• Filing Date: 2020-07-09
  • Form Type: 10-Q
  • Description: Quarterly report
v3.20.2
Fair Value Measurements
6 Months Ended
May 31, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements
Fair Value Measurements

The Company carries investment in limited partnership, life settlements and investment in deconsolidated subsidiaries at fair value. As of May 31, 2020, life settlements and investment in deconsolidated subsidiaries are no longer held on the Company's consolidated balance sheet. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Fair value measurements are classified based on the following fair value hierarchy:

Level 1-Valuation is based on unadjusted quoted prices in active markets for identical assets and liabilities that are accessible at the reporting date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2-Valuation is determined from pricing inputs that are other than quoted prices in active markets that are either directly or indirectly observable as of the reporting date. Observable inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and interest rates and yield curves that are observable at commonly quoted intervals.

Level 3-Valuation is based on inputs that are both significant to the fair value measurement and unobservable. Level 3 inputs include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value generally require significant management judgment or estimation.

Assets measured at fair value on a recurring basis

The balances of the Company’s assets measured at fair value on a recurring basis as of May 31, 2020, are as follows (in thousands):

 
Level 1
 
Level 2
 
Level 3
 
Total Fair Value
Assets:
 
 
 
 
 
 
 
Investment in limited partnership
$

 
$

 
$
150,200

 
$
150,200

 
$

 
$

 
$
150,200

 
$
150,200


The balances of the Company’s assets measured at fair value on a recurring basis as of November 30, 2019, are as follows (in thousands):
 
Level 1
 
Level 2
 
Level 3
 
Total Fair
Value
Assets:
 
 
 
 
 
 
 
Investment in limited partnership
$

 
$

 
$
137,849

 
$
137,849

Investment in life settlements

 

 
1,297

 
1,297

 
$

 
$

 
$
139,146

 
$
139,146


The below is a quantitative analysis of the Company's level 3 assets fair value measurements at May 31, 2020:
($ in thousands)
Quantitative Information about Level 3 Fair Value Measurements
 
 
 
Fair Value
at 5/31/2020
 
Aggregate
death benefit
at 5/31/20
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
Investment in limited partnership
$
150,200

 
$
671,831

 
Discounted cash flow
 
Discount rate
 
14.03%
 
 
 
 
 
 
 
Life expectancy evaluation, distributions, return on investment
 
 


Following is a description of the methodologies used to estimate the fair values of assets measured at fair value on a recurring basis and within the fair value hierarchy which is our investment in limited partnership which holds a portfolio of life settlements for the six months ended May 31, 2020. At May 31, 2020, the Company did not directly own any life settlement, as a result, the analysis included is for the six months ended May 31, 2019 for this category.

Investment in limited partnership - In connection with the WE Investment, the Limited Partnership Agreement of White Eagle was amended and restated (the "A&R LPA") to provide for the issuance of the Class A, B and D limited partnership interests, and for funding of an "Advance Facility" evidenced by the Class D limited partnership interests, to maintain reserves sufficient to fund premiums, certain operating expenses of White Eagle and certain minimum payments to Lamington as the holder of the Class B interests. The A&R LPA provides generally that holders of the Class A and Class B Interests receive distributions of proceeds of the assets of White Eagle based on their 72.5% and 27.5% ownership, respectively, after certain expenses and reserves are funded (including such minimum payments to Lamington totaling approximately $8.0 million per year for the first three (3) years and $4.0 million for the subsequent seven (7) years, provided that commencing after year three (3), such minimum payments will be utilized to repay the Class D Return of $8.0 million, which was advanced at closing, plus the greater of $2.0 million or 11% per annum on such $8.0 million to the extent necessary to fully repay such Class D Return. The minimum payments to the Company will occur regardless of maturities with payments through the premium/expense reserve account when there are no maturity proceeds available for distribution as described below). However, the A&R LPA also provides that all payments to holders of the Class B interests (other than such minimum payments to Lamington during the first eight (8) years following the Closing Date) are fully subordinated to payments in respect of the minimum returns to holders of the Class A and Class D interests (including repayment of all amounts advanced in respect of the Advance Facility) and to any indemnification payments, if any, due to such holders and related indemnified persons pursuant to the indemnities afforded them in and in relation to the A&R LPA, Subscription Agreement, Master Termination Agreement and related documents.

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities requires that a reporting entity should account for its equity investments that are not consolidated or accounted for under the equity method at fair value, with changes to fair value recorded in current earnings.

White Eagle previously valued its life settlement policies at fair value whose valuation are based on inputs that are both significant to the fair value measurement and unobservable. The Company now holds an equity investment of 27.5% in White Eagle whose only assets are these life settlements. Additionally, the investment includes a mezzanine financing which the Company assumed at closing which repayment by, and ultimate distributions to, the Company are based on a prescribed waterfall with a guaranteed 11% return to the majority owner partner. The Company will utilize a fair value approach to account for its 27.5% investment in White Eagle, and the calculation will be performed consistent with ASC 820, Fair Value Measurement with changes in fair value recorded in current earnings.

The Company performed a valuation at May 31, 2020 resulting in a value of approximately $150.2 million using an estimated discount rate of approximately 14.03%.

See Note 11, "Investment in Limited Partnership", to the accompanying consolidated financial statements for further information.

Discount rate of investment in limited partnership

The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy, the Company's estimates of the return and investor would require and the current rate of return of the major partner.

The Company re-evaluates its discount rates at the end of every reporting period in order to reflect the estimated discount rates that could reasonably be used in a market transaction involving the Company’s 27.5% investment in White Eagle. In doing so, consideration is given to the various factors influencing the rates, including risk tolerance and market activity. The Company relies on management insight, engages third party consultants to corroborate its assessment and engages in discussions with other market participants. In considering these factors, at May 31, 2020, the Company determined that the estimated discount rate was 14.03%.

