transaction’s terms, JGW Management will be the initial Master Servicer. In this role, JGW Management will be responsible for billing, servicing, administering, and making collections on the securitized receivables. JGW Management will also be responsible for directing the paying agent, US Bank, to make monthly distributions in accordance with the priority of payments. JGW Management has the experience and expertise to conduct the day to day servicing of the collateral. To provide for a seamless servicing transition, PFSC will act as the Backup Servicer in the transaction. US Bank, as the Trustee, is responsible for finding a successor servicer. If US Bank is unable to find a successor servicer, then US Bank will act as Master Servicer.
Obligors will deposit payments into lockbox accounts that are (1) in the name and control of DBTCA; (2) in the name of Receivables Collections, LLC, a bankruptcy-remote special purpose entity, and under the control of US Bank; (3) in the name of Peachtree Finance Company #2, LLC, a bankruptcy-remote special purpose entity and under the control of Wells Fargo Bank; (4) in the name of Structured Receivables Finance #1, LLC, a bankruptcy-remote special purpose entity under the control of SunTrust Bank; or (5) US Bank Lottery Lockbox. Lottery tax refunds may come in the forms of checks sent to the applicable address of the 2015-2 Lottery SUBI set forth on the appropriate tax return forms. In such event, the servicer will promptly deposit or cause such collections to be deposited into a US Bank Lottery Lockbox.
Within four business days, at most, after amounts become available in the lockbox (for example, when an obligor’s check clears), funds will be transferred into a US Bank Trustee Account. US Bank shall distribute amounts on deposit in the US Bank Trustee Account every day to the Series 2015-2 Collection Account at US Bank, and in the name of US Bank, as indenture trustee, for the benefit of the noteholders. The cash management arrangement is designed to isolate the flow of funds to the transaction from the Sponsor and/or JGW Management, and therefore should benefit the transaction in the event that the Sponsor and/or JGW Management files for bankruptcy. In Moody’s view, therefore, the cash management arrangement is consistent with the Aaa (sf) ratings assigned to the senior Notes.
Payment diversion risk
Payment diversion risk arises from settlement claimants attempting to divert payments from the securitization. This risk is low because approximately 91.76% of the present value of the receivables will consist of court-ordered transfers of structured settlement receivables. Court-ordered transfers of structured settlements consist of receivables created following enactment of the Victims of Terrorism Tax Relief Act of 2001, which stipulates that the sale of a structured settlement receivable must be subject to a court order directing the structured settlement obligors to remit payments to a given party. Therefore, the Issuer’s right to receive settlement payments is backed by strong legal protections. In addition, approximately 4.01% of the present value of the receivables will consist of lottery receivables. The purchase of a lottery payment is subject to a state-specific transfer statute and to court approval, resulting in legal protection against payment diversion risk similar to that of structured settlements.
Factors that would lead to an upgrade or downgrade of the rating:
An upgrade of the Class B Notes is unlikely in the near term due to the fact that Class B noteholders will not receive principal payments in the first four years and the possibility that, due to structural features, Class B noteholders may cease to receive any payments until the Class A interest and principal are paid in full.
Moody’s could downgrade the ratings of the Notes if the credit risk profile of the obligors (primarily life insurance companies) were to deteriorate significantly, as reflected by a downgrade of one or more of the obligors’ credit ratings.
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.
Further information on the representations and warranties and enforcement mechanisms available to investors are available onhttp://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF414647
The analysis relies on a Monte Carlo simulation that generates a large number of collateral loss or cash flow scenarios, which on average meet key metrics Moody’s determines based on its assessment of the collateral characteristics. Moody’s then evaluates each simulated scenario using model that replicates the relevant structural features and payment allocation rules of the transaction, to derive losses or payments for each rated instrument. The average loss a rated instrument incurs in all of the simulated collateral loss or cash flow scenarios, which Moody’s weights based on its assumptions about the likelihood of events in such scenarios actually occurring, results in the expected loss of the rated instrument.
Moody’s did not use any stress scenario simulations in its analysis.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The following information supplements Disclosure 10 (“Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7”) in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:
Moody’s was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody’s to determine this credit rating.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Asst Vice President – Analyst
Structured Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Luisa De Gaetano
Senior Vice President
Structured Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
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