The following discussion should be read in conjunction with the accompanying condensed consolidated financial statements and accompanying notes and the information contained in other sections of this report. This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Unless the context otherwise indicates, all references in this Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, to the "Company," "we," "us," "our" or "ours" or similar words are toGWG Holdings Inc. and its direct and indirect wholly-owned and consolidated subsidiaries, references to "GWG Holdings " refer toGWG Holdings Inc. , references to "GWG Life" refer toGWG Life, LLC (a wholly-owned subsidiary ofGWG Holdings ), references to "DLP IV" refer toGWG DLP Funding IV, LLC (a wholly-owned subsidiary of GWG Life), references to "DLP V Holdings " refer toGWG DLP Funding V Holdings, LLC (a wholly-owned subsidiary of GWG Life), references to "DLP V" refer toGWG DLP Funding V, LLC (a wholly-owned subsidiary ofDLP V Holdings ), references to "DLP VI Holdings " refer toGWG DLP Funding Holdings VI, LLC (a wholly-owned subsidiary of GWG Life), references to "DLP VI" refer toGWG DLP Funding VI, LLC (a wholly-owned subsidiary ofDLP VI Holdings ), references to "Ben LP" refer toThe Beneficient Company Group, L.P. (a consolidated subsidiary ofGWG Holdings ), references to "Beneficient" refer toBen LP and all of its consolidated subsidiaries, references to "BCH" refer toBeneficient Company Holdings, L.P. (of whichBen LP is the general partner), references to "Beneficient Management" refer toBeneficient Management, L.L.C. (the general partner ofBen LP ), references to "BCC" refer toBeneficient Capital Company, L.L.C. (a subsidiary ofBen LP ), references to "BACC" refer toBeneficient Administrative and Clearing Company, L.L.C. (a subsidiary ofBen LP ), references to "Pen" refer toPen Indemnity Insurance Company, LTD (a subsidiary ofBen LP ), references to "Ben Markets" refer toBen Markets L.L.C. (a subsidiary ofBen LP ), references to "FOXO" refer toFOXO Technologies Inc. (formerly,FOXO BioScience LLC , an equity investee ofGWG Holdings ), references to "FOXO Labs " refer toFOXO Labs Inc. (formerly,Life Epigenetics Inc. , a wholly-owned subsidiary of FOXO), references to "FOXO Life" refer toFOXO Life LLC (formerly, youSuranceGeneral Agency, LLC , a wholly-owned subsidiary of FOXO), and references to the "ExAlt PlanTM" refer to a trust structure comprising customized trust vehicles (the "ExAlt Trusts" and each, an "ExAlt Trust ") . Risk Relating to Forward-Looking Statements This report contains forward-looking statements that reflect our current expectations and projections about future events. Actual results could differ materially from those described in these forward-looking statements. The words "believe," "could," "possibly," "probably," "anticipate," "estimate," "project," "expect," "may," "will," "should," "seek," "intend," "plan," "expect," or "consider" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from such statements. Many of the forward-looking statements contained in this report can be found in the following discussion and analysis. Such risks and uncertainties include, but are not limited to: •substantial doubt about our ability to continue as a going concern; •the valuation of assets reflected on our financial statements; •the illiquidity of our life insurance investments and receivables from affiliates; •the continued success of the alternative assets industry; •our ability to realize the anticipated benefits from our consolidation of Beneficient; •Beneficient's financial performance and ability to execute on its business plan; •Beneficient's ability to obtain the trust company charter from theTexas Department of Banking and its trust bank charter from theKansas State Bank Commissioner necessary to implement its business plan; •changes resulting from the evolution of our business model and strategy with respect to Beneficient and the life insurance secondary market; •our reliance on debt financing and continued access to the capital markets; •our significant and ongoing financing requirements; •our predominant use of short-term debt to fund a portfolio of long-term assets could result in a liquidity shortage; Page 51 -------------------------------------------------------------------------------- •our ability to make cash distributions in satisfaction of dividend obligations and redemption requests; •our ability to satisfy our debt obligations if we were to sell our assets; •general economic outlook, including prevailing interest rates; •the novel coronavirus pandemic, the ongoing economic downturn and its impact on our business; •federal, state,FINRA and other regulatory matters; •litigation risks; •our ability to comply with financial and non-financial covenants contained in borrowing agreements; •the reliability of assumptions underlying our actuarial models, including life expectancy ("LE") estimates and our projections of mortality events and the realization of policy benefits; •risks relating to the validity and enforceability of the life insurance policies we purchase; •our reliance on information provided and obtained by third parties, including changes in underwriting tables and underwriting methodology; •life insurance company credit exposure; •cost-of-insurance (premium) increases on our life insurance policies; •performance of our investments in life insurance policies; and •risks associated with our investment inFOXO Technologies Inc. (formerlyFOXO BioScience LLC ). We caution you that the foregoing list of factors is not exhaustive. Forward-looking statements are only estimates and predictions, or statements of current intent. Actual results, outcomes or actions that we ultimately undertake could differ materially from those anticipated in the forward-looking statements due to risks, uncertainties or actual events differing from the assumptions underlying these statements. We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Overview We are an innovative financial services firm based inDallas, Texas that is a leader in providing unique liquidity solutions and services for the owners of illiquid investments. In 2018 and 2019,GWG Holdings and GWG Life consummated a series of transactions withThe Beneficient Company Group, L.P. ("Ben LP" including all of the subsidiaries it may have from time to time - "Beneficient"), as more fully described in Note 1 to our accompanying condensed consolidated financial statements in this Form 10-Q. OnDecember 31, 2019 ,GWG Holdings obtained the right to appoint a majority of the board of directors of Beneficient Management. As a result of this change-of-control event,GWG Holdings reported the results of Beneficient on a consolidated basis beginning on the transaction date ofDecember 31, 2019 . As further described in Note 17 to the accompanying condensed consolidated financial statements, onAugust 13, 2021 ,GWG Holdings ,Ben LP , and BCH entered into a non-binding term sheet (the "Term Sheet") that contemplates a series of transactions, which, once completed, is expected to result in, among other things, the deconsolidation of Beneficient fromGWG Holdings . Beneficient is a financial services company, based inDallas, Texas , that markets an array of liquidity and trust administration products to alternative asset investors primarily comprised of mid-to-high-net-worth individuals having a net worth between$5 million and$30 million ("MHNW") and small-to-midsize institutional investors and family offices with less than$1 billion in investable assets ("STMIs"). Ben LP plans to offer its products and services through its five operating subsidiaries, which include (i)Ben Liquidity, L.L.C. and its subsidiaries (collectively, "Ben Liquidity"), (ii)Ben Custody, L.L.C. and its subsidiaries (collectively, "Ben Custody Admin"), (iii)Ben Insurance, L.L.C. and its subsidiaries (collectively, "Ben Insurance"), (iv)Ben Markets, L.L.C. , and its subsidiaries (collectively, "Ben Markets") and (v)The Beneficient Company Group (USA ), L.L.C ("Beneficient USA "). Ben Liquidity plans to operate a trust company that is a Kansas Technology Enabled Fiduciary Financial Institutions ("TEFFI") authorized to serve as an alternative asset custodian, trustee and lender with statutory powers granted for each of these activities and permitting Ben Liquidity to provide fiduciary financing for certain of its customer liquidity transactions. Ben Custody Admin plans to operate aTexas trust company that is being organized to provide its customers with certain administrative, custodial and trustee products and specialized services focused on alternative asset investors. Ben Insurance has been chartered as aBermuda based insurance company that plans to offer certain customized insurance products and services covering risks relating to owning, managing and transferring alternative assets. Ben Markets is in the regulatory process for acquiring a captive registered broker-dealer that would conduct certain of its activities attendant to offering a suite of products and services from the Beneficient family of companies. Certain ofBen LP's operating subsidiary products and services involve or are offered to certain of the ExAlt Trusts, which operate for the benefit of the Non-Controlling Interest Holders, and are consolidated subsidiaries ofBen LP for financial reporting purposes (such trusts are and may Page 52 -------------------------------------------------------------------------------- individually be referred to as Custody Trusts, Collective Trusts, LiquidTrusts, and Funding Trusts).Beneficient USA employs a substantial majority of the executives and staff for Beneficient's operating subsidiaries to whichBeneficient USA provides administrative and technical services. We believe that Beneficient's operations will generally produce higher risk adjusted returns than those we can achieve from life insurance policies acquired in the secondary market; however, returns on equity in life settlements, especially with the current availability of financings on favorable terms, appear to be an attractive option to diversify our exposure to alternative assets, and we have begun exploring the feasibility of acquiring such policies. Furthermore, although we believe that our portfolio of life insurance policies is a meaningful component of a growing diversified alternative asset portfolio, we continue to explore strategic alternatives for our life insurance portfolio aimed at maximizing its value, including a possible sale, refinancing, recapitalization, partnership, reinsurance guarantees, life insurance operations or other transactions involving our life insurance portfolio, as well as pursuing other alternatives to increase our exposure to alternative assets. These operations are in addition to allocating capital to provide liquidity to holders of a broader range of alternative assets, which we currently provide throughGWG Holdings' and GWG Life's investments in Beneficient.GWG Holdings completed the transactions with Beneficient, in part, to provide the Company with a significant increase in assets and common stockholders' equity. In addition, the transactions with Beneficient may provide us with the opportunity for a diversified source of future earnings within the alternative asset industry. We believe the Beneficient transactions and the other strategies we are pursuing will transformGWG Holdings from a niche provider of liquidity to owners of life insurance to a diversified provider of financial products and services with exposure to a broad range of alternative assets. Restatement The Company restated its previously issued (i) consolidated balance sheet as ofDecember 31, 2019 , included in its Annual Report on Form 10-K for the year endedDecember 31, 2019 and (ii) the consolidated statement of operations, (iii) the consolidated statement of changes in stockholders' equity, and (iv) the consolidated statement of cash flows for the year endedDecember 31, 2019 , included in its Annual Report on Form 10-K for the year endedDecember 31, 2019 , (the "Restatement") as part of its 2020 Form 10-K. The Restatement also impacted each of the quarters for the periods beginning withGWG Holdings, Inc.'s consolidation withThe Beneficient Company Group, L.P. ("Ben LP," including all of the subsidiaries it may have from time to time - "Beneficient") as ofDecember 31, 2019 through the quarter endedSeptember 30, 2020 . The historical interim periods included in this Form 10-Q have been restated to reflect the Restatement. Critical Accounting Policies and Estimates Critical Accounting Estimates The preparation of our accompanying condensed consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America ("GAAP") requires us to make significant judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our judgments, estimates, and assumptions on historical experience and on various other factors believed to be reasonable under the circumstances. Actual results could differ materially from these estimates. We evaluate our judgments, estimates, and assumptions on a regular basis and make changes accordingly. Material estimates that are particularly susceptible to change, in the near term, relate to: determining the assumptions used in estimating the fair value of our investments in life insurance policies; determining the grant date fair value for equity-based compensation awards; determining the allocation of income (loss) to Beneficient's equity holders; and evaluation of potential impairment of goodwill and other intangibles. We believe these estimates are likely to have the greatest potential impact on our accompanying condensed consolidated financial statements and accordingly believe these to be our critical accounting estimates. As it relates to the goodwill intangible asset, in light of Beneficient's significant recurring losses from operations, negative cash flows from operations, and delays in executing its business plans, management plans to engage a third-party valuation firm to assist in performing a quantitative goodwill impairment test in the fourth quarter of 2021. The valuation work related to the goodwill intangible is not complete, and we expect the work to be completed before the filing of our 2021 annual financial Page 53 -------------------------------------------------------------------------------- statements. While management has implemented strategies to execute its business plans, a failure to execute our business plans or adverse market changes in the future could result in changes in management's forecasts, which could result in a decline in estimated fair value of the Beneficient reporting unit and would result in an impairment of our goodwill intangible. Key assumptions in our quantitative goodwill impairment test include assumptions regardingBen LP's ability to raise substantial amounts of capital as disclosed in the 2020 Form 10-K (as defined below). Beneficient is actively engaged in capital raising efforts that may include the issuance of equity or debt ofBen LP or one of its subsidiaries and has received non-binding indications of interest from potential investors. The outcome ofBen LP's capital raising