Market interest rate sensitivity analysis of the investment in limited partnership

The extent to which the fair value of the investment in limited partnership could vary in the near term has been quantified by evaluating the effect of changes in the weighted average discount. If the weighted average discount rate were increased or decreased by 1/2 of 1% and the other assumptions used to estimate fair value remained the same, the change in estimated fair value of investment in limited partnership as of May 31, 2020 would be as follows (dollars in thousands):

Weighted Average Rate
Rate Adjustment
 
Value
 
Change in Value
13.53%
(0.50
)%
 
$
154,198

 
$
3,998

14.03%

 
$
150,200

 
$

14.53%
0.50
 %
 
$
146,358

 
$
(3,842
)


Life settlements- The Company previously owned a portfolio of life settlements. With the sale of the 72.5% interest in White Eagle and the Sun Life settlement, the Company no longer owns life settlements. During the period of ownership, the Company elected to account for the life settlement policies it acquires using the fair value method. The Company used a present value technique to estimate the fair value of its life settlements, which is a Level 3 fair value measurement as the significant inputs are unobservable and require significant management judgment or estimation. The Company used a probabilistic method of valuing the life insurance policies, which the Company believes to be the preferred valuation method in the industry. The most significant assumptions were the estimates of life expectancy of the insured and the discount rate.

Investment in deconsolidated subsidiaries - As previously discussed in Note 4, "Deconsolidation of Subsidiaries" upon the deconsolidation of Lamington, the Company recorded an investment which was equivalent to the carrying value of Lamington's net assets at fair value. The Company calculated the fair value using unobservable inputs, primarily discounted cash flow analysis which required significant management judgment due to the absence of quoted market prices or observable inputs for assets of similar nature, hence, we utilized a discounted cash flow analysis considering the anticipated date the Company would emerge from bankruptcy, the settlement amount of the debt under the then White Eagle Revolving Credit Facility, and future expenses. The calculation resulted in a fair value of approximately $128.8 million at November 30, 2018, the Company further evaluate its investment at May 31, 2019 and took a further reduction of approximately $52.8 million, the amount is reflected in current earnings as change in fair value of investment in deconsolidated subsidiaries, the fair value of $77.2 million at May 31, 2019. Effective August 16, 2019, Lamington was reconsolidated under the provisions of ASC 810, Consolidation.

Changes in Fair Value

The following tables provides a roll-forward in the changes in fair value for the six months ended May 31, 2020, for all assets for which the Company determines fair value using a material level of unobservable (Level 3) inputs (in thousands):

Life Settlements - Consolidated:
 
Balance, December 1, 2019
$
1,297

Sale of policies
(2,040
)
Gain on sale of life settlement
743

Change in fair value

Premiums paid

Balance, May 31, 2020
$

Changes in fair value included in earnings for the period relating to assets held at May 31, 2020
$



Investment in Limited Partnership
 
Balance, December 1, 2019
$
137,849

Change in fair value
16,351

Distributions

(4,000
)
Balance, May 31, 2020
$
150,200

Changes in fair value included in earnings for the period relating to assets held at May 31, 2020
$
12,351


The following tables provides a roll-forward in the changes in fair value for the periods ended May 31, 2019, for all assets for which the Company determines fair value using a material level of unobservable (Level 3) inputs, which consists solely of life settlements (in thousands):
Life Settlements - Consolidated:
 
Balance, December 1, 2018
$
1,172

Purchase of policies

Change in fair value
6

Matured/lapsed/sold polices

Premiums paid
77

Balance, May 31, 2019
$
1,255

Changes in fair value included in earnings for the period relating to assets held at May 31, 2019
$
6


Life Settlements - Deconsolidated:
 
Balance, December 1, 2018
$
505,235

Purchase of policies

Change in fair value
(29,825
)
Receivable for maturity of life settlement write off
17,800

Policies matured
(68,606
)
Premiums paid
50,947

Balance at, May 31, 2019

$
475,551

Changes in fair value included in earnings for the period relating to deconsolidated assets held at May 31, 2019
$
69,907


The following tables provides a roll-forward in the changes in fair value for the periods ended May 31, 2019, for the White Eagle Revolving Credit Facility for which the Company determines fair value using a material level of unobservable (Level 3) inputs (in thousands):
White Eagle Revolving Credit Facility - Deconsolidated:
 
Balance, December 1, 2018

$
346,670

Draws under the White Eagle Revolving Credit Facility
4,221

Payments on White Eagle Revolving Credit Facility

Unrealized change in fair value
43,679

Balance, May 31, 2019
$
394,570

Changes in fair value included in earnings for the period relating to liabilities at May 31, 2019
$
43,679


The following table provides a roll-forward in the changes in fair value for the period ended May 31, 2019, for the investment in deconsolidated subsidiaries for which the Company determines fair value using a material level of unobservable (Level 3) inputs (in thousands):
Investment in Deconsolidated Subsidiaries
 
Investment in Lamington at December 1, 2018

$
128,795

Change in fair value
(52,769
)
Increase in basis investment

1,151

Investment in Lamington at May 31, 2019

$
77,177



There were no transfers of financial assets or liabilities between levels of the fair value hierarchy during the six months ended May 31, 2020 and 2019.

Other Fair Value Considerations - Carrying value of certificate of deposits, prepaid expenses and other assets, 8.5% Senior Secured Notes, 5.0% Senior Unsecured Convertible Notes, accounts payable and accrued expenses approximate fair value due to their short-term maturities and/or low credit risk.