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Rating Action:

Moody's assigned definitive ratings to securitization of structured settlements sponsored by J.G. Wentworth

05 Nov 2010

Approximately $198 million of asset-backed securities rated

New York, November 05, 2010 -- Moody's Investors Service (Moody's) has assigned definitive ratings to the notes (Notes) issued by J.G. Wentworth XXII LLC (Issuer), an indirect subsidiary of J.G. Wentworth, LLC, collateralized by a pool of structured settlements and assignable annuities.

The complete rating action is as follows:

Issuer: J.G. Wentworth XXII LLC

$180,723,000 Class A, 3.82% Fixed Rate Asset Backed Notes, Series 2010-3, rated Aaa (sf)

$17,009,000 Class B, 6.85% Fixed Rate Asset Backed Notes, Series 2010-3, rated A2 (sf)

It should be noted that final amounts of each class are slightly different from the amounts that were assigned provisional ratings on October 28, 2010. Specifically, the Class A Notes were reduced by approximately $0.5 million and the Class B Notes were reduced by approximately $0.05 million, resulting in a decrease in the total issuance of approximately $0.55 million. Nevertheless, the deal's structure and the subordination levels were not changed and the definitive ratings of the Notes with these lower balances are based on the same methodology that was used to assign the provisional ratings (see below). The lower amounts are due to the final interest rate on the notes when priced as compared to the assumed rate that was used for the provisional ratings.

RATINGS RATIONALE

Moody's ratings on the Notes reflects the assessed quality of the court ordered structured settlements and annuity receivables (the receivables), the credit worthiness of the obligors, the servicing arrangement and the structural and legal features. Historically, Wentworth's originated court ordered structured settlements receivables have experienced very low losses, totaling less than 0.15% cumulatively since 2002. In addition, the pool of obligors under the receivables is diverse and comprised primarily of highly rated life insurance companies, of which approximately 89.21%, based on the present value of the securitized receivable, have an insurance financial strength ratings of A3 or higher.

The Issuer's assets will include court ordered structured settlements (approximately 97.4% of the present value of the receivables), annuity receivables (approximately 2.6% of the present value of the receivables) (together the receivables) and $25,000,000 deposited into the Prefunding Account. The receivables were originated by J.G. Wentworth Origination LLC (J.G. Wentworth).

This will be the first J.G. Wentworth transaction that utilizes a Prefunding Account. The amount on deposit in the prefunding account may be used within a prefunding period of sixty days after closing to acquire additional receivables. The addition of new receivables is subject to eligibility criteria and to a Rating Agency Confirmation in which Moody's must affirm that it will not downgrade, withdraw or qualify its ratings of the Notes solely as a result of the acquisition of additional receivables. Any amount remaining in the prefunding account at the end of the Prefunding Period will be deposited into the collection account and distributed in accordance with the priority of payments.

The servicing arrangement adequately reduces the risk of a servicing disruption; Deutsche Bank Trust Company Americas (DBTCA) will act as the master servicer, and will initially subcontract with J.G. Wentworth Management Company, LLC (JGW Management) to perform its servicing obligations. In addition, Portfolio Financial Servicing Company (PFSC) will act as hot back-up servicer.

The transaction utilizes a turbo structure in which all collections from the receivables, net of certain fees and expenses, are first used to meet interest payments on the Notes and second to pay down the Notes' outstanding principal balance until paid in full. The Class A will benefit from 15% subordination comprised of Class B Notes and the Issuer Interest. The Class A subordination is expected to increase over time as the Class B will not receive any principal payments in the first 48 months after the closing date and the Issuer Interest will not receive any principal until all the Notes are paid in full; performance triggers provide additional protection to the Class A notes. The Class B benefits from 7% subordination provided by the Issuer Interest. Finally, the Notes benefit from a non-declining reserve account equal to 1% of the initial present value of the receivables; if and when additional receivables are added to the pool during the prefunding period, the amount on deposit in the reserve account and the target reserve account balance will increase accordingly.

The principal methodology used in rating the Notes is described below. Other methodologies and factors that may have been considered in the process of rating the Notes can be found on www.moodys.com in the Rating Methodologies sub-directory.

Moody's Investors Service received and took into account a third party due diligence report on the underlying assets or financial instruments in this transaction and the due diligence report had a neutral impact on the rating.

In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.