efforts will have a direct impact on management's forecasts and consequently, have a direct impact on the magnitude of future goodwill intangible impairment losses, if any. The outcome ofBen LP's capital raising efforts is uncertain, and it is not certain that the potential investors that have submitted non-binding indications of interest ultimately will invest inBen LP , or the amount of any such investments. As a result, our quantitative goodwill intangible impairment analysis, once complete, could result in material goodwill intangible impairment in the near future. Update on the Investments in Life Insurance Policies We maintain an actual-to-expected analysis-based valuation methodology ("A2E Methodology") to ensure more accurate pricing and valuation of our life insurance policies. Proper maintenance of an A2E Methodology includes the continual tracking of actual results as well as comparisons to projections. An A2E Methodology rests on the actuarial premise that mortality results for sufficiently large populations follow predictable mortality curves. As such, through the A2E Methodology and the use of the portfolio mortality multiplier ("PMM"), we are able to "fit" projections to actual results, which provides a basis to forecast future performance more accurately. When performance sufficiently deviates from these projections, the A2E Methodology is re-examined to determine if the resultant PMM still results in the most accurate fitting of the projections to actual results. Adjustments to the PMM are made based on that analysis if warranted. The basis for a re-examination is based on a performance-based trigger approach that allows the portfolio to perform within statistical norms (+/- 1 standard deviation). We re-examine the A2E Methodology and recalculate the resultant PMM anytime the six-month moving average of the difference between actual portfolio performance and projected performance deviates by more than one standard deviation from the mean and such deviation continues as of the end of any calendar quarter after persisting for three consecutive months. A re-examination occurred during second quarter of 2021, which resulted in an update to the PMM and a downward adjustment of$16.4 million to the fair value of the investments in life insurance policies. Critical Accounting Policies Refer to our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSEC onNovember 5, 2021 ("2020 Form 10-K") for a discussion of our critical accounting policies and estimates. There have been no significant changes to our critical accounting policies during the nine months endedSeptember 30, 2021 . Recent Developments We define "recent developments" as material transactions or matters that occurred in the most recent fiscal quarter or in the period between the end of the fiscal quarter and the filing of the quarterly or annual financial statements with theSEC . The following recent developments are described in more detail in the notes to the accompanying condensed consolidated financial statements. A reference to the corresponding note is included below: •EffectiveJuly 15, 2021 , Beneficient executed Consent and Amendment No. 3 to the Second Amended and Restated Credit Agreement and Amendment No. 2 to the Second Amended and Restated Subordinate Credit Agreement with its lender, which (i) deferred the payment of all accrued and unpaid interest untilDecember 10, 2021 , and (ii) deferred the installment payment of$5.0 million due onSeptember 10, 2021 , toDecember 10, 2021 . Beneficient agreed to pay an amendment fee to the lender in an amount equal to 3% of the then outstanding principal and interest onDecember 10, 2021 (Note 9). Page 54 -------------------------------------------------------------------------------- •OnAugust 11, 2021 ,GWG DLP Funding VI, LLC , aDelaware limited liability company ("DLP VI"), entered into a Credit Agreement (the "NF Credit Agreement") with each lender from time to time party thereto andNational Founders LP , aDelaware limited partnership, as the administrative agent (the credit facility evidenced by such NF Credit Agreement, the "NF Credit Facility") that resulted in a one-time$107.6 million advance with a scheduled maturity date ofAugust 11, 2031 (Note 9). Approximately$56.7 million of such advanced amount was used to pay off the remaining amount due under the Third LNV Credit Facility. •OnAugust 13, 2021 ,GWG Holdings ,Ben LP , and BCH entered into a Term Sheet that contemplates a series of transactions, which, once completed, is expected to result in, among other things, (i)GWG Holdings receiving certain proposed enhancements to its investments in Beneficient; (ii)GWG Holdings no longer having the right to appoint directors of the board of directors of Beneficient Management; and (iii) Beneficient no longer being a consolidated subsidiary ofGWG Holdings (Note 17). •OnSeptember 7, 2021 , DLP IV entered into a Fourth Amended and Restated Loan and Security Agreement withLNV Corporation , as lender, andCLMG Corp. , as the administrative agent on behalf of the lenders under the agreement (the "Fourth LNV Credit Facility") that resulted in a$30.3 million advance fromLNV Corporation , with such advance including amounts to cover certain fees and expenses incurred in connection with the entry into the Fourth LNV Credit Facility (Note 9). •Pursuant to a letter agreement, dated as ofNovember 15, 2021 (the "Letter Agreement"), DLP IV, as borrower,LNV Corporation , as lender, andCLMG Corp. , as the administrative agent on behalf of the lenders under the LNV Credit Facility, the parties thereto modified the terms of the Fourth LNV Credit Facility. Pursuant to the Letter Agreement,LNV Corporation andCLMG Corp. agreed to release$17.0 million from the collection account, which is maintained by DLP to collect policy benefits from pledged policies, to DLP IV in exchange for an irrevocable beneficial interest in three percent (3.0%) of theU.S. dollar death benefit payable under each life insurance policy pledged as collateral under the LNV Credit Facility. •An update on the current state of the Company and potential impact of the COVID-19 pandemic (Note 17). Page 55 -------------------------------------------------------------------------------- Asset Diversification As ofSeptember 30, 2021 , we held a combined portfolio of assets consisting of 77% of fair value secondary life insurance policies and 23% of indirect interests in alternative assets held by certain of the ExAlt Trusts. The table presented below reflects classifications based onGWG Holdings' and Beneficient's current exposure types as ofSeptember 30, 2021 (dollar amounts in thousands). Additional information regarding the Collateral portfolio is available on its website at www.trustben.com. The information on Beneficient's website is not part of, or incorporated by reference in, this report. Exposure Type Value Percent of Total Near-Duration Life Insurance Policies (1)$ 334,450 33.7 % Intermediate-Duration Life Insurance Policies (1) 288,996 29.3 % Long-Duration Life Insurance Policies (1) 138,114 14.0 % Growth Stage Private (2) 84,039 8.5 % Late Stage Venture Backed (2) 72,316 7.3 % Early Stage Venture Backed (2) 30,141 3.1 % Other (2) 24,317 2.5 % Corporate Buyouts (2) 15,325 1.6 % Total$ 987,698 100.0 %
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(1)Represents fair value of life insurance policies.
(2)Represents the net asset value ("NAV") of the interests in alternative assets
that provide cash flows, which comprise the Collateral of the ExAlt Loans
(defined in section below entitled ExAlt Trusts' Investment in Alternative
Assets). Excludes collateral exchanged in the Collateral Swap, which are
eliminated in consolidation. These ExAlt Loans eliminate upon consolidation in
the presentation of our accompanying condensed consolidated financial
statements. The Net Asset Value ("NAV") calculation reflects the most current
report of NAV and other data received from firm/fund sponsors. If no such report
has been received, Beneficient estimates NAV based upon the last NAV calculation
reported by the investment manager and adjusts it for capital calls and
distributions made in the intervening time frame.
The underlying exposure data represents GWG Holdings' exposure to life insurance
policies included in its portfolio and its exposure to the underlying Collateral
of Beneficient's loan portfolio to the ExAlt Trusts. Exposure type reflects
classifications based on each company's portfolio as determined by management.
Figures are based on third-party information and other relevant information as
determined by management. "Other" includes private debt strategies, natural
resources strategies, and hedge funds. "Near-Term", "Intermediate-Term", and
"Long-Term" life insurance policies represent policies with life expectancies
between 0 - 47 months, 48 - 95 months, and 96 - 240 months, respectively.
The following sections contain information on each of the secondary life
insurance assets and the interests in alternative assets held by certain of the
ExAlt Trusts separately.
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Secondary Life Insurance Assets
Our portfolio of life insurance policies, owned by GWG Holdings' subsidiaries as
of September 30, 2021 , is summarized below:
Life Insurance Portfolio Summary
Total life insurance portfolio face value of policy benefits (in
thousands)
$ 1,801,306 Average face value per policy (in thousands) $ 1,831 Average face value per insured life (in thousands) $ 1,984 Weighted average age of insured (years) 83.6 Weighted average life expectancy estimate (years) 6.4 Total number of policies 984 Number of unique lives 908 Demographics 74% Male; 26% Female Number of smokers 36 Largest policy as % of total portfolio face value 0.7 % Average policy as % of total portfolio 0.1 % Average annual premium as % of face value 4.1 % Our portfolio of life insurance policies, owned byGWG Holdings' subsidiaries as ofSeptember 30, 2021 , organized by the insured's current age and the associated number of policies and policy benefits, is summarized below: Distribution of Policies and Policy Benefits by Current Age of Insured
Percentage of Total
Policy Benefits Weighted Average
Min Age Max Age Number of Policies (in thousands) Number of Policies Policy Benefits LE (Years)
64 69 23 $ 22,735 2.3 % 1.2 % 11.4
70 74 168 198,473 17.1 % 11.0 % 10.1
75 79 197 340,040 20.0 % 18.9 % 9.3
80 84 197 350,391 20.0 % 19.5 % 7.5
85 89 210 489,899 21.3 % 27.2 % 4.8
90 94 155 334,534 15.8 % 18.6 % 3.1
95 101 34 65,234 3.5 % 3.6 % 2.2
Total 984 $ 1,801,306 100.0 % 100.0 % 6.4
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Our portfolio of life insurance policies, owned by
of
estimates and associated policy benefits, is summarized below:
Distribution of Policies by Current Life Expectancies of Insured
Percentage of Total
Policy Benefits
Min LE (Months) Max LE (Months) Number of Policies (in Thousands) Number of Policies Policy Benefits
0 47 295 $ 531,585 30.1 % 29.6 %
48 71 213 380,621 21.6 % 21.1 %
72 95 178 334,664 18.1 % 18.6 %
96 119 140 248,971 14.2 % 13.8 %
120 143 92 133,992 9.3 % 7.4 %
144 179 58 149,198 5.9 % 8.3 %
180 240 8 22,275 0.8 % 1.2 %
Total 984 $ 1,801,306 100.0 % 100.0 %
We rely on the payment of policy benefit claims by life insurance companies as a
significant source of cash inflow. The life insurance assets we own represent
obligations of third-party life insurance companies to pay the benefit amount
under the policy upon the mortality of the insured. As a result, we manage this
credit risk exposure by generally purchasing policies issued by insurance
companies with investment-grade credit ratings from Standard & Poor's , and
diversifying our life insurance portfolio among a number of insurance companies.
The yield to maturity on bonds issued by life insurance carriers reflects, among
other things, the credit risk (risk of default) of such insurance carrier. We
follow the yields on certain publicly traded life insurance company bonds
because this information is part of the data we consider when valuing our
portfolio of life insurance policies for our financial statements.
The average yield to maturity of publicly traded life insurance company bonds
data we consider as inputs to our life insurance portfolio valuation process was
1.64% as of September 30, 2021 . We believe this average yield to maturity
reflects, in part, the financial market's judgment that credit risk is low with
regard to these carriers' financial obligations. The obligations of life
insurance carriers to pay life insurance policy benefits ranks senior to all of
their other financial obligations, including the senior bonds they issue. As of
September 30, 2021 , 94.7% of the face value benefits of our life insurance
policies were issued by insurers having an investment-grade credit rating (BBB
or better) by Standard & Poor's .
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As of
exposures and the
strength and claims-paying ability is set forth below:
Distribution of Policy Benefits by Top 10 Insurance Companies
Policy Benefits Percentage of Policy S&P Insurer Financial
Rank (in Thousands) Benefit Amount Insurance Company Strength Rating
1 $ 240,132 13.3 % John Hancock Life Insurance Company AA-
11.5 % Lincoln National Life Insurance AA-
2 207,917
Company
11.0 % Equitable Financial Life Insurance A+
3 198,091
Company
4 156,976 8.7 % Transamerica Life Insurance Company A+
5 150,789 8.4 % Brighthouse Life Insurance Company AA-
6 84,081 4.7 % Pacific Life Insurance Company AA-
4.5 % American General Life Insurance A+
7 81,389
Company
8 63,876 3.5 % ReliaStar Life Insurance Company A+
3.1 % Security Life of Denver Insurance A-
9 56,732
Company
10 53,419 3.0 % Protective Life Insurance Company AA-
$ 1,293,402 71.7 %
ExAlt Trusts' Investment in Alternative Assets
Beneficient's primary operations, which commenced on September 1, 2017 , consist
of offering its liquidity and trust administration services to its customers,
primarily through certain of Ben LP's operating subsidiaries, Ben Liquidity (as
defined below) and Ben Custody Admin (as defined below), respectively. Ben
Liquidity offers simple, rapid and cost-effective liquidity products to its
customers through the use of customized trust vehicles, the ExAlt Trusts, that
facilitate the exchange of a customer's alternative assets for consideration
using a unique financing structure. A subsidiary of Ben Liquidity makes ExAlt
Loans to certain of the ExAlt Trusts. Ben Liquidity generates interest and fee
income earned in connection with such ExAlt Loans to certain of the ExAlt
Trusts, which are collateralized by the cash flows from the exchanged
alternative assets (the "Collateral"). Ben Custody Admin provides trust
administration services to the trustees of certain of the ExAlt Trusts that own
the exchanged alternative asset following a liquidity transaction for fees
payable quarterly. The Collateral supports the repayment of the loans plus any
related interest and fees. Since the ExAlt Trusts are consolidated, Ben LP's
operating subsidiary ExAlt Loans and interest and fee income are eliminated in
the presentation of our accompanying condensed consolidated financial
statements.
