Scottish Re subsidiaries file for Chapter 11 over preferred payments

New York, Jan. 29 – Scottish Re Group Ltd. said that its Cayman Islands subsidiary, Scottish Annuity & Life Insurance Co. (Cayman) Ltd., and Scottish Annuity’s U.S. subsidiary, Scottish Holdings, Inc., made Chapter 11 filings in the U.S. Bankruptcy Court for the District of Delaware on Sunday.

Scottish Re said that the filings are being made because Scottish Holdings and another subsidiary of Scottish Annuity, Scottish Financial (Luxembourg) Sarl, are unable to make payments due on trust preferred securities that were issued from 2002 to 2004.

A total of $86 million principal amount of trust preferreds is outstanding.

In addition, interest payments have been deferred since the first quarter of 2013 and there is now $20 million of deferred interest that has accrued, net of a further $11 million owed on trust preferreds held by Scottish Re.

Under the terms of the trust preferreds, interest may be deferred for a maximum of 20 consecutive quarters, a limit that has now been reached, making the payments due.

Scottish Holdings and Scottish Financial “lack the resources” to make this payment, Scottish Re said in a news release. In addition Scottish Annuity is unable to pay the deferred interest and still meet its other obligations, including reinsurance obligations to third-party ceding companies, as well as to Scottish Re (U.S.), Inc. in 2018.

In addition to the trust preferred payments, Scottish Annuity has also suffered from the historically adverse performance of its legacy book of yearly renewable term reinsurance business.

As a result, Scottish Re said, it faces “acute liquidity issues in the first quarter of 2018.”

The Chapter 11 filings have been made to implement a sale and restructuring plan for Scottish Annuity and Scottish Holdings.

Sale terms

Scottish Re has entered into an agreement with Hudson Structured Capital Management Ltd. under which Hudson Structured will buy the reorganized Scottish Annuity and will act as plan sponsor for the Chapter 11 proceedings.

In addition to selling Scottish Annuity and Scottish Financial to Hudson Structured, Scottish Re will also sell some of Scottish Annuity’s subsidiaries, including Scottish Re (U.S.) and Scottish Re (Dublin) DAC.

Gregg Klingenberg, the subsidiaries’ chief executive officer, said in a statement filed with the court that the purchase price to be funded by Hudson under the stalking horse agreement has three principal components.

First, Hudson will pay $12.5 million on the effective date of the subsidiaries’ Chapter 11 plan to fund the costs of administration of the Chapter 11 cases, the costs of implementation of the plan and distributions to the holders of claims.

Any portion of the plan funding payment that is not immediately paid to creditors on account of their allowed claims will be transferred to a liquidating trust to fund reserves for costs of administration of the trust and future distributions.

Second, Hudson will make an additional $12.5 million recapitalization funding payment on the plan effective date.

Finally, Klingenberg said Hudson has agreed to bear the cost of cure obligations, up to $100,000, incurred for any executory contracts or unexpired leases that are required to be assumed by the debtors or that Hudson elects to assume.

The restructuring process was announced in May 2017 when Scottish Re began voluntary provisional winding up proceedings in Bermuda with ancillary proceedings in the Cayman Islands.

Debt details

According to court documents, Scottish Holdings has $1 billion to $10 billion in both assets and debt.

The subsidiaries’ largest unsecured creditors are indenture trustee Wilmington Trust Corp. of Wilmington, Del., with a $61.25 million debentures claim; indenture trustee U.S. Bank NA of St. Paul, Minn., with a $39.82 million debentures claim, a $25.03 million debentures claim and a $21.98 million debentures claim, and indenture trustee BNY Mellon, Corporate Trust, of Atlanta, with a $12.51 million debentures claim.

The subsidiaries are represented in the Chapter 11 proceedings by Morris Nichols Arsht & Tunnell, LLP.

Scottish Re is a Hamilton, Bermuda-based life reinsurance company. The subsidiaries’ Chapter 11 case number is 18-10160.

Caroline Salls contributed to this report

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