WaMu deal reverses votes against bankruptcy plan

Thu Feb 16, 2012 3:03pm EST

* Group of preferred shareholders now onboard

* Stake in reorganized company upped to 75 pct from 70 pct

By Tom Hals

WILMINGTON, Del., Feb 16 (Reuters) - Washington Mutual Inc reached an agreement on Thursday that gave it the needed approval of creditors to end its bankruptcy three years after its namesake bank was seized by regulators.

A group of preferred shareholders agreed to change their votes and they now support the company's reorganization plan, according to Brian Rosen of Weil, Gotshal & Manges LLP, which represents the company.

Rosen was speaking at a bankruptcy court hearing to approve the company's reorganization plan, which will pay about $7 billion to its creditors.

Thursday's hearing was delayed for several hours as attorneys negotiated outside the courtroom to win over a small group of preferred shareholders.

Earlier in the week, court papers showed that about 62 percent of preferred shareholders voted to approve the company's reorganization plan. Without the required 2/3 majority, no lower priority claim could be paid until the preferred shareholders were paid in full.

That meant common shareholders might get nothing, despite agreeing in December to settle their hard-fought objections in return for a stake in the reorganized company.

To win over enough preferred shareholders, Washington Mutual increased their stake in the reorganized company that will emerge from bankruptcy to 75 percent from 70 percent, according to court documents. The remaining part of the reorganized company, which operates a mortgage reinsurance business, will be owned by common shareholders.

The preferred shareholders who changed their votes will also receive a general unsecured claim of $619,000 and they will be allowed to receive up to $18 million from settlement funds previously offered by JPMorgan Chase & Co.

The preferred shareholders may also seek reimbursement for their expenses up to $15 million, Rosen told the court.

Washington Mutual's lending business was seized by regulators at the height of the 2008 financial panic in the biggest bank failure in U.S. history.

The bank was immediately sold by the Federal Deposit Insurance Corp to JPMorgan Chase & Co for $1.88 billion. Washington Mutual filed for bankruptcy the next day, and legal battles quickly followed over who owned which assets.

Thursday's confirmation hearing, which was still underway during the afternoon, is the company's third.

Judge Mary Walrath rejected the company's two previous plans, in part because of her concerns that a group of hedge funds had used their role negotiating the bankruptcy plan to use nonpublic information in trading Washington Mutual securities.

The company's common stock was down about 5 percent at 4.1 cents in pink sheet trading.

The case is In re Washington Mutual, U.S. Bankruptcy Court, District of Delaware, No. 08-12229.