The ExAlt Trusts' investments in alternative assets are the source of the
Collateral supporting the ExAlt Loans. These assets consist primarily of limited
partnership interests in various alternative investments, including private
equity funds. These alternative investments are valued using NAV as a practical
expedient. Changes in the NAV of these investments are recorded in investment
income, net in our consolidated statements of operations. The ExAlt Trusts'
investments in alternative assets provide the economic value creating the
Collateral to the ExAlt Loans made in connection with each liquidity
transaction.
The ExAlt Trusts held interests in alternative assets with a net asset value of
$226.1 million and $221.9 million at September 30, 2021 and December 31, 2020 ,
respectively. As of September 30, 2021 , the ExAlt Trusts' portfolio had exposure
to 111 professionally managed alternative investment funds, comprised of 301
underlying investments, 99 percent of which are investments in private
companies.
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The portfolio of alternative assets, excluding the collateral exchanged in the
Collateral Swap, which is eliminated in consolidation, covers the following
industry sectors and geographic regions as of the dates shown below (dollar
amounts in thousands):
September 30, 2021 December 31, 2020
Percent of Percent of
Industry Sector Value Total Value Total
Software and Services $ 30,700 13.6 % $ 23,310 10.5 %
Semiconductors and Semiconductor Equipment 29,656 13.1 % 21,271 9.6 %
Diversified Financials 29,051 12.8 % 28,462 12.8 %
Food and Staples Retailing 26,986 11.9 % 24,450 11.0 %
Telecommunication Services 24,859 11.0 % 27,401 12.3 %
Utilities 23,208 10.3 % 21,740 9.8 %
Not Applicable (e.g., Escrow, Earnouts)(1) 15,524 6.9 % 18,138 8.2 %
Health Care Equipment and Services 12,056 5.3 % 14,682 6.6 %
Other(1) 34,098 15.1 % 42,440 19.2 %
Total $ 226,138 100.0 % $ 221,894 100.0 %
September 30, 2021 December 31, 2020
Percent of Percent of
Geography Value Total Value Total
North America $ 97,182 43.0 % $ 96,056 43.3 %
Asia 48,421 21.4 % 42,475 19.1 %
Southern Europe 30,912 13.7 % 36,229 16.3 %
South America 27,248 12.0 % 24,767 11.2 %
Western Europe 20,773 9.2 % 21,064 9.5 %
Other(2) 1,602 0.7 % 1,303 0.6 %
Total $ 226,138 100.0 % $ 221,894 100.0 %
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Certain previously reported amounts have been reclassified to agree with current presentation. (1)Industries in this category each comprise less than 5 percent as ofSeptember 30, 2021 . (2)Locations in this category each comprise less than 5 percent. Assets in the portfolio consist primarily of interests in alternative investment vehicles (also referred to as "funds") that are managed by a group ofU.S. and non-U.S. based alternative asset management firms that invest in a variety of financial markets and utilize a variety of investment strategies. The vintages of the funds in the portfolio as ofSeptember 30, 2021 ranged from 1993 to 2021. As the ExAlt Trusts grow their portfolio, they will monitor the diversity of the portfolio through the use of concentration guidelines. These guidelines were established, and will be periodically updated, through a data driven approach based on asset type, fund manager, vintage of fund, industry segment and geography to manage portfolio risk. Beneficient will refer to these guidelines when making decisions about new financing opportunities; however, these guidelines will not restrict Beneficient from entering into financing opportunities that would result in Beneficient having exposure outside of its concentration guidelines. In addition, changes to the ExAlt Trusts' portfolio may lag changes to the concentration guidelines. As such, the ExAlt Trusts' portfolio may, at any given time, have exposures that are outside of its concentration guidelines to reflect, among other things, attractive financing opportunities, limited availability of assets, or other business reasons. Given the ExAlt Trusts' limited operating history, the portfolio as ofSeptember 30, 2021 had exposure to certain alternative investment vehicles and investments in private companies that were outside of those guidelines. Classifications by industry sector, exposure type and geography reflect classification of investments held in funds or companies held directly in the portfolio. Investments reflect the assets listed by the general partner of a fund as held by the fund and have a positive or negative net asset value. Typical assets include portfolio companies, limited partnership interests in other funds, and Page 60 -------------------------------------------------------------------------------- net other assets, which are a fund's cash and other current assets minus liabilities. The underlying interests in alternative assets are primarily limited partnership interests, and the limited partnership agreements governing those interests generally include restrictions on disclosure of fund-level information, including fund names and company names in the funds. Industry sector is based on Global Industry Classification Standard (GICS®) Level 2 classification (also known as "Industry Group ") of companies held in the portfolio by funds or directly, subject to certain adjustments by us. "Other" classification is not a GICS® classification. "Other" classification reflects companies in the GICS® classification categories of Automobiles & Components, Capital Goods, Commercial & Professional Services, Consumer Durables & Apparel, Consumer Services, Energy, Food, Beverage & Tobacco, Household & Personal Products, Insurance, Materials,Media & Entertainment , Pharmaceutical, Biotechnology & Life Sciences, Real Estate, Retailing, Tech Hardware & Equipment, and Transportation. N/A includes investments assets that we have determined do not have an applicable GICS® Level 2 classification, such as Net Other Assets and investments that are not operating companies. Investment exposure type reflects classifications based on each fund's current investment strategy stage as determined by us. "Other" includes private debt strategies, natural resources strategies and hedge funds. Geography reflects classifications determined by us based on each underlying investment. "Other" geography classification includesAustralia ,Northern Europe , andEastern Europe . Principal Revenue and Expense Items During the three and nine months endedSeptember 30, 2021 and 2020, we earned revenues from the following primary sources: •Revenue Realized from Maturities of Life Insurance Policies. We recognize the difference between the face value of the policy benefits and carrying value when an insured event has occurred and determine that collection of the policy benefits is realizable and reasonably assured. Revenue from a transaction must meet both criteria in order to be recognized. We generally collect the face value of the life insurance policy from the insurance company within 45 days of our notification of the insured's mortality, but this collection time varies depending on the insurance company and individual policy. •Change in Fair Value of Life Insurance Policies. We value our life insurance portfolio investments for each reporting period in accordance with the fair value principles discussed herein, which reflects the expected receipt of policy benefits in future periods, net of premium costs, as shown in our accompanying condensed consolidated financial statements. •Investment Income. Includes the change in NAV of the alternative assets held by certain of the ExAlt Trusts. •Interest Income. Primarily includes interest earned from policy benefits receivable and cash held in banks. •Other Income. Includes changes in the fair value of Beneficient's investment in put options, L Bond redemption fees, and other miscellaneous income. Additionally, includes$36.3 million recognized during the second quarter of 2020 by Beneficient as a result of the forfeiture of vested equity-based compensation related to one former director of Beneficient. During the three and nine months endedSeptember 30, 2021 and 2020, our main components of expense are summarized below: •Interest Expense. Includes interest incurred under the LNV Credit Facility and the NF Credit Facility, as well as interest paid onGWG Holdings' L Bonds, Seller Trust L Bonds and other outstanding indebtedness, including Beneficient's debt due to related parties. When we issue debt, we amortize the financing costs (commissions and other fees) associated with such indebtedness over the outstanding term of the financing and classify it as interest expense. •Employee Compensation and Benefits. Employee compensation and benefits includes salaries, bonuses and other incentives and costs of employee benefits. Also included are significant non-cash compensation expenses totaling$13.1 million and$96.3 million for the nine months endedSeptember 30, 2021 and 2020, respectively, related to Beneficient's equity incentive plans. Page 61 -------------------------------------------------------------------------------- •Selling, General and Administrative Expenses. We recognize and record expenses incurred in our business operations, including operations related to the servicing of life insurance policies, the origination and servicing of ExAlt Loans and costs associated with trust administration. These expenses include legal and professional fees, sales, marketing, occupancy and other expenditures. Additional components of our net earnings include: •Earnings (Loss) fromEquity Method Investment . We account forGWG Holdings' investment in FOXO as an equity method investment, which is included in earnings (loss) from equity method investment in our accompanying condensed consolidated statements of operations. We had losses from equity method investments of$4.9 million and$1.4 million during the three months endedSeptember 30, 2021 and 2020, respectively. We had losses from equity method investments of$11.9 million and$4.3 million during the nine months endedSeptember 30, 2021 and 2020, respectively. Results of Operations -Three and Nine Months EndedSeptember 30, 2021 Compared to the Same Periods in 2020 The following is our analysis of the results of operations for the periods indicated below. This analysis should be read in conjunction with our accompanying condensed consolidated financial statements and related notes (dollar values in thousands). Net Loss Attributable to Common Shareholders Net loss attributable to common shareholders was$50.6 million and$48.9 million for the three months endedSeptember 30, 2021 and 2020, respectively. Net loss attributable to common shareholders was$169.9 million and$120.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The results of operations for the three and nine months endedSeptember 30, 2021 reflect higher interest expense as result of increased average debt balances and interest rates, combined with a lower gain on life insurance policies as a result of the adjustment to the PMM and lower revenue recognized from the change in fair value of life insurance policies. More details regarding revenue and expenses for the three and nine months endedSeptember 30, 2021 and 2020 are included in the discussion below. Revenue fromSecondary Life Insurance Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue realized from maturities of life insurance policies$ 30,891 $ 26,336 $ 73,688 $ 72,939 Revenue recognized from change in fair value of life insurance policies 3,860 6,021 623 23,476 Premiums and other annual fees paid (19,267) (18,235) (56,388) (53,060) Gain on life insurance policies, net$ 15,484 $ 14,122 $ 17,923 $ 43,355 Attribution of gain on life insurance policies, net: Change in estimated probabilistic cash flows, net of premium and other annual fees paid$ (6,147) $
(3,512)
Change in life expectancy evaluation
