(Updates with preferred shares in eighth paragraph.)
June 16 (Bloomberg) -- Washington Mutual Inc.’s agreement with shareholders, aimed at ending opposition to the company’s more than $7 billion reorganization proposal, has fallen apart, three people with direct knowledge of the negotiations said.
The talks broke down over how to split up ownership of the only WaMu unit that will survive the collapse of the company, which is the former owner of the biggest U.S. bank to fail, one person with knowledge of the negotiations said.
Creditors, the company and shareholders were trying to complete a contract based on the outline of a settlement that would have given a stake in the unit, a reinsurance company, to shareholders.
WaMu and a committee of shareholders tried to give both common and preferred shareholders a stake in the reinsurance company. They were opposed by a group of preferred holders, who were concerned about anything being given to holders of the common stock, the person said.
“The equity committee and the debtors were trying to provide for a distribution to both,” the person said. “The debtor was hard set on giving something to the commons.”
WaMu, based in Seattle, filed for bankruptcy on Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to JPMorgan Chase & Co. for $1.9 billion. WaMu owned Washington Mutual Bank, the biggest bank to fail in U.S. history, with more than 2,200 branches and $188 billion in deposits.
Black Horse Capital LP of Charlotte, North Carolina, Guggenheim Portfolio Co. VII LLC of New York, Paige Opportunity Partners LP of New York, Pandora Select Partners LP of Minneapolis and Scoggin Capital Management II LLC of New York are among the holders of WaMu preferred shares, known as the “trust preferred holders,” according to a filing last year by their law firm, Brown Rudnick LLP.
One class of preferred shares has fallen since reaching $41 on May 31, their highest price of the year, one week after WaMu confirmed the outlines of an agreement with shareholders. They opened today at $27, 18 percent lower than yesterday’s close, and sold for $31.50 at noon in New York, according to information on the Bloomberg terminal.
The securities carry a dividend of 7.75 percent and are convertible to WaMu common shares until 2049. They jumped more than 86 percent on May 20 to $30 after Bloomberg News reported the outlines of the agreement, citing people familiar with the negotiations. Days later the company confirmed the accord during a court hearing and said the parties were working on final wording of the proposal.
Two WaMu bank notes rose yesterday in after-hours trading, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. WaMu’s zero percent coupon note that was due in February rose 1.4 percent to 36 cents on the dollar and WaMu’s zero percent coupon that matured last year gained less than 1 percent to 36 cents on the dollar, according to Trace. Both trades were recorded at about 5:45 p.m. yesterday in New York.
Should shareholders get nothing from a reorganization, there may be more money available to pay WaMu’s noteholders. According to payment priorities in bankruptcy, preferred holders must be paid in full before common shareholders get anything.
The collapse means that WaMu will move forward with its sixth version of a reorganization plan that proposes to give nothing to shareholders.
U.S. Bankruptcy Judge Mary Walrath said in a hearing earlier this month that should the agreement fall apart, the parties would return to court on July 5 to begin a battle on whether to approve the sixth amended plan.
Robert Stark, a Brown Rudnick attorney who represents some preferred shareholders, declined to comment.
Under the failed settlement, shareholders offered to drop their investigation of the hedge funds in exchange for common equity in the new company and funding for a litigation trust that would try to raise money through lawsuits. The trust would be funded initially with $5 million and later have access to as much as $25 million more, WaMu said.
Now, to defeat WaMu’s sixth amended plan, the committee has renewed its investigation of four hedge funds it suspects of using confidential information to buy and sell WaMu debt. The committee suspects the hedge funds used information it gained while negotiating the sixth amended plan with WaMu.
‘Bad for Shareholders’
Shareholders today filed notice in bankruptcy court that they will take testimony from Centerbridge Partners LP, Appaloosa Management LP and Owl Creek Asset Management LP, filings show. The company has already questioned the fourth hedge fund, Aurelius Capital Management.
Walrath gave shareholders permission to question hedge funds that hold WaMu notes under oath and collect documents about their WaMu trades. Depositions of the hedge funds had been on hold during the current round of negotiations.
“It’s bad for shareholders unless it is a temporary collapse,” Ilene Slatko, a WaMu common shareholder who also covers the case through Twitter for her company, Delaware Shareholder Services. “I’d like to believe that whatever information the committee has will be enough to stop the sixth plan.”
The case is In re Washington Mutual Inc., 08-12229 in U.S. Bankruptcy Court, District of Delaware (Wilmington).
--Editors: John Pickering, Fred Strasser
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