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Re: Enterprising Investor post# 220

Tuesday, 07/02/2019 6:03:08 PM

Tuesday, July 02, 2019 6:03:08 PM

Post# of 270
Sale and Restructuring Plan and the Commencement of Chapter 11 Proceedings (4/18/19)

On 29 January 2018, SRGL announced that it had commenced, on 28 January 2018, implementation of a sale and restructuring plan for SALIC and certain of its subsidiaries (the “Sale and Restructuring”). The Sale and Restructuring plan is being implemented through U.S. Chapter 11 insolvency proceedings for SALIC and SALIC’s U.S. subsidiary, SHI, in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) (the “SALIC/SHI Chapter 11”).

In connection with the SALIC/SHI Chapter 11, SRGL announced that a stock purchase agreement (the “Stalking Horse SPA”) had been executed between SALIC and SHI, on the one hand, and HSCM Bermuda Fund Ltd., a Bermuda-domiciled investment fund (“Hudson”) managed by Hudson Structured Capital Management (“Hudson Structured”), on the other.

Hudson Structured caused Hudson to execute certain documents associated with the SALIC/SHI Chapter 11 in order for Hudson to act as plan sponsor of the SALIC/SHI Chapter 11. In conjunction with the SALIC/SHI Chapter 11, SALIC filed a number of first day motions on 30 January 2018, intended to allow it to operate in the ordinary course of business during the restructuring process. Upon closing of the Stalking Horse SPA, the Buyer was to own 100% of the stock of the reorganized SALIC including ownership of SHI, SRUS, SRLB, and the Company.

Certain of the SALIC’s subsidiaries, such as the Company, SRUS, and SRLB (together, the “NonDebtors”), are not debtors in the SALIC/SHI Chapter 11 and as such, contracts and relationships between the Non-Debtors and their reinsurance and other counterparties, vendors, and employees are largely unaffected by the SALIC/SHI Chapter 11 filing. In March 2018, SALIC’s wholly-owned subsidiary, Scottish Financial (Luxembourg) S.a r.l. (“SFL”), which was not expected to be acquired as part of the Sale and Restructuring, filed an application with the Luxembourg District Court, sitting in commercial matters (“Luxembourg Court”), to commence a voluntary bankruptcy proceeding. Thereafter, on 16 April 2018, the Luxembourg Court opened a bankruptcy proceeding over SFL and appointed an independent bankruptcy receiver for SFL.

SALIC faced acute liquidity issues in the first quarter of 2018 as a result of the historically adverse performance of the Group’s legacy book of yearly renewable term (“YRT”) reinsurance business, and the growing strain created by payments coming due in the first quarter of 2018 on twenty (20) consecutive quarters of accrued and deferred interest on certain trust preferred securities guaranteed by SALIC.
With the liquidity constraint facing SALIC, the SALIC/SHI Chapter 11 process is designed to:

• Permit SALIC to continue as a going concern during the reorganization process, and to continue to provide uninterrupted performance of its obligations to its third-party and affiliated reinsurance counterparties and business partners; • Permit the SALIC businesses, post-reorganization and under new ownership, to continue to actively participate in the U.S. life reinsurance and annuity industries; and

• Preserve the existing jobs of the employees of SALIC and its subsidiaries.

As contemplated by the Stalking Horse SPA, on 28 February 2018, the Bankruptcy Court entered an Order Approving Bidding Procedures In Connection With An Auction For Plan Sponsorship or Other Alternative Transaction that essentially establishes a framework for an auction process during the pendency of the SALIC/SHI Chapter 11 proceedings in which alternative restructuring transactions from other parties may be offered to and considered by SALIC/SHI in consultation with the Official Committee of Unsecured Creditors appointed in SALIC/SHI Chapter 11 cases (the “Creditors Committee”). The designation of the winning bidder was subject to Bankruptcy Court approval.

On 25 May 2018, SALIC/SHI received bids for alternative restructuring transactions from two other parties, one of which was considered by SALIC/SHI, in consultation with the Creditors Committee, to be a qualified bid in accordance with the bidding procedures approved by the Bankruptcy Court, for onward submission to the auction process to compete with Hudson. The qualified bid was from a newly formed Cayman Islands company controlled by or affiliated with Connecticut-based asset management firm, Hildene Capital Management LLC (“Hildene”). The auction took place on 30 May 2018, between Hildene and Hudson, in which Hildene emerged as the winning bidder following the auction process. Hildene was confirmed as the winning bidder by the Bankruptcy Court, through a winning bidder order, on 12 June 2018, following an uncontested Bankruptcy Court hearing on 4 June 2018. As part of the same order, Hudson was confirmed as the backup bidder. Also on 12 June 2018, the Bankruptcy Court entered an order approving the stock purchase agreement (the “SPA”) between SALIC and Hildene. Following the emergence of Hildene as the confirmed winning bidder, the Bankruptcy Court approved an accompanying disclosure statement following a hearing on 28 June 2018.