- - 2,337 - Change in PMM - - (16,386) - Net revenue recognized at maturity 21,631 17,634 48,130 48,492 Gain on life insurance policies, net$ 15,484 $ 14,122 $ 17,923 $ 43,355 Number of policies matured 26 21 74 70 Face value of matured policies$ 43,217 $ 39,803 $ 104,662 $ 105,194 Net revenue recognized at maturity event (% of face value matured) 50.1 % 44.3 % 46.0 % 46.1 % Revenue from changes in estimated probabilistic cash flows, net of premiums paid was a charge of$6.1 million compared to$3.5 million during the three months endedSeptember 30, 2021 and 2020, respectively. Revenue from changes in estimated probabilistic cash flows, net of premiums paid was a charge of$16.2 million and$5.1 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase of$1.4 million in gain on life insurance policies for the three months endedSeptember 30, 2021 compared to the same period of 2020, was driven by higher revenue realized from maturities of life Page 62 -------------------------------------------------------------------------------- insurance policies, partially offset by a decreases in revenue recognized from the change in fair value of life insurance policies and higher premium costs due to the aging of the portfolio. The decrease of$25.4 million in gain on life insurance policies for the nine months endedSeptember 30, 2021 , respectively, over the comparable prior year period, was driven by higher premium costs due to the aging of the portfolio and lower amount of revenue recognized from changes in fair value of the policies still in force atSeptember 30, 2021 , partially offset by higher revenue realized from maturities of life insurance policies (see more details in the following paragraph). The lower amount of revenue recognized from changes in fair value of the policies is largely driven by the$16.4 million downward adjustment to fair value recorded as a result of an update to the PMM as discussed in the "Critical Accounting Policies and Estimates" section above. The face value of matured policies was$43.2 million and$39.8 million for the three months endedSeptember 30, 2021 and 2020, respectively, reflecting an increase in face value of matured policies of$3.4 million . The resulting revenue realized at maturity was$30.9 million and$26.3 million during the three months endedSeptember 30, 2021 and 2020, respectively. The increased revenue realized at maturity during the comparable periods was primarily due to a higher number and face value of matured policies during the third quarter of 2021 compared to the third quarter of 2020. The face value of matured policies was$104.7 million and$105.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively, reflecting a decrease in face value of matured policies of$0.5 million , respectively, during those periods. The resulting revenue recognized at maturity was$73.7 million and$72.9 million during the nine months endedSeptember 30, 2021 and 2020, respectively. The revenue recognized at maturity was comparable between periods due to the relatively comparable face value of and average carrying value of policies that matured. Investment Income, Interest Income, and Other Income (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 Variance 2021 2020 Variance Investment income (loss)$ 17,554 $ 56,705 $ (39,151) $ 21,417 $ 41,590 $ (20,173) Interest income 213 278 (65) 835 1,293 (458) Other (loss) income 535 (3,093) 3,628 (2,916) 33,504 (36,420) Total$ 18,302 $ 53,890 $ (35,588) $ 19,336 $ 76,387 $ (57,051) Investment income was$17.6 million and$21.4 million during the three and nine months endedSeptember 30, 2021 , respectively, driven by an increase in the NAV of the alternative assets held by certain of the ExAlt Trusts. Investment income was$56.7 million during the three months endedSeptember 30, 2020 primarily due to a decrease to the repurchase option liability combined with an increase in NAV of the alternative assets held by certain of the ExAlt Trusts. Investment income was$41.6 million during the nine months endedSeptember 30, 2020 , due to decrease to the repurchase option liability, partially offset by an increase in the NAV of the alternative assets held by certain of the ExAlt Trusts. Interest income decreased during the nine months endedSeptember 30, 2021 , compared to the same period in 2020, primarily due to a decrease in average cash balances and corresponding bank interest earned. Other income (loss) during the three and nine months endedSeptember 30, 2021 , includes a$0.2 million increase and a$4.0 million decrease, respectively, to the fair value of Beneficient's investment in put options, compared to a$3.2 million decrease for both of the comparable periods of 2020. Other income for the nine months endedSeptember 30, 2020 , includes$36.3 million of income recognized during the second quarter of 2020 by Beneficient as a result of the forfeiture of vested equity-based compensation related to one former director of Beneficient. A substantial majority of the former director's equity-based compensation units were fully vested, and the related expense was recorded in prior periods. The three and nine months endedSeptember 30, 2021 also includes higher L Bond early redemption fees and other miscellaneous income items recorded than in the comparable periods of 2020. Page 63
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Interest and Operating Expenses (in thousands)
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 Variance 2021 2020 Variance
Interest expense (including
amortization of deferred
financing costs) $ 45,096 $ 40,792 $ 4,304 $ 128,605 $ 113,805 $ 14,800
Employee compensation and (18,906) 43,977 123,321 (79,344)
benefits 14,871 33,777
Legal and professional fees 6,650 7,830 (1,180) 20,832 21,636 (804)
Other expenses 9,652 4,712 4,940 23,050 13,387 9,663
Total expenses $ 76,269 $ 87,111 $ (10,842) $ 216,464 $ 272,149 $ (55,685)
Interest expense, including amortization of deferred financing costs, increased
$4.3 million and $14.8 million during the three and nine months ended
September 30, 2021 , respectively, compared to the same periods in 2020,
primarily due to the increase in the average balance of outstanding L Bonds and
increased deferred financing cost amortization as a result of the LNV credit
facility amendments. The increase in interest expense was partially offset by
the elimination of a portion of the interest expense on the Seller Trust L Bonds
as a result of the Collateral Swap transaction that occurred on September 30,
2020 . Additionally, interest expense on debt due to related parties for the
three months ended September 30, 2021 compared to the same period in 2020 was
lower due to a decrease in the average balance outstanding. Interest expense on
debt due to related parties for the nine months ended September 30, 2021
compared to the same period in 2020 increased slightly due to an increase in in
the interest rate and additional deferred financing cost amortization as a
result of the amendments of Beneficient's credit agreements partially offset by
a decrease in interest expense attributable to a lower average balance
outstanding was offset by an increase
The decrease in employee compensation and benefits in the three and nine months
ended September 30, 2021 , compared to the same periods of 2020, was primarily
related to Beneficient's equity incentive plans. Specifically, the Company
recognized $4.1 million and $13.1 million during the three and nine months ended
September 30, 2021 , respectively, compared to $23.2 million and $96.3 million
during the comparable periods of 2020, respectively, of equity-based
compensation expense related to Beneficient's equity incentive plans. The
decrease is due to the full vesting of some awards upon grant during the first
quarter of 2020 compared to predominately service-based vesting during 2021. In
addition to Beneficient's equity-based compensation expense, we recognized
additional retention, severance and other costs in the first quarter of 2020
related to the relocation of GWG Holdings' principal offices from Minneapolis to
Dallas in late 2019. Finally, these decreases were partially offset by higher
salary and benefit costs recognized as a result of higher headcount for the
comparable periods.
The decreases in legal and professional fees in the three and nine months ended
September 30, 2021 , compared to the same period of 2020, is primarily the result
of lower consulting fees during 2021 combined with higher costs of life
expectancy reports and higher legal costs during 2020 related to debt amendments
and other transactions that occurred during that time.
The increase in other expenses during the three months ended September 30, 2021 ,
compared to the same period of 2020, is primarily due to a $3.7 million
prepayment premium related to the repayment of the Third LNV Credit Facility. In
addition to the prepayment premium, the increase in other expenses during the
nine months ended September 30, 2021 , compared to the same period of 2020, is
primarily due to: the $1.0 million TEFFI application fee incurred by Beneficient
during the second quarter of 2021; the $2.0 million write-off of an investment
related to legacy business initiatives of GWG Holdings during the first quarter
of 2021; and a $1.3 million partial expense reversal of a service provider
accrual by Beneficient during the first quarter of 2020.
Income Taxes
The Company applies an estimated annual effective rate to interim period pre-tax
income to calculate the income tax provision for the quarter in accordance with
the principal method prescribed by the accounting guidance established for
computing income taxes in interim periods.
The Company's effective tax rate was (0.09)% for the nine months ended
September 30, 2021 . The income tax expense for the three and nine months ended
September 30, 2021 was $0.7 million and $0.2 million , respectively, compared to
income tax expense of $3.6 million and income tax benefit of $14.5 million for
the three and nine months ended September 30, 2020 , respectively. The effective
tax rate differs from the statutory U.S. federal income tax rate of 21%
primarily due to valuation allowances recorded on the current year losses,
offset by a current state tax expense. The income tax expense for the three and
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nine months ended September 30, 2021 reflects current state tax expense of GWG
Holdings and adjustments to deferred federal income taxes related to
Beneficient's losses, partially offset by adjustments to the deferred tax
liability of GWG Holdings for specific expense allocations to the holders of the
Preferred Series A Subclass 1 Unit Accounts.
The Company currently records a valuation allowance against its deferred tax
assets that cannot be realized solely by the future reversal of existing
temporary differences. Due to the uncertain timing of the reversal of certain of
these taxable temporary differences due to the constraint described below, they
cannot be considered as a source of future taxable income for purposes of
determining a valuation allowance; therefore, the vast majority of the existing
deferred tax liability cannot be utilized in determining the realizability of
the deferred tax assets. Due to a prior deemed ownership change, net operating
loss carryforwards are subject to Section 382 of the Internal Revenue Code.
The Company determined it cannot utilize the reversal of a taxable temporary
difference related to GWG Life's ownership in the Preferred Series A Subclass 1
Unit Accounts described in Note 1, until such time as the preferred equity is no
longer constrained, as a source of income to realize existing deferred tax
assets related to the net operating loss and Internal Revenue Code Section
163(j) limitations. As a result, the Company recorded a large net deferred tax
liability on December 31, 2019 , the majority of which remained as of
September 30, 2021 and December 31, 2020 . The disposition of this investment is
constrained by the Pledge and Security Agreement in favor of the holders of the
L Bonds of GWG Holdings . As such, the timing of recognition of the necessary
taxable income related to this investment and the future reversal of this
taxable temporary difference cannot be predicted.
Revenue and Earnings before Tax by Reportable Segment - Three and Nine Months
Ended September 30, 2021 Compared to the Same Periods in 2020
We have two reportable segments: 1) Secondary Life Insurance and 2) Beneficient.
Corporate & Other includes certain activities not allocated to specific business
segments. These activities include holding company financing and investing
activities, management and administrative services to support the overall
operations of the Company, and GWG Holdings' equity method investment in FOXO.
Comparison of revenue by reportable segment for the periods indicated (in
thousands):
Three Months Ended September 30, Nine Months Ended September 30,
Revenue: 2021 2020 Variance 2021 2020 Variance
Secondary Life Insurance $ 15,856 $ 14,422 $ 1,434 18,955 $ 44,800 $ (25,845)
Beneficient 17,867 53,589 (35,722) 18,235 74,925 (56,690)
Corporate & Other 63 1 62 69 17 52
Total $ 33,786 $ 68,012 $ (34,226) $ 37,259 $ 119,742 $ (82,483)
The primary components of the changes in revenue during the three and nine
months ended September 30, 2021 compared to the same periods in 2020 were as
follows:
•Secondary Life Insurance revenue increased by $1.4 million during the three
months ended September 30, 2021 compared to the same period in 2020, primarily
due to higher revenue realized from maturities of life insurance policies,
partially offset by a decreases in revenue recognized from the change in fair
value of life insurance policies and higher premium costs due to the aging of
the portfolio. Secondary Life Insurance revenue decreased by $25.8 million
during the nine months ended September 30, 2021 , compared to the comparable
periods in 2020, primarily as a result of an adjustment to the PMM during the
second quarter of 2021 that resulted in a $16.4 million downward adjustment to
the fair value of the portfolio, combined with higher premiums and lower revenue
recognized from changes in fair value of the policies still in force at
September 30, 2021 , notwithstanding the PMM adjustment.
•Beneficient segment revenue decreased for the three and nine months ended
September 30, 2021 , compared to the same periods in 2020, primarily due income
recognized from the decrease to fair value of the repurchase option liability in
both periods of 2020 combined with $36.3 million of non-recurring income
recognized in the year to date period of 2020 by Beneficient as a result of the
forfeiture of vested equity-based compensation related to one former director of
Beneficient. A substantial majority of the former director's equity-based
compensation units
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were fully vested, and the related expense was recorded in prior periods. This
decrease was partially offset by an increase in investment income driven by
changes in the NAV of the alternative assets held by certain of the ExAlt Trusts
during the three and nine months ended September 30, 2021 , compared to the same
periods in 2020.
