Friday, September 26, 2008

WaMu Bondholders are `Stranded' in Thrift Seizure

(Bloomberg) Washington Mutual Inc. bondholders are likely to lose most of their money after the thrift was seized in the largest U.S. bank failure in history, according to CreditSights Inc.

WaMu was taken over after customers withdrew $16.7 billion from accounts since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said yesterday. New York-based JPMorgan Chase & Co. then bought WaMu's branch network for $1.9 billion to become the biggest U.S. bank by deposits. JPMorgan won't acquire WaMu's liabilities, including claims by senior and subordinated debt holders, according to the Federal Deposit Insurance Corp.

``It seems that WaMu's major debt holders have been stranded by regulatory intervention,'' David Hendler, an analyst at bond research firm CreditSights in New York wrote in a report today. ``The deal structure seems to be unprecedented in that it excludes bondholders at the holdco and bank levels from the major assets and liabilities of the operating bank.''

WaMu has $28.4 billion in outstanding bonds, with Los Angeles-based Capital Research and Management Co. its largest noteholder, according to data compiled by Bloomberg.

Bondholders' only recourse may be the capital remaining at the holding company, Washington Mutual Inc., which Hendler estimated at $2.8 billion. It's unclear whether bondholders at the holding company or at the bank subsidiary level will have first claim on the cash because regulators may force the money to move to support the bank subsidiary, he wrote.

Holding Company Investors

If the holding company keeps the cash, holders of $4.1 billion of Washington Mutual Inc. senior unsecured debt may see a recovery of more than 50 cents on the dollar and investors in $1.6 billion of subordinated debt may get back as much as 10 cents, according to CreditSights. In that scenario, bondholders at the bank level may get an ``extremely low recovery,'' the report said.

If the money is moved to the bank, holders of Washington Mutual Bank's $14.8 billion of senior unsecured debt may recover ``in the mid-to-high teens'' and the holders of $7.9 billion of subordinated debt may see a ``minimal recovery,'' Hendler wrote. Holding company bonds would have an ``extremely low recovery'' in this scenario, he said.

Washington Mutual Bank's $1 billion of 5.65 subordinated securities due in 2014 tumbled 24.75 cents to 0.125 cent at 10:10 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Worst Case

``The worst case developed for the major credit instrument holders,'' wrote Hendler, who didn't immediately return a phone call seeking comment.

No matter where the cash ends up, the $3.4 billion of preferred stock and equity investors will see ``minimal recovery,'' Hendler wrote.

Washington Mutual Inc.'s $730 million of 5.25 percent senior unsecured notes due in 2017 rose 5 cents to 25 cents on the dollar as of 10:20 a.m., according to Trace.

Bond traders had already been pricing in a bankruptcy for some time, said Andrew Rahl, co-head of bankruptcy in New York at law firm Reed Smith LLP.

``This was long anticipated,'' Rahl said. ``You have to assume that, in terms of the creditors, anyone that could has taken steps to protect themselves.''

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