The disclosure statement was then distributed by SALIC/SHI to eligible creditors on 3 July 2018, to solicit votes on a Chapter 11 plan of reorganization incorporating the terms of the new restructuring transaction from Hildene (the “Plan”), and request the Bankruptcy Court to confirm the Plan. The Plan was unanimously accepted by all voting classes, and was confirmed by the Bankruptcy Court on 22 August 2018.

The SPA was subject to certain closing conditions related to the SALIC/SHI Chapter 11, as well as the receipt by Hildene of all required regulatory approvals necessary to effectuate a change of control of the affected entities. Recognizing that regulatory approval can take time, SALIC, SHI, and Hildene had always understood and expected that there would be a longer-than-usual period between confirmation and the Plan effective date. Thus, the SPA with Hildene provided for an outside closing date of 9 December 2018. As at 31 December 2018, the Plan had not gone effective. There were two primary reasons that the SPA had not yet closed and the Plan had not yet gone effective before year-end. First, certain of the necessary regulatory approvals remained pending. Second, and not entirely unrelated, the Company’s U.S. affiliate, SRUS, has continued to experience significant deterioration in its financial condition due to unprecedented levels of current and projected adverse mortality experience, predominantly in respect of the business ceded to SRUS by one particular ceding company (“Cedent One”). None of this YRT business is ceded to the Company.

Adverse mortality experience on Cedent One’s business increased dramatically during 2018 to even higher levels, rendering the preliminary solution unworkable and requiring a new solution. Without such a solution, the funding need at the Group is expected to be even greater at a closing and into the foreseeable future.

Therefore, SALIC, with Hildene’s cooperation and assistance, were actively pursuing such a solution through negotiations with Cedent One.

During December 2018 and January 2019, Hildene had indicated a willingness to extend the outside closing date pursuant to an amendment to the SPA to attempt to reach a satisfactory resolution of the issues described earlier. Hildene and SALIC were continually in discussions concerning, and were close to memorializing, such an extension to the SPA.

However, a new obstacle to the closing of the SPA had emerged which was that the fourth quarter 2018 financial results of SRUS and SALIC were far worse than originally expected, and, without renegotiating additional business negatively impacting SRUS and SALIC, the capital contributions required of Hildene at closing and in the future, would remain prohibitively high and be subject to an unacceptable level of risk of depletion. As a result, Hildene required as a further condition to proceeding with the extension and subsequent closing of the SPA, at a minimum, that SALIC and SHI favourably resolve the business with another third-party ceding company (“Cedent Two”) adversely affecting SRUS’s capital and surplus and SALIC’s liquidity.

During January and February 2019, SALIC engaged in extensive negotiations with Cedent Two in an effort to reach a resolution acceptable to both Cedent Two and Hildene. Despite these efforts, a settlement proposal could not be agreed, and on 16 February 2019, Hildene informed SALIC that it would not pursue closing the SPA. Accordingly, the SALIC and SHI board of directors sent a notice of termination to Hildene on 16 February 2019, and, immediately afterward, contacted Hudson, the company that had entered into a stalking horse stock purchase agreement with SALIC and SHI on 28 January 2018 (and as stated earlier), on the possibility of reengaging on a new transaction.

During February and March 2019, SALIC and Hudson engaged in a more fulsome discussion regarding reengaging to pursue a new transaction. Hudson did provide an indicative bid on 9 March 2019, but following review, this was not deemed acceptable by SALIC and the Creditors Committee.

Following this development, SALIC and the Creditors Committee were in discussions regarding next steps in the SALIC/SHI Chapter 11, which included engaging again with Hildene, in an effort to find an alternative restructuring transaction.

On 27 March 2019, the Creditors Committee filed with the Bankruptcy Court a motion to convert the SALIC/SHI Chapter 11 restructuring process to Chapter 7 (liquidation) proceedings. A hearing on the conversion motion has been scheduled in the Bankruptcy Court for 17 April 2019.

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