Comparison of loss before tax by reportable segment for the periods indicated
(in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
Segment Loss Before Tax 2021 2020 Variance 2021 2020 Variance
Secondary Life Insurance $ (28,142) $ (12,147) $ (15,995) $ (86,730) $ (39,314) $ (47,416)
Beneficient (6,576) 532 (7,108) (67,450) (94,880) 27,430
Corporate & Other(1) (12,714) (8,915) (3,799) (36,923) (22,492) (14,431)
Total $ (47,432) $ (20,530) $ (26,902) $ (191,103) $ (156,686) $ (34,417)
_______________________________________________
(1)Includes loss from equity method investments as presented in our accompanying condensed consolidated statements of operations, related toGWG Holdings' investment in FOXO. The primary drivers of the changes in loss before tax during the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020 were as follows: •Secondary Life Insurance loss before tax increased by$16.0 million and$47.4 million , respectively, for the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020, primarily as a result of the following: •$1.4 million increase and$25.4 million decrease, respectively, in gain on life insurance policies, net for the comparative periods as described above in the revenue comparison discussion; •$12.7 million and$23.7 million respective increases in interest expense during the comparative periods as a result of higher average debt outstanding; and •$4.8 million increase and$2.1 million decrease, respectively, in operating expenses during the comparative periods, primarily resulting from the$3.8 million prepayment premium as described above for the third quarter of 2021, partially offset by a lower percentage of employee compensation and benefits allocated to theSecondary Life Insurance segment for the current year periods. •Beneficient segment recognized a loss before tax of$6.6 million for the three months endedSeptember 30, 2021 compared to earnings before tax of$0.5 million during same period in 2020, primarily due to: •a decrease of$20.6 million in non-cash charges for equity incentive compensation; •an decrease in investment income of$39.2 million as described above in the revenue comparison discussion; and •net decreases in interest and other operating expenses of approximately$8.0 million . •Beneficient segment loss before tax decreased by$27.4 million for the nine months endedSeptember 30, 2021 , primarily due to: •a decrease of$81.2 million in non-cash charges for equity compensation; •a decrease in investment income of$20.2 million combined with$36.3 million of non-recurring income in second quarter of 2020 as described above in the revenue comparison discussion; and •net decreases in interest and other operating expenses of approximately$2.9 million . •Corporate & Other operating loss was higher during the three and nine months endedSeptember 30, 2021 compared to the same periods in 2020, primarily due: •$3.5 million and$7.6 million respective increases in loss from equity method investments due to higher costs incurred by FOXO as it continues to strive to bring its products to market; Page 66 -------------------------------------------------------------------------------- •$0.3 million and$4.8 million respective increases in operating expenses due to a higher percentage of salaries and benefits, legal fees and other operating expenses allocated to Corporate & Other; and •the write-off of a$2.0 million investment related to legacy business initiatives ofGWG Holdings during the nine months endedSeptember 30, 2021 . Liquidity and Capital Resources As ofSeptember 30, 2021 andDecember 31, 2020 , we had approximately$67.7 million and$124.2 million , respectively, in combined available cash, cash equivalents, and restricted cash. We generated net losses attributable to common shareholders of$169.9 million and$120.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. As ofNovember 10, 2021 , we had cash, cash equivalents, and restricted cash of approximately$29.8 million . Besides funding operating expenditures, we are obligated to pay other items such as interest payments and debt maturities, and preferred stock dividends and redemptions. We have historically financed our businesses primarily through a combination of L Bond sales, preferred stock sales, the LNV Credit Facility, and the NF Credit Facility. We have also financed our business through proceeds from life insurance policy benefit receipts, cash distributions from the ExAlt Trusts' alternative asset portfolio, dividends and interest on investments, and Beneficient's debt due to related parties. We have traditionally used proceeds from these sources for policy acquisition, policy premiums and servicing costs, working capital and financing expenditures including paying principal, interest and dividends. We have also used proceeds to allocate capital to Beneficient; however, ifBen LP becomes an independent company pursuant to the terms of the Term Sheet discussed in Note 17, the Company expects thatBen LP would reduce its reliance onGWG Holdings to fund its operations and would raise future capital from other sources. Ben LP's capital raising efforts and participation in liquidity transactions may include the issuance of equity or debt ofBen LP or one of its subsidiaries, and the newly issued securities may be dilutive toGWG Holdings' and GWG Life's investments inBen LP and BCH and may include preferential terms relative toGWG Holdings' and GWG Life's investments inBen LP and BCH, as applicable. We currently fund our business primarily with debt that generally has a shorter duration than the duration of our long-term assets. The resulting asset/liability mismatch can result in a liquidity shortfall if we are unable to renew maturing short-term debt or secure suitable additional financing. In such a situation, we could be forced to sell assets at less than optimal (distressed) prices. Substantially all of our life insurance policies are pledged as collateral under the LNV Credit Facility and the NF Credit Facility and we would not be able to dispose of them without compliance with the terms of those credit facilities. We heavily rely onGWG Holdings' L Bond offering to fund our business operations, including, among other things, interest and principal payments on the existing L Bonds and capital allocations to Beneficient. We temporarily suspended the offering ofGWG Holdings' L Bonds, commencingApril 16, 2021 , as a result of our delay in filing certain periodic reports with theSEC , and were required to seek alternative sources of capital. As a result of the suspension ofGWG Holdings' L Bond offering, onJune 28, 2021 , we pledged additional life insurance policies as collateral and received an additional advance of$51.2 million under the Third LNV Credit Facility. Subsequently, onAugust 11, 2021 , we received a one-time advance of$107.6 million under the NF Credit Facility as described above. Approximately$56.7 million of such advanced amount was used to pay off the remaining amount due, including interest and penalties, under the Third LNV Credit Facility and the pledged life insurance policies used as collateral for the Third LNV Credit Facility were released and pledged under the NF Credit Facility. Further, onSeptember 7, 2021 , DLP IV entered into the Fourth LNV Credit Facility, that replaced the aforementioned Third LNV Credit Facility. The Fourth LNV Credit Facility resulted in an additional advance of$30.3 million fromLNV Corporation , with no additional pledged collateral. All of the aforementioned transactions are described in more detail in Note 9. Page 67 -------------------------------------------------------------------------------- Primarily due to the current suspension ofGWG Holdings' L Bond offering, the Company may require additional capital to continue its operations over the next twelve months if our ability to sell L Bonds dissipates, or if we are forced to suspend the L Bond offering. However, the Company may not be able to obtain additional borrowings under existing debt facilities or new borrowings with other third-party lenders. To the extent thatGWG Holdings or its subsidiaries raise additional capital through the future issuance of debt, the terms of those debt securities may include terms that adversely affect the rights of our existing debt and/or equity holders or involve negative covenants that restrictGWG Holdings' ability to take specific actions, such as incurring additional debt or making additional investments in growing the operations of the Company. IfGWG Holdings is unable to fund its operations and other obligations, or defaults on its debt, then the Company will be required to either i) sell assets to provide sufficient funding, ii) exercise our right to decline requests for early L Bond redemptions or redemptions of preferred stock, or iii) to raise additional capital through the sale of equity and the ownership interest of our equity holders may be diluted. Substantially all of our life insurance policies are pledged as collateral under the LNV Credit Facility and the NF Credit Facility and we would not be able to dispose of them without compliance with the terms of those credit facilities. We anticipate recommencing the offering ofGWG Holdings' L Bonds once we become current with our filing obligations and satisfy applicable NASDAQ listing requirements. Once we become current with our filing obligations with respect to the L Bonds, we may be limited in the origination channels in which we sell our L Bonds in the event that we are unable to meet the applicable NASDAQ listing requirements in a timely manner, which could result in the L Bonds no longer being "covered securities" for federal securities law purposes which would subject the offer and sale of L Bonds to potentially extensive state "blue sky" securities law requirements. If for any reason we are forced to suspendGWG Holdings' L Bond offering, are limited in our origination channels in which we sell our L Bonds, or demand forGWG Holdings' L bonds dissipates, our business would be adversely impacted and our ability to service and repay our debt obligations, much of which is short term, would be compromised, thereby negatively affecting our business prospects and viability. We had$70.1 million of borrowing base capacity, excluding any potential capacity for premiums and servicing costs, under the LNV Credit Facility as ofSeptember 30, 2021 . Additional future borrowing base capacity for premiums and servicing costs, created as the premiums and servicing costs of pledged life insurance policies become due and by additional policy pledges to the facility, if any, exists under the LNV Credit Facility at the sole discretion of the lender. The LNV Credit Facility has certain financial and nonfinancial covenants, and we were in compliance with these debt covenants as ofSeptember 30, 2021 and continue to be so as of the filing date of this report. Beneficient is obligated to make debt payments totaling$77.1 million on certain outstanding borrowings throughMay 30, 2022 under the terms of the Amendment No. 1 to the Second Amended and Restated Credit Agreements as discussed in more detail in Note 9. Primarily due to both the forthcoming debt payments under the Credit Agreement and Second Lien Credit Agreement and the anticipated deconsolidation of Beneficient fromGWG Holdings as discussed in Note 17, which is expected to result in reduced reliance by Beneficient onGWG Holdings to fund its operations, Beneficient will require additional liquidity to continue its operations over the next twelve months. We expect Beneficient to satisfy these obligations and fund its operations through anticipated operating cash flows, proceeds from distributions on the alternative assets portfolio, additional investments into Beneficient byGWG Holdings and/or other parties and, potentially refinancing with other third-party lenders some or all of the existing borrowings due prior to their maturity. Beneficient is currently in the process of raising additional equity, which is anticipated to close during the fourth quarter of 2021 and/or the first quarter of 2022. Beneficient may not be able to refinance or obtain additional financing on terms favorable to the Company, or at all. To the extent that Beneficient raises additional capital through the future sale of equity or debt, the ownership interest of its existing equity holders may be diluted. The terms of these future equity or debt securities may include liquidation or other preferences that adversely affect the rights of its existing equity unitholders or involve negative covenants that restrict Beneficient's ability to take specific actions, such as incurring additional debt or making additional investments in growing its operations. If Beneficient defaults on these borrowings, then it will be required to either i) sell assets to repay these loans or ii) to raise additional capital through the sale of equity and the ownership interest of our equity holders may be diluted. Moreover, if Beneficient were to sell assets to avoid a default of these borrowings, then the price at which Beneficient sold such assets may not reflect the carrying value of those assets as reflected in our consolidated financial statements, especially in the event of a bulk or distressed sale. As noted in the "Results of Operations" section above, onNovember 11, 2019 ,GWG Holdings contributed the common stock and membership interests of its then wholly-ownedFOXO Labs and FOXO Life subsidiaries to FOXO in exchange for a membership interest in the entity. OnNovember 13, 2020 ,FOXO BioScience LLC converted to a corporation and is now known asFOXO Technologies Inc. With the corporate conversion,GWG Holdings' previous membership interest in the LLC converted to preferred equity.GWG Holdings has contributed$3.8 million in cash to FOXO during the nine months ended Page 68 --------------------------------------------------------------------------------September 30, 2021 , and has fully contributed its commitment to FOXO in accordance with the related subscription agreement. GWG has no other outstanding capital commitments to FOXO. The potential NASDAQ delisting and our current inability to sell L Bonds as discussed above, in combination with significant recurring losses from operations, negative cash flows from operations, delays in executing our business plans, and any potential negative outcome from the ongoingSEC investigation discussed elsewhere in this Form 10-Q, raise substantial doubt about our ability to continue as a going concern for the next 12 months following the filing of this Form 10-Q. Financings Summary We had the following outstanding debt balances as ofSeptember 30, 2021 andDecember 31, 2020 , with the following weighted average interest rates as calculated for the nine months endedSeptember 30, 2021 , and the year endedDecember 31, 2020 (dollars in thousands): September 30, 2021 December 31, 2020 Principal Amount Weighted Average Principal Amount Weighted Average Issuer/Borrower Outstanding Interest Rate Outstanding Interest Rate GWG DLP Funding IV, LLC - LNV senior credit 9.00 % 9.12 % facility$ 229,862 $ 202,611 GWG DLP Funding VI, LLC - NF senior credit 5.61 % - % facility 107,604 - GWG Holdings, Inc. - L Bonds 1,311,104 7.25 % 1,277,881 7.21 % GWG Holdings, Inc. - Seller Trust L Bonds 272,104 7.50 % 272,104 7.50 % Beneficient - Debt due to related parties 79,803 7.91 % 77,176 6.50 % Total$ 2,000,477 7.42 %$ 1,829,772 7.43 %
