Table of Contents
The J.G. Wentworth Company
(Prior to November 14, 2013, J.G. Wentworth, LLC and Subsidiaries)
Notes to Consolidated Financial Statements
F-17
all residual cash flows are collected. As a result of the long lives of many finance receivables purchased and securitized by the
Company, most consolidated VIEs have expected lives in excess of 20 years.
5. Fair Value Measurements
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value:
For assets and liabilities measured at fair value in the consolidated financial statements:
Marketable securities
– The estimated fair value of investments in marketable securities is based on quoted market prices.
VIE and other finance receivables and VIE long-term debt issued by securitization and permanent financing trusts, at
fair market value
– The estimated fair value of VIE and other finance receivables and VIE long-term debt issued by securitization
and permanent financing trusts, at fair value is determined based on a discounted cash flowmodel using expected future collections
discounted at a calculated rate as described below.
For guaranteed structured settlements and annuities, the Company allocates the projected cash flows based on the waterfall
of the securitization and permanent financing trusts (collectivity the “Trusts”). The waterfall includes fees to operate the Trusts
(servicing fees, admin fees, etc.), note holder principal and note holder interest. Many of the Trusts have various tranches of debt
that have varying subordinations in the waterfall calculation (Note 16). The remaining cash flows, net of those obligations, are
considered a residual interest which is projected to be paid to the Company’s retained interest holders.
The projected finance receivable cash flows used to pay the obligations of the Trusts are discounted using a calculated
rate derived from the fair value interest rates of the debt in the Trusts. The fair value interest rate of the debt is derived using a
swap curve and applying a calculated spread that is based on market indices that are highly correlated with the spreads from the
Company's previous securitizations. The calculated spread is adjusted for the specific attributes of the debt in the Trusts, such as
years to maturity and credit grade. The debt’s fair value interest rates are applied to the projected future cash payments paid on
the principal and interest to derive the debt’s fair value. The debt’s fair value interest rates are blended using the debt’s principal
balance to obtain a weighted average fair value interest rate; this rate is used to determine the value of the finance receivables’
asset cash flows. In addition, the Company considers transformation cost and profit margin associated with its securitizations to
derive the fair value of its finance receivables’ asset cash flows. The finance receivables’ residual cash flows remaining after the
projected obligations of the Trusts are satisfied are discounted using a separate yield based on an assumed rating of the residual
tranche (5.97% and 7.85% at December 31, 2014 and December 31, 2013, respectively, with a weighted average life of 20 years
as of both dates).
The residual cash flows are adjusted for a loss assumption of 0.25% over the life of the finance receivables in its fair
value calculation. Finance receivable cash flows, including the residual asset cash flows, are included in VIE and other finance
receivables, at fair market value in the Company’s consolidated balance sheets. The associated debt’s projected future cash payments
for principal and interest are included in VIE long-term debt issued by securitization and permanent financing trusts, at fair market
value.
For finance receivables not yet securitized, the Company uses the calculated spreads based on market indices, while also
considering transformation costs and profit margin to determine the fair value yield adjusting for expected losses and applying the
residual yield for the cash flows the Company projects would make up the retained interest in a securitization.
For the Company’s Life Contingent Structured Settlements (“LCSS”) receivables and long-term debt issued by its related
permanent financing trusts, the blended weighted average discount rate of the LCSS receivables at the time of borrowing (which
occurs frequently throughout the year) is used to determine the fair value of the receivables’ cash flows. The residual cash flows
relating to the LCSS receivables are discounted using a separate yield based on the assumed rating to the residual tranche reflecting
the life contingent feature of these receivables.
Life settlement contracts, at fair market value –
The fair values of life settlement contracts are determined by reference
to the transfer price of similar life settlement contracts under a discounted cash flow calculation that takes into account the net
death benefit under the policy, estimated future premiumpayments and the life expectancy of the insured, as well as other qualitative
factors regarding market participants' assumptions. Life expectancy is determined on a policy-by-policy basis using the results of
