Washington Mutual stock down on credit concerns
By Anastasija Johnson and Jonathan Stempel
NEW YORK (Reuters) - Washington Mutual Inc (WM.N) shares fell more than 13 percent and the cost to insure its debt against default rose after an analyst said some creditors reduced their exposure to the largest U.S. savings and loan.
Citing the thrift's financial statements for the period ending June 30, Gimme Credit analyst Kathleen Shanley wrote that "many creditors have quietly been pulling funds" from the Seattle-based thrift.
Shanley wrote that federal funds purchased and commercial paper declined to $75 million as of June 30 from $2 billion at year end, while securities sold under repurchase agreements fell to $214 million from $4.1 billion.
Washington Mutual, in a response to Shanley's report, said that, as it had stated months ago, "WaMu funds all of its business through its banking operations and does not rely on commercial paper."
The thrift's shares closed down 62 cents at $4.03 on the New York Stock Exchange, recovering some losses after issuing the statement.
The shares have nevertheless fallen 31 percent since Tuesday, when the thrift reported a surprisingly large $3.33 billion quarterly loss, and 90 percent in the last year.
Washington Mutual was the sixth-largest U.S. mortgage lender in 2007, according to Inside Mortgage Finance, and has struggled with mounting credit losses.
On Tuesday, Washington Mutual said residential mortgage losses through 2011 would likely be toward the high end of the $12 billion to $19 billion range it forecast.
Chief Executive Kerry Killinger said, however, that the thrift had enough capital to get through the housing downturn, after raising $7.2 billion this year from private equity firm TPG Inc and others.
Many other lenders have also raised capital in the past year, but their share prices have still been depressed.
In an interview, Shanley said Washington Mutual is well- capitalized right now, but the company has experienced declines in institutional brokerage deposits and commercial business deposits.
"We don't want to encourage a climate of unnecessary panic, but need to look at the numbers to see what the reality is," she said.
"My concern is that they may have an issue raising additional capital if losses turn out worse than what they have forecast," she added. "Investors have looked at the first wave of capital infusions and so many of them are under water that future investments might be very difficult.
"There is no reason for someone with an insured deposit to feel they need to run to the branch to pull it out," Shanley added.
Credit default swaps on Washington Mutual's debt rose on Thursday to 13.5 percent up front plus 500 basis points, or 5 percent, a year to insure $10 million of debt for five years, according to Markit Intraday.
Swaps typically start trading on an upfront basis when spreads widen over 1,000 basis points. The swaps closed at 832.5 basis points on Wednesday, according to Markit Intraday.
"The shift to upfront represents more of a shift to 'when' WaMu defaults as opposed to 'if,"' said Tim Backshall, chief derivatives strategist at Credit Derivatives Research in Walnut Creek, California.
Gary Kelly, director of research at Tradition Asiel Securities Inc in New York, said: "It's the first real mainstream financial CDS that I've ever seen trade upfront. That gives you an idea how much risk the market sees."
Moody's Investors Service said on Tuesday it may cut the thrift's "Baa3" credit rating to junk status, in part because
of declining balances in "certain deposit categories."
Standard & Poor's cut its credit rating to "BBB-minus" on Wednesday, one notch above junk and equal to Moody's "Baa3" rating. S&P also said the holding company has enough liquidity to avoid needing to tap capital markets through 2012.
(Additional reporting by Dena Aubin and Karen Brettell; Editing by Theodore d'Afflisio and Andre Grenon)