The table below reconciles the face amount of our outstanding debt to the
carrying value shown on our balance sheets (dollars in thousands):
September 30, 2021 December 31, 2020 Senior credit facility withLNV Corporation : Face amount outstanding $ 229,862 $ 202,611 Unamortized deferred financing costs (7,894) (8,881) Carrying amount $ 221,968 $ 193,730 Senior credit facility withNational Founders LP : Face amount outstanding $ 107,604 $ - Unamortized deferred financing costs (1,870) - Carrying amount $ 105,734 $ - L Bonds and Seller Trust L Bonds: Face amount outstanding $ 1,583,208$ 1,549,985 Redemptions and subscriptions in process(1) 12,726 17,978 Unamortized selling costs (44,022) (48,957) Carrying amount $ 1,551,912$ 1,519,006 Debt due to related parties: Face amount outstanding $ 79,803 $ 77,176 Unamortized discount (2,441) (916) Carrying amount $ 77,362 $ 76,260
__________________________________________
(1)Amount as of
Page 69 -------------------------------------------------------------------------------- Amendments of Senior Credit Facility withLNV Corporation EffectiveSeptember 7, 2021 , DLP IV entered into the Fourth LNV Credit Facility, which replaced the Third LNV Credit Facility, datedJune 28, 2021 . The Fourth LNV Credit Facility makes available a total of up to$300.0 million in credit to DLP IV with a maturity date ofSeptember 27, 2029 . Subject to available borrowing base capacity, additional advances are available under the Fourth LNV Credit Facility at the LIBOR rate described below. Such advances are available to pay premiums and servicing costs of pledged life insurance policies as such amounts become due. Under the Fourth LNV Credit Facility, all advances bear interest at a rate of the Benchmark Rate plus the Applicable Margin, or the Default Rate if an event of default has occurred and is continuing. For purposes of the Fourth LNV Credit Facility, (i) the "Benchmark Rate" is the greater of (a) the sum of (i) the Federal Funds Rate plus (ii) one-half of one percent (0.50%) and (b) one and one half of one percent (1.50%); (ii) the "Applicable Margin" is seven and one half percent (7.50%); and (iii) the "Default Rate" is the Benchmark Rate plus nine and one half percent (9.50%). The effective rate atSeptember 30, 2021 was 9.00%. Interest payments are made on a quarterly basis. As ofSeptember 30, 2021 , we had approximately$229.9 million outstanding under the LNV Credit facility. The Fourth LNV Credit Facility resulted in an additional advance of$30.3 million fromLNV Corporation . Under the Fourth LNV Credit Facility, DLP IV has granted the administrative agent, for the benefit of the lenders under the facility, a security interest in all of DLP IV's assets. As with prior collateral arrangements relating to the senior secured debt ofGWG Holdings and its subsidiaries (on a consolidated basis), GWG Life's excess equity value of DLP IV after satisfying all amounts owing under the LNV Credit Facility is available as collateral for the obligations ofGWG Holdings under the L Bonds and Seller Trust L Bonds (although the life insurance assets owned by DLP IV do not themselves serve as direct collateral for those obligations). We are subject to various financial and non-financial covenants under the Fourth LNV Credit Facility, including, but not limited to, compliance with laws, preservation of existence, financial reporting, keeping of proper books of record and account, payment of taxes, and ensuring that neither DLP IV nor GWG Life become an investment company. In addition, the Fourth LNV Credit Facility has certain reporting obligations that require DLP IV to deliver unaudited quarterly financial statements no later than forty-five days after the end of each of the first three fiscal quarters, and audited annual financial statements no later than ninety days after the end of each fiscal year. As ofSeptember 30, 2021 , we were in compliance with all financial and non-financial covenants. Credit Facility withNational Founders LP OnAugust 11, 2021 , DLP VI, entered into the NF Credit Agreement with each lender from time to time party thereto andNational Founders LP , as the administrative agent. OnAugust 11, 2021 , a one-time advance of approximately$107.6 million was made to the DLP VI under the NF Credit Facility with a scheduled maturity date ofAugust 11, 2031 . Approximately$56.7 million of such advanced amount was used to pay off the remaining amount due under the Third LNV Credit Facility. Amounts borrowed under the NF Credit Facility bear interest on each day on the outstanding principal amount on such day at a per annum rate, determined on a daily basis, generally equal to 5.5% up to a 65% of the loan to value percent as calculated in accordance with the NF Credit Agreement, and 7.0% on anything above that loan to value percent. The principal amount outstanding under this facility was$107.6 million as ofSeptember 30, 2021 . We are subject to various financial and non-financial covenants under the NF Credit Facility, including, but not limited to, compliance with laws, preservation of existence, financial reporting, keeping of proper books of record and account, payment of taxes, and ensuring that neither DLP VI nor GWG Life become an investment company. Additionally, we are required to maintain a Debt Coverage Ratio not to exceed 90%. As ofSeptember 30, 2021 , we were in compliance with all financial and non-financial covenants in the NF Credit Facility. L Bonds (including Liquidity Bonds) and Seller Trust L Bonds InJanuary 2015 ,GWG Holdings began publicly offering up to$1.0 billion of L Bonds as a follow-on to our earlier$250.0 million public debt offering. InJanuary 2018 ,GWG Holdings began publicly offering up to$1.0 billion L Bonds as a follow-on to its earlier offering. OnJune 3, 2020 , a registration statement relating to an additional public offering was declared effective permitting us to sell up to$2.0 billion in principal amount of L Bonds on a continuous basis throughJune 2023 . These bonds contain the same terms and features as our previous offerings. ThroughSeptember 30, 2021 , we have raised$453.2 million under this offering, including renewals, since it was declared effective. Page 70 -------------------------------------------------------------------------------- ThroughSeptember 30, 2021 , the total amount of L Bonds sold under all offerings, including renewals, was$2.3 billion . As of bothSeptember 30, 2021 andDecember 31, 2020 , respectively, we had approximately$1.3 billion in principal amount of L Bonds outstanding (exclusive of Seller Trust L Bonds). OnAugust 10, 2018 ,GWG Holdings , GWG Life and theBank of Utah , as trustee, entered into the L Bond Supplemental Indenture to the Amended and Restated Indenture.GWG Holdings entered into the L Bond Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture necessary to provide for the issuance of the Seller Trust L Bonds.GWG Holdings issued Seller Trust L Bonds in the amount of$366.9 million to the Seller Trusts in connection with the Exchange Transaction. As a result of the Collateral Swap discussed in Note 1 to the accompanying condensed consolidated financial statements,$94.8 million of the Seller Trust L Bonds are eliminated upon consolidation. The maturity date of the Seller Trust L Bonds isAugust 9, 2023 . The Seller Trust L Bonds bear interest at 7.5% per annum. Interest is payable monthly in cash (see Note 9 to the accompanying condensed consolidated financial statements). The Amended and Restated Indenture was subsequently amended onDecember 31, 2019 , primarily to modify the calculation of the Debt Coverage Ratio in the Indenture to provideGWG Holdings with the ability to incur indebtedness (directly or through a subsidiary ofGWG Holdings ) that is payable in capital stock ofGWG Holdings or mandatorily convertible into or exchangeable for capital stock ofGWG Holdings that would be excluded from the calculation of the Debt Coverage Ratio. OnDecember 31, 2020 , we entered into the Liquidity Bond Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture necessary to provide for the issuance of the Liquidity Bonds in a principal amount of up to$1.0 billion . The weighted-average interest rate ofGWG Holdings' outstanding L Bonds (excluding the Seller Trust L Bonds) as of bothSeptember 30, 2021 andDecember 31, 2020 was 7.25%, and the weighted-average maturity at those dates was 2.89 years and 3.19 years, respectively.GWG Holdings' L Bonds (other than the Seller Trust L Bonds and Liquidity Bonds) have renewal features. Since we first issuedGWG Holdings' L Bonds, we have experienced$873.1 million in maturities, of which$429.5 million has renewed throughSeptember 30, 2021 , for an additional term. This renewal activity has provided us with an aggregate renewal rate of approximately 49.2% for investments in these securities. Future contractual maturities of L Bonds (including the Seller Trust L Bonds and Liquidity Bonds) atSeptember 30, 2021 are as follows (in thousands): Years EndingDecember 31 , Three months ending 2021(1)$ 320,919 2022 288,968 2023 248,168 2024 171,306 2025 164,645 Thereafter 389,202$ 1,583,208 (1)As ofSeptember 30, 2021 , we had approximately$366.9 million in principal amount of Seller Trust L Bonds outstanding, of which$94.8 million are held by the ExAlt Trusts and are eliminated in consolidation. Accordingly, the net of these amounts,$272.1 million , is presented in the table above. As the second anniversary of the Final Closing Date has passed, the holders of the Seller Trust L Bonds now have the right to causeGWG Holdings to repurchase, in whole but not in part, the Seller Trust L Bonds held by such holder within 45 days. As such, while the maturity date of the Seller Trust L Bonds is inAugust 2023 , their contractual maturity is reflected in 2021, as that is the first period in which they could become payable. The repurchase may be paid, at the option ofGWG Holdings , in the form of cash, and/or a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under the Commercial Loan Agreement, and (ii) Common Units, or a combination of cash and such property. The L Bonds (including the Seller Trust L Bonds and Liquidity Bonds) are secured by all of our assets and are subordinate to the LNV Credit Facility and the NF Credit Facility. Debt Due to Related Parties Beneficient had borrowings with an aggregate carrying value of$77.4 million and$76.3 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. This aggregate outstanding balance includes a first lien credit agreement and a second lien credit agreement with respective balances, including accrued interest, of$2.4 million and$74.7 million as ofSeptember 30, 2021 and$2.3 million and$72.3 million as ofDecember 31, 2020 , respectively. These amounts exclude an unamortized Page 71 -------------------------------------------------------------------------------- discount of$2.4 million and$0.9 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. In accordance with the terms of the Ben Credit Agreements, datedAugust 13, 2020 , both loans accrue interest at a rate of 1-month LIBOR plus 8.0%, with a maximum rate of 9.5%. Prior to the Ben Credit Agreements, both loans accrued interest at a rate of 1-month LIBOR plus 3.95%, compounded daily. OnMarch 10, 2021 , the Ben Credit Agreements were amended to extend the maturity for both agreements toMay 30, 2022 , as discussed in detail in Note 17 to the accompanying condensed consolidated financial statements. These loans are not currently guaranteed byGWG Holdings as ofSeptember 30, 2021 . Beneficient has additional borrowings maturing in 2023 and 2024 with an aggregate principal balance of$2.7 million and$2.6 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. We expect to meet our ongoing operational capital needs for, among other things,GWG Holdings' investments in Beneficient, alternative asset investments, policy premiums and servicing costs, new policy acquisitions, exploring opportunities to establish a life insurance company, working capital and financing expenditures including paying principal, interest and dividends through a combination of the receipt of policy benefits from our portfolio of life insurance policies, net proceeds fromGWG Holdings' L Bond offering, dividends and interest from investments, distributions from the alternative assets held by certain of the ExAlt Trusts, future preferred and common equity offerings, and funding available from the LNV Credit Facility. We estimate that our liquidity and capital resources are sufficient for our current and projected financial needs for at least the next twelve months given current assumptions. However, if we are unable to continueGWG Holdings' L Bond or preferred stock offerings for any reason, and we are unable to obtain capital from other sources, our business will be materially and adversely affected. In addition, our business will be materially and adversely affected if we do not receive the policy benefits we forecast and if holders ofGWG Holdings' L Bonds fail to renew with the frequency we have historically experienced. In such a case, we could be forced to sell our investments in life insurance policies to service or satisfy our debt-related and other obligations. A sale under such circumstances may result in significant impairment of the recognized value of our portfolio. Capital expenditures have historically not been material and we do not anticipate making material capital expenditures through the remainder of 2021. Alternative Assets and Secured Indebtedness The following information is specifically related toGWG Holdings, Inc. and its subsidiaries (not including the assets and liabilities held by Beneficient or any eliminations in consolidation). The following table seeks to illustrate the impact that a hypothetical sale of our portfolio of life insurance assets (at various discount rates, including the discount rate used to value our portfolio atSeptember 30, 2021 ), and the realization of the investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH (a substantial majority of the net assets of which are currently represented by intangible assets and goodwill), and the Commercial Loan Agreement (in each case, at their respective carrying amounts and assuming no discount for lack of marketability or transaction costs, which could be substantial) would have on our ability to satisfy our debt obligations as ofSeptember 30, 2021 . The investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH, and Commercial Loan Agreement are discussed in detail in Note 1 and other applicable notes to the accompanying condensed consolidated financial statements. The amounts in the table below do not include the consolidation of the assets and liabilities of Beneficient and related eliminations as ofSeptember 30, 2021 . In all cases, the sale of the life insurance assets owned by DLP IV will be used first to satisfy all amounts owing under the LNV Credit Facility. The net sale proceeds remaining after satisfying all obligations under the LNV Credit Facility would be