News Column

Tiny Shred of Bankrupt WaMu Emerging to Uncertain Future

Feb. 6, 2012

Drew DeSilver

Washington Mutual

Nearly three and a half years ago Washington Mutual went bankrupt, dragged down by its shoddy lending practices and fleeing depositors. After regulators seized its banking operations, few thought WaMu had much future -- except as an employment project for bankruptcy lawyers.

But perhaps as soon as the end of this month, a sliver of the old WaMu is set to emerge from bankruptcy. It will have offices in the old Washington Mutual Tower, at least for now, and be majority-owned by the old company's preferred and common shareholders.

Don't look for khaki-clad tellers, rodeo grandmas, or any other relics of the former WaMu, though -- there's no bank left. But even though the new company's name, executive team and business plan all are still to be determined, it represents ordinary shareholders' best chance for getting anything of value out of the WaMu wreckage.

"So many times in bankruptcy, shareholders never get this far," said James Scott, of Seattle, a member of the committee that has represented shareholders during the bankruptcy. "For shareholders to have the chance to participate in a company that is moving forward, that could provide for some meaningful recovery down the road -- it's a huge win."

The new company -- call it NewCo for short, since a permanent name hasn't yet been picked -- will have just one operating unit, a small mortgage-reinsurance business. However, the reinsurer isn't writing any new business, it's not expected to turn a profit anytime before the existing policies run out in 2019, and most of the cash it's taking in now is pledged to repay notes that will be issued to certain groups of WaMu creditors.

But NewCo will have a few things going for it as it exits bankruptcy and seeks to rebuild a viable business for its shareholders' benefit. Two creditor groups have agreed to endow the company with $75 million in fresh capital, it likely will receive about $10 million from the reinsurance business, and it will have access to a $125 million credit line.

The biggest potential value may lie in the tax losses NewCo expects to create by formally abandoning its worthless stock in Washington Mutual Bank, which was taken over by regulators and sold to JPMorgan Chase in September 2008. Those losses, which can be used to offset future income for tax purposes, are estimated to be around $5.4 billion.

All of this, of course, presumes that WaMu's creditors and shareholders vote to approve the current reorganization plan and federal Bankruptcy Judge Mary Walrath confirms it.

The voting deadline is Thursday; a confirmation hearing is set for a week later. Should everything fall into place, NewCo hopes to emerge from bankruptcy Feb. 29.

Getting to this point has been a long, tortuous process. The various parties to the bankruptcy case -- WaMu itself, Chase, the Federal Deposit Insurance Corp., shareholders and holders of various issues of WaMu debt -- have spent much of the past three and a half years fighting over billions of dollars in assets and accusing each other of thievery, insider trading and other bad behavior.

It's taken two "global settlement agreements" and seven proposed reorganization plans to reach a compromise deal that most (though not all) of the parties involved have agreed to support.

WaMu's senior creditors -- the vendors, pension-plan beneficiaries and various classes of bondholders, who have top priority in bankruptcies -- are slated to receive around $6.25 billion in cash, primarily from tax refunds owed to the old company. Some creditor groups also will get $140 million in notes backed by the existing reinsurance business, though $10 million are expected to be traded for 10 million shares of NewCo stock.

NewCo will issue 200 million shares of stock. Owners of old WaMu preferred stock will get two-thirds, or 133 million shares. Common stockholders, including investors who own warrants issued by a New York bank that WaMu bought a decade ago, will divide 57 million NewCo shares, or 28.5 percent.

Assuming all of the old company's common shareholders opt for the deal, they'd get one NewCo share for every 33 old WaMu shares; the precise exchange ratio will depend on how many shareholders accept the plan. People with not enough old shares for at least one NewCo share get nothing, as will those who don't formally release any other claims they might have.

Given all the uncertainties surrounding NewCo, it's difficult to put a firm valuation on the company. This past September, Judge Walrath valued it at $210 million; her analysis presumed that NewCo would be able to raise nearly $700 million, or twice the value of its current assets, over the next 20 years.

At that level each NewCo share would be worth just over $1, implying a value for existing WaMu shares of around 3.2 cents. As it happens, WaMu shares were quoted on the Pink Sheets this past week at 3.7 cents.

Scott, of the equity committee, acknowledges that this may not seem like much, given the protracted legal struggle. "It may not be what we were hoping for when we started," he said.

But, he added, between the creditors' payment, the credit line and NewCo's share of the reinsurance business, "$210 million is a lot of money ... If you forget about what Washington Mutual used to be, not many companies have that type of cash and no liabilities." That shareholders are getting anything is notable, said Richard Mikels, a veteran bankruptcy attorney with the Boston-based firm Mintz Levin. For decades, Mikels said, bankruptcy law has been tilting away from shareholders, or equity, and toward creditors.

"If there's any value in the equity of these companies, most of them wouldn't be filing for Chapter 11," he said.

NewCo's next steps are up to its board of directors (see box) and the management the board hires.

IRS rules governing tax losses effectively mean NewCo will have to remain in the financial-services field. The company could buy or build an operating business -- presumably a profitable one, to make use of the losses.

"It could become a bank again," Scott said. "It could be an investment company. Within the world of finance and insurance, it's going to be wide open."

The immediate focus, said equity committee attorney Edgar Sargent, will be on building a company that's successful on its own -- perhaps by buying a small business, growing it for a few years, then seeking outside financing to pursue bigger deals.

However, the tax losses likely will loom large in NewCo's longer-term plans -- if for no other reason than that they're potentially so valuable.

"That is a very attractive corporation for any profitable bank or other company in a related business," said Scott Schumacher, a professor of tax law at the University of Washington Law School. "I wouldn't be surprised if they got acquired."

But that's not likely to happen for a while.

For one thing, federal law generally prohibits a company from using tax losses if it changes ownership within two years of a previous ownership change. The losses have to be used by the entity that generated them in the first place, and the company has to be engaged in broadly the same line of business that led to the losses.

The IRS frowns on companies that exist solely to preserve their tax losses and shop them around, Schumacher said, and it can disallow the losses if it decides the "primary purpose" of an acquisition was to evade or avoid income tax.

"The Service is concerned about 3M or Boeing or GE buying the (tax losses) from someone wholly unrelated and using them to offset profits," he said.

That doesn't mean NewCo couldn't, at some point in the future, strike a deal with a larger, profitable company. But any such transaction would have to be structured very carefully to stay within IRS rules.

Mikels said similar deals have succeeded in the past, and the WaMu plan appears to be on the right track.

"It's certainly a creative approach to maximizing value and trying to create some recovery for people," he said. "They don't seem to be leaving anything on the table."

One more uncertainty: NewCo's name. JPMorgan Chase may own rights to the "Washington Mutual" and "WaMu" names (the company declined to comment), and in any case the new company might want a fresh identity to go with its fresh start.

But Scott, for his part, hopes the old identity can live on in some form.

"Personally, I'd love to see something Washington Mutual-ish," he said. "I don't think the name is tainted -- at least, as long as they don't get into mortgages."



Source: (c) 2012 The Seattle Times


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