Scottish Re negotiating PATs restructuring, considering trust preferred interest deferral to avoid bankruptcy

By Caroline Salls

Pittsburgh, Jan. 28 - Scottish Re Group Ltd. has been in private negotiations for the restructuring, exchange and/or repurchase of its $100 million payment obligation on the Premium Asset Trust certificates due March 12, 2009 issued by Scottish Annuity & Life Insurance Co. (Cayman) Ltd. in an effort to avoid bankruptcy, according to a company news release.

If Scottish Re is unable to buy back the PATs at a substantial discount or restructure the PATs payment obligation, the company said Salic would likely not be able to repay the principal amount at maturity and, as a result, Scottish Re could be forced to seek bankruptcy protection.

In addition, the company said it is considering deferring interest payments on trust preferred securities issued and sold through statutory trusts established by Scottish Re in order to further preserve liquidity.

The trust preferred securities include the $20 million trust preferreds due 2033, the $10 million trust preferreds due 2033, the $32 million trust preferreds due 2034 and the $50 million trust preferreds due 2034.

Under the related transaction documents, each trust can defer payment of interest for up to 20 consecutive quarterly periods, but no later than their respective scheduled maturity date.

Any deferred payments would accrue interest quarterly on a compounded basis if Scottish Holdings, Inc. or Scottish Financial (Luxembourg) Sarl defers interest on the related debentures issued to the trust.

Scottish Re said Salic is a guarantor under each tranche of the trust preferreds.

According to the release, throughout the third and fourth quarters of 2008 and continuing into the first quarter of 2009, adverse capital and credit market conditions have negatively impacted the value of underlying collateral used to secure Scottish Re's life reinsurance obligations and statutory reserves for its operating companies. The company said this has decreased the reserve credit permitted to be taken by its insurance subsidiaries for reinsurance ceded to its collateral finance facilities and to the company's non-U.S. reinsurers, and it has diminished Scottish Re's available capital and liquidity.

As a result, Scottish Re said it has taken a number of actions to preserve its capital and liquidity in order to meet its near-term obligations and to avoid bankruptcy.

If the company does not meet the expectations of the Insurance Commissioner of the State of Delaware, Scottish Re said the commissioner could seize control of Scottish Re (U.S.), Inc., which would place control of all management decisions with the commissioner, including controlling cash flows, settling claims and paying obligations.

Scottish Re said the commissioner's primary objective would be to protect the interests of the policyholders and ceding insurers, not to protect the interests of the company or its controlling shareholders.

According to the release, any seizure of Scottish Re (U.S.) could trigger default provisions on some of the company's finance facilities and result in the ceding of company recapture rights on reinsurance agreements.

The seizure would also force the company into bankruptcy. Based on management's preliminary analysis, Scottish Re said it would not have enough funds to pay creditors in bankruptcy or the ability to execute an orderly runoff strategy.

Scottish Re is a life reinsurance specialist located in Hamilton, Bermuda.

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