applied to the L Bonds and Seller Trust L Bonds on a pari passu basis. All dollar amounts in the table below are in thousands. Page 72 -------------------------------------------------------------------------------- Life Insurance Portfolio Discount Rate 8.25%(1) 8.49% Value of life insurance portfolio$ 761,560 $ 753,160 Common Units 437,573 437,573 Preferred Series A Subclass 1 Unit Account of BCH 319,030 319,030 Preferred Series C Unit Account of BCH 210,624 210,624 Commercial Loan Agreement 189,957 189,957 Cash, cash equivalents and policy benefits receivable 91,080 91,080 Other assets 14,037 14,037 Total assets 2,023,861 2,015,461 Less: Senior credit facilities(2) 337,466 337,466 Net after senior credit facilities 1,686,395 1,677,995 Less: L Bonds(3) 1,677,996 1,677,996 Net remaining $ 8,399$ (1) Impairment to L Bonds No impairment Impairment (1)The discount rate used to calculate the fair value of our life insurance portfolio as ofSeptember 30, 2021 . (2)This amount excludes unamortized deferred financing costs. (3)Amount represents aggregate outstanding principal balance of L Bonds and Seller Trust L Bonds prior to eliminations as ofSeptember 30, 2021 . The above table illustrates that our ability to fully satisfy amounts owing under the L Bonds and Seller Trust L Bonds would likely be impaired upon the sale or the realization of the investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH and Commercial Loan Agreement at their respective carrying amounts, plus all our life insurance assets at a price equivalent to a discount rate of approximately 8.49% or higher atSeptember 30, 2021 . AtDecember 31, 2020 , the likely impairment occurred at a discount rate of approximately 16.12% or higher. The above hypothetical analysis is included for informational purposes only, and the results of such analysis have no bearing on the current ability ofGWG Holdings to market and sell L Bonds or to satisfy amounts owing under the L Bonds and Seller Trust L Bonds. The table does not include any allowance for transactional fees and expenses (which expenses and fees could be substantial) nor any discount for lack of marketability associated with a portfolio sale or the realization of the investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH, and Commercial Loan Agreement, respectively, and is provided to demonstrate how various discount rates used to value our portfolio of life insurance assets could affect our ability to satisfy amounts owing under our debt obligations in light of our senior secured lenders' right to priority payments under the LNV Credit Facility and the NF Credit Facility. The table also assumesGWG Holdings will realize the full amounts of investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH, and Commercial Loan Agreement. However, the ultimate value of these investments in Beneficient depends on multiple factors, including the expected growth of new service offerings and products. Since predicting the rate of growth attributable to newly launched products is inherently uncertain, there is no assurance thatGWG Holdings will recover the full book basis of its investments in Beneficient. Additionally, there is currently no market for the aforementioned assets, and a market may not develop. Our Commercial Loan receivable and a portion ofGWG Holdings' investment in the Common Units may be used as consideration for retiring the Seller Trust L Bonds upon a redemption event or at the maturity of the Seller Trust L Bonds (see Note 9 to the accompanying condensed consolidated financial statements). This table also does not include the yield maintenance fee we are required to pay in certain circumstances under the LNV Credit Facility, which could be substantial. The above table should be read in conjunction with the information contained in other sections of this report, including the notes to the accompanying condensed consolidated financial statements in this Form 10-Q and our 2020 Form 10-K. As a result of the Letter Agreement datedNovember 15, 2021 , by and among DLP IV,LNV Corporation , andCLMG Corp. , discussed in detail in Note 17 to these accompanying condensed consolidated financial statements, three percent (3.0%) of any amount received by DLP IV with respect to any death benefit under any policies pledged under the LNV Credit Facility will be payable directly toCLMG Corp. for the benefit of the lenders. The Company expects that the three percent (3.0%) beneficial interest obtained byLNV Corporation will result in a significant downward adjustment to the fair value of the policies pledged under the LNV Credit Facility and will likely have an unfavorable impact on the above sensitivity analysis as ofDecember 31, 2021 , absent any other changes to the values of other assets and liabilities reported at that date. Page 73 -------------------------------------------------------------------------------- Cash Flows Interest and Dividend Payments We finance our businesses through a combination of: life insurance policy benefit receipts; principal, dividends and interest receipts from investments; distributions from the alternative assets held by the ExAlt Trusts; debt and equity offerings; and the LNV Credit Facility and the NF Credit Facility. We have historically relied on debt (L Bonds and the LNV Credit Facility) and equity (preferred stock) financing for the majority of our cash expenditures (for policy acquisition, policy premiums and servicing costs, working capital and financing expenditures including paying principal and interest on existing debt, and forGWG Holdings and GWG Life making investments in Beneficient) as the amount of cash flows from the realization of life insurance policy benefits and cash flows from our other investments has been insufficient to meet all of our needs. This has resulted in the Company incurring substantial indebtedness and, to a lesser extent, obligations to make dividend payments on our classes of preferred stock. Beneficient primarily finances its business through repayments on ExAlt Loans. Such repayments are funded from a portion of the cash distributions the ExAlt Trusts receive from their alternative assets and additional investments in Beneficient byGWG Holdings and/or other parties. See Note 9 to the accompanying condensed consolidated financial statements for details on the amendments of Beneficient's credit agreements. Beneficient uses proceeds from these sources to fund liquidity transactions and potential unfunded capital commitments, working capital, debt service payments, and costs associated with potential future products. Beneficient also anticipates the need to establish sufficient regulatory capital if and when itsTexas trust company charter is issued or the Kansas TEFFI trust company becomes operational. Additionally,Bermuda insurance statutes and regulations, and the policies of the BMA, require that Pen, among other things, maintain a minimum level of capital and surplus, satisfy solvency standards, and restrict dividends and distributions.Beneficient Capital Markets will also be subject to regulations of theSEC andFINRA that require, among other things,Beneficient Capital Markets to maintain a minimum level of capital. Our total interest expense of$45.1 million and$40.8 million for the three months endedSeptember 30, 2021 and 2020, respectively, and$128.6 million and$113.8 million for the nine months endedSeptember 30, 2021 and 2020, respectively, represents the largest cash expense item in each period. Preferred stock cash dividends were$2.4 million and$3.6 million for the three months endedSeptember 30, 2021 and 2020, respectively. and$8.4 million and$11.2 million for the nine months endedSeptember 30, 2021 and 2020, respectively. While reducing our cost of funds and increasing our common equity base are primary goals of the Company, until we do so we will continue to expend significant amounts of cash for interest and dividend payments and will thus continue to rely heavily on our ability to raise cash fromGWG Holdings' L Bond offering, LNV Credit Facility and other means as they are developed and available. Life Insurance Policy Premium Payments The payment of premiums and servicing costs to maintain life insurance policies represents one of our most significant requirements for cash disbursement. When a policy is purchased, we are able to calculate the minimum premium payments required to maintain the policy in-force. Over time as the insured ages, premium payments will increase. Nevertheless, the probability we will be required to pay the premiums decreases as mortality becomes more likely. These scheduled premiums and associated probabilities are factored into our expected internal rate of return and cash-flow modeling. Beyond premiums, we incur policy servicing costs, including annual trustee, policy administration and tracking costs. Additionally, we incur significant financing costs, including principal, interest and dividends. Both policy servicing costs and financing costs are excluded from our internal rate of return calculations. We finance our businesses through a combination of life insurance policy benefit receipts, dividends and interest on other investments, equity offerings, debt offerings, and advances under the LNV Credit Facility and NF Credit Facility. Page 74 -------------------------------------------------------------------------------- The amount of payments for anticipated premiums, including the requirement under the LNV Credit Facility and NF Credit Facility to maintain a two month cost-of-insurance threshold within each policy cash value account, and servicing costs that we will be required to make over the next five years to maintain our current portfolio, assuming no mortalities, is set forth in the table below (in thousands): Years Ending December 31, Premiums Servicing Total Three months ending 2021$ 13,847 $ 457 $ 14,304 2022 81,839 1,828 83,667 2023 93,037 1,828 94,865 2024 101,998 1,828 103,826 2025 113,722 1,828 115,550 2026 125,911 1,828 127,739$ 530,354 $ 9,597 $ 539,951 Our anticipated premium expenses are subject to the risk of increased cost-of-insurance charges (i.e., "COI" or premium charges) for the life insurance policies we own. We have received notices of COI increases on one policy in the first nine months of 2021 compared to six in the first nine months of 2020. We have no known pending cost-of-insurance increases on any policies in our portfolio, but we are aware that cost-of-insurance increases have become more prevalent in the industry. Thus, we may see additional insurers implementing cost-of-insurance increases in the future. Life Insurance Policy Benefit Receipts For the quarter-end dates set forth below, the following table illustrates the total amount of face value of policy benefits owned, and the trailing 12 months of life insurance policy benefits realized and premiums paid on our portfolio. The trailing 12-month benefits/premium coverage ratio indicates the ratio of policy benefits realized to premiums paid over the trailing 12-month period from our portfolio of life insurance policies. 12-Month Trailing 12-Month Trailing 12-Month Trailing Portfolio Face Amount Benefits Realized Premiums Paid Benefits/Premiums Coverage Quarter End Date (in thousands) (in thousands) (in thousands) Ratio September 30, 2017 1,622,627 53,742 46,559 115.4 % December 31, 2017 1,676,148 64,719 52,263 123.8 % March 31, 2018 1,758,066 60,248 53,169 113.3 % June 30, 2018 1,849,079 76,936 53,886 142.8 % September 30, 2018 1,961,598 75,161 55,365 135.8 % December 31, 2018 2,047,992 71,090 52,675 135.0 % March 31, 2019 2,098,428 87,045 56,227 154.8 % June 30, 2019 2,088,445 82,421 59,454 138.6 % September 30, 2019 2,064,156 101,918 61,805 164.9 % December 31, 2019 2,020,973 125,148 63,851 196.0 % March 31, 2020 2,000,680 120,191 65,224 184.3 % June 30, 2020 1,960,826 137,082 66,846 205.1 % September 30, 2020 1,921,067 149,415 67,931 220.0 % December 31, 2020 1,900,715 125,109 69,734 179.4 % March 31, 2021 1,879,895 125,566 71,206 176.3 % June 30, 2021 1,844,466 121,163 61,301 197.7 % September 30, 2021 1,801,306 124,577 72,846 171.0 % We believe that the portfolio cash flow results set forth above are consistent with our general investment thesis that the life insurance policy benefits we receive will continue to increase over time in relation to the premiums we are required to pay on Page 75 -------------------------------------------------------------------------------- the remaining polices in the portfolio. Nevertheless, we expect that our portfolio cash flow on a period-to-period basis will remain inconsistent as we have reduced capital allocated to acquiring a larger, more diversified portfolio of life insurance policies. Inflation Changes in inflation do not necessarily correlate with changes in interest rates. We presently do not foresee any material impact of inflation on our results of operations in the periods presented in our accompanying condensed consolidated financial statements. Off-Balance Sheet Arrangements Unfunded Capital Commitments The ExAlt Trusts had$35.5 million and$35.6 million of gross potential capital commitments as ofSeptember 30, 2021 andDecember 31, 2020 , respectively, representing potential limited partner capital funding commitments on the interests in alternative asset funds. The trust holding the interest in the limited partnership for the alternative asset fund is required to fund these limited partner capital commitments per the terms of the limited partnership agreement. Capital funding commitment reserves are maintained by the associated trusts within the ExAlt PlanTM created at the origination of each trust for up to$0.1 million . To the extent that the associatedExAlt Trust cannot pay the capital funding commitment, Beneficient is obligated to lend sufficient funds to meet the commitment. Any amounts advanced by Beneficient to the ExAlt Trusts for these limited partner capital funding commitments above the associated capital funding commitment reserves held by the associated ExAlt Trusts are added to the ExAlt Loan balance between Beneficient and the ExAlt Trusts and are expected to be recouped through the cash distributions from the interests in alternative asset fund that collateralizes such ExAlt Loan. Capital commitments generally originate from limited partner agreements having fixed or expiring expiration dates. The total limited partner capital funding commitment amounts may not necessarily represent future cash requirements. Beneficient considers the creditworthiness of the investment on a case-by-case basis. At bothSeptember 30, 2021 andDecember 31, 2020 , Beneficient had no reserves for losses on unused commitments to fund potential limited partner capital funding commitments. Equity Method Investee CommitmentsGWG Holdings contributed$3.8 million in cash to FOXO during the nine months endedSeptember 30, 2021 , and has fully contributed its commitment to FOXO in accordance with the related subscription agreement. GWG has no other outstanding capital commitments to FOXO. Credit Risk and Interest Rate Risk We review the credit risk associated with our portfolio of life insurance policies when estimating its fair value. In evaluating the policies' credit risk, we consider