Washington Mutual Inc. (WAMUQ) and its biggest creditors agreed to settle a fight with shareholders by giving them equity in the company that will emerge from bankruptcy, two people familiar with the proposal said.
The outline of the deal includes $25 million for a litigation trust that would bring lawsuits to collect more money for shareholders. In return, shareholders would drop allegations that hedge funds who own $2.54 billion of WaMu’s debt used confidential information to guide their investments.
Washington Mutual shares rose as much as 90 percent to 7.9 cents in over-the-counter trading.
How much the deal is worth to shareholders can’t be easily calculated because the value of the reinsurance company they will get a stake in relies in part on future tax breaks, said one of the people, who declined to be identified because the discussions are private.
“That is impossible to assess,” one of the people said.
Shareholders are among the last opponents to WaMu’s reorganization plan, which would pay more than $7 billion to creditors, who are mostly unsecured note holders. The parties to the negotiation haven’t decided how to split equity in the reorganized company between preferred and common shareholders.
The deal would include the court-appointed committee of WaMu’s equity holders, WaMu, and four hedge funds that helped negotiate the current reorganization plan: Appaloosa Management LP, Centerbridge Partners LP, Owl Creek Asset Management LP and Aurelius Capital Management LP.
Mark Gallogly, a managing principal of Centerbridge, and David Tepper, president of Appaloosa, didn’t immediately respond to e-mails seeking comment.
Details of the proposed settlement have not yet been decided and the deal could still fall through, one of the people said.
The two sides have agreed that the noteholders will provide $100 million in exit financing to the new reorganization plan. The form the financing will take has not been worked out, one of the people said.
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. (JPM) for $1.9 billion. Washington Mutual Bank was the biggest bank to fail in U.S. history, with more than 2,200 branches and $188 billion in deposits.
U.S. Bankruptcy Judge Mary Walrath has given shareholders permission to question the hedge funds’ under oath and collect documents about their WaMu trades. Depositions of the hedge funds were scheduled to begin this month.
Hearing Next Month
Any evidence they found could be used at a hearing Walrath scheduled for June 29 to decide whether to approve WaMu’s reorganization proposal.
Under the plan WaMu would distribute more than $7 billion in cash and tax refunds and reorganize a reinsurance company that has the right to offset taxes on future profits with losses from the former bank-holding company.
Until now WaMu and its creditors had argued that shareholders were not entitled to receive anything under the reorganization plan. Senior noteholders owed $4.13 billion are scheduled to be fully repaid with interest, as are senior subordinated noteholders owed $1.67 billion, under WaMu’s original reorganization plan.
Washington Mutual shares rose as much as 90 percent to 7.9 cents in over-the-counter trading. WaMu’s 5 3/8 percent convertible bonds rose as much as $2.85, or about 24 percent, to $14.60 before closing at $12.50. The securities can be converted to shares until 2041.
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