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Scottish Re 'meltdown' would be 'apocalyptic' for creditors, company warns


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Scottish Re 'meltdown' would be 'apocalyptic' for creditors, company warns

Scottish Re Group Ltd. companies are warning of dire consequences in a prospective receivership of their Delaware-domiciled insurance affiliate to counter various bankruptcy court objections filed by entities linked to investments in trust preferred securities.

In the event that the Delaware Department of Insurance finds cause to move for rehabilitation or liquidation of Scottish Re (U.S.) Inc., the companies argued in documents filed Feb. 26, the consequences "would be apocalyptic" for their creditors.

Such action would be "destructive of any hope" that creditors of Scottish Holdings Inc. and Scottish Annuity & Life Insurance Co. (Cayman) Ltd. "would have of ever realizing value" from a sale or other transaction involving the two debtor, according to the documents. It would also trigger certain obligations for the latter of the two entities under a net worth maintenance agreement that requires Scottish Annuity & Life to cause Scottish Re (U.S.) to maintain minimum capital and surplus of at least $20 million at all times.

"In a [Scottish Re (U.S.)] meltdown scenario, the Debtors estimate that additional claims against [Scottish Annuity & Life] arising from defaults on commitments to ceding insurers would be in excess of $300 million, which would dilute the existing [trust preferred securities]-related creditors' share of any distributable assets by several multiples," the Scottish Re debtors argued.

Funds linked to Hildene Capital Management LLC, which hold certain Scottish Re trust preferreds, were among the objecting parties who argued, among other things, that Scottish Re was seeking to proceed too quickly with the auction and sale of Scottish Annuity & Life and Scottish Re (U.S.). The stalking-horse bidder for those properties, an affiliate of Hudson Structured Capital Management Ltd., has agreed to pay $12.5 million, and invest another $12.5 million for the recapitalization of the reinsurer.

But while Hildene and other creditors argued that a lengthier time frame than the one proposed by the Scottish Re entities might help attract alternative offers that would bring higher recoveries for the estate, the debtors said there are structural limitations on the kinds of transactions that a prospective acquirer could pursue and that the assets had already been extensively marketed.

The debtors noted that their business has been the subject of sales processes nine times in the last 10 years. "The niche market of strategic and financial buyers who have the interest and capabilities to acquire an offshore/onshore life reinsurance company is well exposed to the Debtors' business, and the current sale time frame is sufficient to solicit higher or otherwise better offers," they argued.

They also noted that the process culminating in Hudson Structured's stalking-horse bid began in early 2017 with Scottish Re's retention of Keefe Bruyette & Woods Inc. The only other proposal to emerge from that process, beyond the one that resulted in the agreement with Hudson Structured, included conditions that Scottish Re determined to be "impracticable if not impossible to meet."

In light of that background, and the media coverage the bankruptcy filing has received, Scottish Re said it does not believe there are any credible prospective buyers that have not already been exposed to the sale process. The debtors also said they have reason to believe a member of their official committee of unsecured creditors, which consists of representatives of Hildene, Voya Financial Inc.'s Security Life of Denver Insurance Co., and M&T Bank Corp.'s trustee subsidiary Wilmington Trust Co., might become a bidder. For its part, Scottish Re expressed concern about granting the committee unfettered consultation rights as it proceeds with the proposed auction and sale given Voya's status as a "direct competitor" in certain reinsurance markets.

"As should now be apparent, it is a thin line between these cases becoming abject failures in which everyone loses and comes away with little to show for their efforts," the Scottish Re entities argued. They also said they are "gravely concerned" that the creditors will push the cases toward such an outcome, and criticized the objecting parties for supporting positions that reflect a "failure to accept the difficult realities that exist" or a "pervasive misunderstanding" of what the debtors are trying to accomplish.

The objections are among the matters scheduled to be taken up at a Feb. 27 hearing.