MOODY'S V-SCORE AND PARAMETER SENSITIVITIES

The V Score for this transaction is Low/Medium. The V Score indicates better than "Average" structure complexity and uncertainty about critical assumptions. The Low/Medium score for this transaction is driven by a variety of factors. Historic collateral performance in this sector has been consistent with expectations, and there have been no downgrades to date. Securitization performance data dates back fifteen years or so. Nevertheless, transactions have very long durations of thirty to forty years, and the past experience does not include a period of significant stress such as a default by a major life insurance carrier. Additionally, the vast majority of the assets are originated though a court order process which minimize origination and legal risk. Finally, the obligors under the receivables are life insurance companies which are subject to regulations and oversight. Servicing responsibilities are low because the insurance company obligors are reliable payors.

Moody's Parameter Sensitivities. For this exercise, we analyzed scenarios stressing two key model input assumptions to determine the potential model-indicated ratings impact. The two key model inputs and associated stressed values were as follows: (a) for the default probability, the ten largest obligors were used as a proxy for the pool as a whole. These ten largest obligors constitute about 78% of the pool at closing (based on the present value of the receivables). We lowered their ratings by three and six notches as a proxy for increase in default probability; and (b) for the recovery rate upon an obligor default we lowered the assumed recovery rate by an additional 15% and 45%. Our base case assumes a range of recoveries centered at around 70% for companies that are rated investment grade and centered around 50% for non investment grade companies.

For the Class A notes, using such assumptions , the Aaa (sf) initial rating might change as follows based purely on model results: (a) If the assumed ratings for the ten largest obligors are their current ratings, the model-indicated output based on the changes in recovery rates becomes as follows: base case, Aaa(0); 15% lower than base case, Aaa(0); and 45% lower than base case, Aaa(0); (b) If the assumed ratings for the ten largest obligors are three notches down, the model-indicated output based on the changes in recovery rates becomes as follows: base case, Aaa(0); 15% lower than base case, Aa1(1); and 45% lower than base case, Aa2(2); and (c) If the assumed ratings for the ten largest obligors are six notches down, the model-indicated output based on the changes in recovery rates becomes as follows: base case, Aa3(2); 15% lower than base case, Aa3(2); and 45% lower than base case, A2(5).

For the Class B notes, using such assumptions, the A2 (sf) initial rating might change as follows based purely on model results: If the assumed ratings for the ten largest obligors are their current ratings, the model-indicated output based on the changes in recovery rates becomes as follows: base case, A2(0); 15% lower than base case, A2(0); and 45% lower than base case, A2(0); (b) If the assumed ratings for the ten largest obligors are three notches down, the model-indicated output based on the changes in recovery rates becomes as follows: base case, A2(0); 15% lower than base case, A2(0); and 45% lower than base case, A3(1); and (c) If the assumed ratings for the ten largest obligors are six notches down, the model indicated output based on the changes in recovery rates becomes as follows: base case, Baa2(3); 15% lower than base case, Baa2(3); and 45% lower than base case, Ba1(5).

PRINCIPAL METHODOLOGY

In assigning credit ratings on the Notes, Moody's relied on qualitative and quantitative analysis described in the paragraphs that follow.

Qualitative Analysis. Our qualitative analysis focuses primarily on evaluating (i) servicing disruption risk ; (ii) cash management, and (iii) payment diversion risk. Under the deal's terms, DBTCA (Aa3/P-1) will be the initial Master Servicer in the transaction. In this role, DBTCA is responsible for billing, servicing, administering, and making collections on the securitized receivables. DBTC is also responsible for directing the Paying Agent, U.S. Bank National Association (U.S. Bank), to make monthly distributions according to the priority of payments. DBTCA is expected to enter into a sub-servicing agreement with JGW Management. Under the agreement, JGW Management is expected to perform a significant portion of the servicing duties on behalf of DBTCA; JGW Management has the experience and expertise to perform the day to day servicing of the collateral. Importantly, DBTCA retains the responsibility and liability for the duties subserviced to JGW Management. Further, to provide for a seamless servicing transition, PFSC is will act as a Backup Servicer in the deal. In this role, PFSC is expected to assume JGW Management's duties to the extent that JGW Management is terminated as a subservicer. PFSC duties as a back-up servicer, including maintain daily parallel postings and posting reconciliation, should ensure that it is ready to assume the servicing responsibilities within a relatively short period of time, if needed.

