A newly formed entity backed by a Scottish Re Group Ltd. creditor was deemed to have submitted the highest and best offer for two subsidiaries of the life reinsurer following a two-party, bankruptcy-court supervised auction.
After multiple rounds of bidding through the afternoon and evening of May 30, Hildene Capital Management LLC's Hildene Re Holdings LLC agreed to a transaction that includes consideration of $21.5 million in the form of a plan funding payment to acquire Scottish Annuity & Life Insurance Co. (Cayman) Ltd., as well as a commitment to recapitalize that company and its operating subsidiaries with $12.5 million. The stalking-horse bid by an affiliate of Hudson Structured Capital Management Ltd. contemplated amounts of $12.5 million, apiece, for the plan funding payment and recapitalization. The company ultimately dropped out of the auction after agreeing to raise the plan funding payment component of the transaction to $19.5 million.
A proposed winning bidder order is subject to the approval of the U.S. Bankruptcy Court for the District of Delaware at a hearing scheduled for June 4, as well as regulatory approvals in multiple jurisdictions. The final Hudson Structured offer would be designated as the backup bid.
"The consideration provided by Hildene under the Winning Bidder [stock purchase agreement] will provide a greater recovery for the Debtors' estates than would be provided by any other available alternative," the proposed order stated. "No other person or entity or group of entities has presented an alternative transaction for greater economic value to the Debtors' estate than Hildene," it added.
During the course of the auction, Hudson Structured offered two additional forms of consideration that also would be incorporated in certain respects in the agreement with Hildene. First, it offered to eliminate releases of liability pertaining to Massachusetts Mutual Life Insurance Co. and Cerberus Capital Management LP, affiliates of which combine to hold 100% equity voting power in Scottish Re Group. Secondly, it proposed to finalize an agreement with bond insurer Assured Guaranty Ltd. to eliminate an unsecured claim with an estimated value of around $20 million. Earlier court documents indicated that the Assured claim related to attorneys fees amassed by the bond insurer in connection with legal actions pursued against the investment manager of a special-purpose reinsurer formed by Scottish Re.
Hildene agreed to remove the releases pertaining to the Scottish Re Group shareholders and to work with Assured to resolve its claim.
Hildene, best known as an investor in distressed trust preferred securities and collateralized debt obligations backed by trust preferred securities and insurance company surplus notes, had been an early and vocal critic of Scottish Re's proposed Chapter 11 reorganization plan, which was highlighted by the planned asset sale. The firm criticized the pace at which Scottish Re sought to execute the transaction and warned that the bidding procedures that the life reinsurer proposed would serve to chill bidding.
Scottish Re, for its part, argued that a drawn-out marketing process would increase the risk that the Delaware Department of Insurance might move to place Scottish Annuity & Life subsidiary Scottish Re (U.S.) Inc. into rehabilitation or liquidation. That "apocalyptic" scenario, Scottish Re cautioned in February, would likely destroy trust preferred creditors' hopes of realizing value from the Chapter 11 process.
Instruments linked to trust preferred securities account for much of Scottish Re's outstanding unsecured debt. Scottish Re affiliates issued five series of trust preferreds between 2002 and 2004: $17.5 million in capital securities due 2032; $20 million in preferred trust securities due 2033; $10 million of trust preferreds due 2033; $32 million of trust preferreds due 2034; and $50 million in trust preferreds due 2034. The company acquired $43 million of its trust preferreds in after-market transactions. Two Hildene funds indicated in court filings that they are among the non-insider holders of the Scottish Re trust preferreds.
Scottish Re's claimants also include Security Life of Denver Insurance Co., a Voya Financial Inc. subsidiary. Security Life of Denver's claim of $15.4 million relates to administration fees on certain reinsured business.
Hildene's active involvement in the Chapter 11 proceedings was not atypical for a company that has aggressively sought to protect its interests in similar scenarios in recent years, most notably those in which bank holding companies filed for bankruptcy protection so as to facilitate sales of their banking subsidiaries and to address their outstanding trust preferred-related debt. It has typically operated in such scenarios to facilitate what it believes to be value-maximizing bids by third parties as opposed to direct participation in auctions.
Delaware records show that Hildene Re was incorporated on May 24.
Keefe Bruyette & Woods is serving as Scottish Re's investment banker in connection with the sales process. The law firm of Hogan Lovells US LLP serves as Scottish Re's bankruptcy co-counsel; Nichols Arsht & Tunnell LLP acts as Delaware counsel and bankruptcy co-counsel; and Mayer Brown LLP represents the company as special transactional and insurance regulatory counsel.
Stephen Zide of the law firm of Kramer Levin Naftalis & Frankel LLP represented Hildene at the auction.