Preferred shareholders of Washington Mutual Inc., the former owner of the biggest U.S. bank to fail, voted against the company’s $7 billion reorganization proposal, jeopardizing a plan to pay common shareholders.
Preferred shareholders who hold about 38 percent, or $2.48 billion worth, of the equity voted against the plan, according to court records filed yesterday in Wilmington, Delaware.
Under the U.S. bankruptcy code, that would typically be enough to block common shareholders from collecting money, even though they settled a potential lawsuit against higher-ranking creditors and voted in favor of the plan with the expectation of getting paid.
“It looks like the settlement for the common shares is out the window,” Kevin Starke, a senior analyst with CRT Capital Group Inc., said in a telephone interview. Unless the judge throws out the “no” votes, the common shares won’t be entitled to recover anything, he said.
WaMu’s preferred convertible securities that may be redeemed until 2049 rose nearly 24 percent today to $15.88, according to data compiled by Bloomberg.
On Feb. 16, WaMu is scheduled to try for the third time to win court approval for its reorganization plan, which would pay $7 billion to creditors. That plan, which includes a settlement endorsed by a committee of preferred and common shareholders, would give shareholders new stock in the only part of the company to survive.
Lower-ranking creditors such as common shareholders typically will not be paid anything unless a super-majority of higher ranking creditors, like preferred shareholders, agree.
WaMu attorney Brian Rosen said 67 percent of the total value of preferred shares participating in the vote needed to accept the reorganization plan. Because 62 percent voted in favor, the judge overseeing the bankruptcy must find a reason to ignore the “no” votes before approving the plan, Rosen said in a telephone interview today.
The official committee that represents common and preferred shareholders supports the reorganization proposal, committee chairman Michael Willingham said in court papers yesterday.
In court papers, WaMu outlined a legal strategy designed to ensure that common shareholders collect something. WaMu said that at least part of the “no” vote should be discounted because it was cast by creditors that have “a bad-faith ulterior motive,” WaMu said.
Creditors that voted against the plan are part of a group called TPS Consortium, WaMu said in its filing. The consortium includes affiliates of hedge funds Black Horse Capital Advisors LLC, Greywolf Capital Management LP and Scoggin Capital Management LP.
In separate votes, the funds voted against the plan and also refused to waive their right to sue, meaning they cannot receive stock set aside for preferred shareholders, WaMu said.
Under bankruptcy rules it may be difficult for WaMu to persuade U.S. Bankruptcy Court Judge Mary Walrath to discount the “no” votes, Starke said.
Starke doesn’t own WaMu securities. Stamford, Connecticut-based CRT Capital is a broker-dealer that helps connect buyers and sellers of securities including WaMu’s. CRT Capital holds three WaMu bonds with a face value of $1,000 each.
Rosen, WaMu’s attorney, said the funds’ votes should be discounted because they weren’t eligible to recover under the plan.
Robert Stark, a lawyer for the funds, didn’t immediately return an e-mail requesting comment.
Seattle-based WaMu 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. Washington Mutual Bank had more than 2,200 branches and $188 billion in deposits.
The bankruptcy case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).