insurance company solvency, credit risk indicators, economic conditions, ongoing credit evaluations, and company positions. We attempt to manage our credit risk related to life insurance policies typically by purchasing policies issued only from companies with an investment-grade credit rating by eitherStandard & Poor's , Moody's, orA.M. Best Company . As ofSeptember 30, 2021 , 94.7% of our life insurance policies, by face value benefits, were issued by companies that maintained an investment-grade credit rating (BBB or better) byStandard & Poor's . The LNV Credit Facility, NF Credit Facility, and Beneficient's debt due to related parties are floating-rate financings. In addition, our ability to offer interest and dividend rates that attract capital (including in our continuous offering of L Bonds) is generally impacted by prevailing interest rates. Furthermore, whileGWG Holdings' L Bond offering provides us with fixed-rate debt financing, our Debt Coverage Ratio is calculated in relation to the interest rate on all of our debt financing, exclusive ofGWG Holdings' Seller Trust L Bonds. Therefore, increases in interest rates impact our business by increasing our borrowing costs and reducing availability under our debt financing arrangements. Earnings from our life insurance portfolio are based upon the spread, if any, generated between the return on the portfolio and the total cost of our financing (excluding cost of financing for the Seller Trust L Bonds). As a result, increases in interest rates will reduce the earnings we expect to achieve from our investments in life insurance policies. The ExAlt Trusts hold investments in alternative assets, which are exposed to risks related to markets, credit, currency, and interest rates. Currently, all of these alternative assets consist of private equity limited partnership interests, which are primarily Page 76 -------------------------------------------------------------------------------- denominated in theU.S. dollar, Euro, and Canadian dollar. The underlying portfolio companies primarily operate inthe United States andAsia , with the largest percentage, based on NAV, operating in software and services, semiconductors and semiconductor equipment, diversified financials, food and staples retailing, telecommunications services, and utilities industries. The financial statements risk, stemming from such investments, are those associated with the determination of estimated fair values, the diminished ability to monetize certain investments in times of strained market conditions, the recognition of income and recognition of impairments on certain investments. As ofSeptember 30, 2021 , andDecember 31, 2020 , all of the ExAlt Loans, which are eliminated upon consolidation, are collateralized by the cash flows originating from the ExAlt Trusts' investments in alternative assets. These ExAlt Loans are a key determinant in income (loss) allocable to Beneficient's equity holders, and thusGWG Holdings . Beneficient has underwriting procedures and utilizes market rates. Additionally, Beneficient has purchased put options to protect the net asset value of the interests in alternative assets held by certain of the ExAlt Trusts from impacts associated with a broad market downturn. Finally, the ExAlt Trusts applicable trust agreements allow for excess cash flows from a collective pool of alternative assets to be utilized to repay the ExAlt Loans they have with Beneficient when cash flows from the customer's originally alternative assets are not sufficient to repay the outstanding principal, interest, and fees. Guarantee and Collateral Provisions ofL Bonds GWG Holdings' L Bonds are offered and sold under a registration statement declared effective by theSEC , andGWG Holdings has issued Seller Trust L Bonds under the L Bond Supplemental Indenture, as described in Note 9 to the accompanying condensed consolidated financial statements. The L Bonds and Seller Trust L Bonds are secured by substantially all the assets ofGWG Holdings and a pledge of all ofGWG Holdings' common stock held byBCC and AltiVerse Capital Markets, L.L.C. , a limited liability company owned by an entity related to theBen Initial Investors , includingBrad K. Heppner (GWG Holdings' former Chairman, who served in such capacity fromApril 26, 2019 toJune 14, 2021 , and Beneficient's current Chief Executive Officer and Chairman) and an entity related toThomas O. Hicks (one of Beneficient's current directors and a former director ofGWG Holdings ) ("AltiVerse"). Together, BCC and AltiVerse represent approximately 12% of our outstanding common stock, and are guaranteed by GWG Life and a corresponding grant of a security interest in substantially all the assets of GWG Life. As a guarantor, GWG Life has fully and unconditionally guaranteed the payment of principal and interest on theL Bonds and Seller Trust L Bonds. GWG Life's equity inGWG Life Trust , DLP IV, andDLP V Holdings serves as collateral forGWG Holdings' L Bond and Seller Trust L Bond obligations. As ofSeptember 30, 2021 , substantially all of our life insurance policies were held by DLP IV, DLP V, orGWG Life Trust . The policies held by DLP IV are not direct collateral for the L Bonds as such policies are pledged under the LNV Credit Facility. OnDecember 31, 2020 ,GWG Holdings ,GWG Life andBank of Utah , as trustee, entered into the Liquidity Bond Supplemental Indenture that provides for the issuance of two series of Liquidity Bonds, as described in Note 9 to the accompanying condensed consolidated financial statements. The Liquidity Bonds are issued by GWG Life and guaranteed byGWG Holdings . The Liquidity Bonds are secured by the same collateral as the other L Bonds. Furthermore, regarding the obligations ofGWG Holdings and its subsidiaries as ofSeptember 30, 2021 : (1) The Seller Trust L Bonds are secured obligations ofGWG Holdings , ranking junior to all senior debt ofGWG Holdings and pari passu in right of payment and in respect of collateral with all L Bonds ofGWG Holdings (see Note 9). Payments under the Seller Trust L Bonds are guaranteed by GWG Life. The assets exchanged in connection with the Beneficent transaction are available as collateral for all holders of the L Bonds and Seller Trust L Bonds. Specifically, the Common Units are held byGWG Holdings and the Commercial Loan is held by GWG Life. (2) The Liquidity Bonds are secured obligations of GWG Life, ranking junior to all senior debt ofGWG Holdings or GWG Life and pari passu in right of payment and in respect of collateral with all L Bonds ofGWG Holdings . Payments under the Liquidity Bonds are guaranteed byGWG Holdings . (3) The terms of the LNV Credit Facility require that we maintain a significant excess of pledged collateral value over the amount outstanding on the LNV Credit Facility at any given time. Any excess after satisfying all amounts owing under the LNV Credit Facility is available as collateral for the L Bonds (including the Seller Trust L Bonds and Liquidity Bonds). The following represents summarized financial information as ofSeptember 30, 2021 andDecember 31, 2020 , with respect to the financial position, and for the nine months endedSeptember 30, 2021 , with respect to results of operations. The tables Page 77 -------------------------------------------------------------------------------- present summarized financial information ofGWG Holdings and GWG Life on a combined basis after elimination of (i) intercompany transactions and balances among such entities, includingGWG Holdings' interest in GWG Life, and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor (including DLP IV, DLP V,GWG Life Trust and Beneficient). The summarized financial information has been prepared in accordance with Rule 13-01 of Regulation S-X.
Summarized Balance Sheet Information (in thousands, not intended to balance):
September 30, 2021 December 31, 2020
Assets(1)
Cash, cash equivalents and restricted cash $ 36,720 $ 65,556 Other assets 4,130 6,366 Total assets $ 40,850 $ 71,922 Liabilities L Bonds $ 1,279,808$ 1,246,902 Seller Trust L Bonds 366,892 366,892 Interest and dividends payable 11,402 12,086 Accounts payable and accrued expenses 7,067 7,347 Deferred tax liabilities 51,328 51,469 Total liabilities $ 1,716,497$ 1,684,696 Equity Redeemable preferred stock and Series 2 redeemable preferred stock $
98,478 $ 156,833
______________________________________
(1) Assets exclude: i)GWG Holdings' investment in GWG Life of$1.0 billion and$1.2 billion as ofSeptember 30, 2021 andDecember 31, 2020 , respectively; ii)GWG Holdings' aggregate investments in non-obligor subsidiaries of$654.0 million and$643.1 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively; and iii) GWG Life's aggregate investments in and loans to non-obligor subsidiaries of$1.0 billion and$1.2 billion as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Summarized Statement of Operations Information (in thousands): Nine Months Ended September 30, 2021 Total revenues $ 19,928 Interest expense 109,535 Other expenses 27,020 Total expenses 136,555 Loss before income taxes and preferred dividends (116,627) Income tax benefit 173 Preferred dividends 8,371 Net loss $ (125,171) Debt Coverage Ratio The L Bond borrowing covenants ofGWG Holdings require it to maintain a Debt Coverage Ratio not to exceed 90%. The Debt Coverage Ratio is calculated by dividing the sum of our total interest-bearing indebtedness (other than Excluded Indebtedness defined and described in note 2 to the table below) by the sum of our cash, cash equivalents, restricted cash, life insurance policy benefits receivable, the net present value of the life insurance portfolio, and, without duplication, the value of all of our other assets as reflected on our most recently available balance sheet prepared in accordance with GAAP.GWG Holdings' and GWG Life's investments in Beneficient and GWG Life's ownership interests in the holding companies that own DLP IV and DLP VI, which own substantially all of the life insurance portfolio, secure our obligations under the L Bonds, and are illiquid assets. AlthoughGWG Holdings and GWG Life own debt and equity securities of Beneficient, a substantial majority of the net assets of Beneficient are currently represented by goodwill, an intangible asset. The calculation Page 78 -------------------------------------------------------------------------------- of Beneficient's goodwill required the utilization of significant estimates and management judgment, as discussed elsewhere in this Quarterly Report on Form 10-Q. As a result, the carrying value of those assets as reflected in our accompanying condensed consolidated financial statements may not necessarily reflect the current market price for those assets, especially in the event of a bulk or distressed sale. Proceeds from L Bond sales will be primarily used for the repayment of L Bond maturities, interest payments and other operating expenses ofGWG Holdings , and as otherwise specified in the prospectus for the L Bonds.GWG Holdings may also continue to use a portion of the proceeds from L Bond sales to make investments in Beneficient. Because advances may be used by Beneficient for working capital purposes, such investments may not increase the tangible assets securing the L Bonds. If the trustee for the L Bonds were forced to sell all or a portion of the collateral securing them, there can be no assurance that the trustee would be able to sell them for the prices at which we have recorded them in our accompanying condensed consolidated financial statements, and the trustee might be forced to sell them at significantly lower prices. The discount rate we use for the net present value of our life insurance portfolio for this calculation may not be the same discount rate we use for our GAAP valuation and is not necessarily reflective of the amount we could realize upon a sale of the portfolio (dollars in thousands): September 30, 2021 December 31, 2020 Life insurance portfolio policy benefits$ 1,801,306 $ 1,900,715 Discount rate of future cash flows(1) 7.39 % 7.46 %
Net present value of life insurance portfolio policy benefits $
792,575 $ 822,859 All cash and cash equivalents (including restricted cash) 57,975 106,282 Life insurance policy benefits receivable, net 33,105 14,334 Financing receivables from affiliates 189,957 180,080 Investments in Common Units(3) 437,573 438,194 Investments in Preferred Series A Subclass 1 Unit Account(3) 319,030 319,030 Investments in Preferred Series C Unit Account(3) 210,624 195,578 Other Assets 14,037 20,082 Total Coverage(2)$ 2,054,876 $ 2,096,439 Total Indebtedness(2)$ 1,684,698 $ 1,519,107 Debt Coverage Ratio 81.99 % 72.46 % (1)Weighted-average interest rate paid on indebtedness, excluding that of Seller Trust L-Bonds, as required under the indenture governing the L Bonds. (2)Total Coverage excludes the assets of Beneficient. Total Indebtedness is equal to the total liabilities balance ofGWG Holdings (excluding the liabilities of Beneficient) as ofSeptember 30, 2021 , other than Excluded Indebtedness. "Excluded Indebtedness" means indebtedness that is payable atGWG Holdings' option in capital stock ofGWG Holdings or securities mandatorily convertible into or exchangeable for capital stock ofGWG Holdings , or any Indebtedness that is reasonably expected to be converted or exchanged, directly or indirectly, into capital stock ofGWG Holdings . This change in the definition of the Debt Coverage Ratio was defined in Amendment No. 2 to the Amended and Restated Indenture entered into as ofDecember 31, 2019 (see Note 9 to the accompanying condensed consolidated financial statements). (3)Generally represents the value of the investment in Beneficient as ofDecember 31, 2019 , for investments that existed at the time of the change-in-control transaction, or the value at the time of purchase for investments that were made subsequent toDecember 31, 2019 . As noted above, these are illiquid investments that are carried at book basis and not market value. In the future, the book basis of these investments is subject to change pending the finalization of the accounting impact and conclusions of the Decoupling Transactions discussed in Note 17 to the accompanying condensed consolidated financial statements. As ofSeptember 30, 2021 andDecember 31, 2020 , we were in compliance with the Debt Coverage Ratio. As a result of the Letter Agreement datedNovember 15, 2021 , by and among DLP IV,LNV Corporation , andCLMG Corp. , discussed in detail in Note 17 to these accompanying condensed consolidated financial statements, three percent (3.0%) of any amount received by DLP IV with respect to any death benefit under any policies pledged under the LNV Credit Facility will be payable directly toCLMG Corp. for the benefit of the lenders. The Company expects that the three percent (3.0%) beneficial interest obtained byLNV Corporation will result in a significant downward adjustment to the fair value of the policies pledged under the LNV Credit Facility and will likely have an unfavorable impact on the debt coverage ratio as ofDecember 31, 2021 , absent any other changes to the values of other assets and liabilities reported at that date. Page 79
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