As for the cash management, all obligors are directed to deposit payments into lockbox accounts that are either in the name and control of DBTCA (DBTCA lockbox) or in the name of Receivables Collections, LLC (Receivables Collections), a bankruptcy remote special purpose entity, and under the control of U.S. Bank (U.S Bank Lockbox). All collections on deposit in the DBTCA lockboxes will be transferred daily to either the Master Collection Account (for the settlements) or the Annuity Collection Account (for the annuities), both in the name of the DBTCA. Similarly, all collections on deposit in the U.S Bank lockboxes will be transferred daily to the US Bank Master Collection Account, which is in the name of Receivables Collections and controlled by U.S. Bank. It should be noted that each collection account whether the DBTCA or the U.S. Bank, may include payments relating to other JGW sponsored transactions. Money in each collection account is then transferred to the US Bank Trustee Account. Overall, within three business days after receipt of funds in a US Bank Lockbox or DB Lockbox, the Collateral Trustee, which is either DBTCA or U.S Bank, shall distribute such collections to the Series 2010-3 Collection Account, which is with U.S Bank and in the name of U.S Bank (Aa1/P-1), as indenture trustee, to the benefit of the noteholders. We think that the cash management arrangement is consistent with the ratings of the note.

With respect to payment diversion risk, approximately 97.4% based on discounted balance of the securitized receivables, consist of court ordered structured settlements. Hence, the risk of claimants diverting payments from the securitized assets is very low. Court-ordered structured settlements consist of receivables created after the enactment of the Victims of Terrorism Tax Relief Act of 2001 (the Act). The Act stipulates that the sale of a structured settlement receivable must be subject to a court order under which the structured settlement obligors are directed by court to remit payments to a given party (i.e. J.G. Wentworth in this case).

Quantitative Analysis. Moody's uses a Monte Carlo analysis to simulate different scenarios of structured settlement pool performance. From these scenarios between 5,000 and 15,000 sets of monthly cash-flows are obtained. These cash-flows are then applied to pay down the Notes and then the frequency and severities of defaults for the different classes of Notes are measured. Additionally, the IRR of the simulated Notes cash flows is calculated for each iteration, and the average IRR is compared to the promised IRR (coupon) to measure the reduction in IRR. If there is a principal loss, this loss is noted and the amount is logged. After completing thousands of iterations, an average reduction in IRR, an average frequency of loss and an average loss (expected loss) is calculated. From these results model-indicated ratings are determined using the appropriate Moody's idealized reference tables. Of these measures, the primary driver to the rating outcome is the IRR reduction. It should be noted that for simplicity, the model ignores interest defaults. Despite the very long term of the settlements, the structure of the transactions' cash flow is very plentiful. As such interest defaults would rarely occur except in conjunction with a principal default or severe servicing disruption.

The Monte Carlo simulation model use obligor level information including the aggregate payments from each obligor (life insurance companies). The model relies on identifying key variables important to the performance of the assets and on assigning probability distributions for these variables. The key variables include the probability of default for the obligors making payments under the securitized receivables, the recovery rate on the receivables upon the default of an obligor, the correlation between obligors' defaults, and losses. In defining the parameters for the variables, Moody's relied on a combination of historical data, market knowledge on current and future trends in the insurance industry and the subservicer's own experience.

The following is a more detailed explanation of the key variables and our assumptions for each:

(i) the obligors mix in this deal consists of insurance companies (primarily life insurance companies) which are typically highly rated; in fact, approximately 89.21% of the obligors, based on discounted balance of the securitized receivable, had an insurance financial strength rating of A3 or higher; for probability of default assumption Moody's used the actual credit ratings for the obligor if available; for obligors for which Moody's credit rating was not available, a probability of default consistent with a Ba rating level was assumed; obligors which are part of the same insurance group were treated as a single obligor;

(ii) for recovery assumption, the assumed distributions were centered at around 70% for companies that are rated investment grade and around 50% for non investment grade companies; To date, recoveries on structure settlements upon default of life insurance company have been greater than 95%;

(iii) for correlation we assumed that each individual company's default is correlated to a single industry random variable (i.e. there is no consideration for cross correlation among obligors in the pool); the deal was evaluated under different correlation thresholds of 50%, 75% and 100%;

(iv) losses were assumed to be between 1.5% and 2%. Though historically losses on court ordered structured settlements have been very low, losses for a specific transaction may be higher than the historical levels. Losses may stem from bankruptcy of claimant, fraud, administrative error by the originator or obligor or other reasons.

The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. From time to time, Moody's may, if warranted, change these expectations. Performance that falls outside the given range may indicate that the collateral's credit quality is stronger or weaker than Moody's had anticipated when the related securities were initially rated. Even so, a deviation from the expected range will not necessarily result in a rating action nor does performance within expectations preclude such actions. The decision to take (or not take) a rating action is dependent on an assessment of a range of factors including, but not exclusively, the performance metrics.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
William Black
MD - Structured Finance
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Giyora Eiger
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's assigned definitive ratings to securitization of structured settlements sponsored by J.G. Wentworth
No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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