WILMINGTON, Delaware (Reuters) - Washington Mutual Inc WAMUQ.PK has struck a tentative deal to end its bankruptcy by essentially giving shareholders tax breaks that they have argued are worth billions of dollars.
Washington Mutual’s attorney told a bankruptcy court on Tuesday that the company hopes the agreement will allow it to exit bankruptcy by the middle of August.
The tentative deal with shareholders brings on board one of the last remaining groups objecting to the company’s reorganization plan. The company will file a new plan in the next seven to 10 days, said Brian Rosen, of law firm Weil, Gotshal & Manges LLP, which represents Washington Mutual.
Washington Mutual’s main pre-bankruptcy business, the savings-and-loan known as WaMu, was seized by regulators in 2008 in the biggest bank failure in U.S. history. It was sold to JPMorgan Chase & Co (JPM.N) for $1.88 billion.
Shareholders have argued that previous bankruptcy plans would have given Washington Mutual’s creditors billions of dollars in hidden value by allowing them to control the reorganized reinsurer, and with it huge potential tax breaks.
The company and creditors disputed those claims, saying the business was worth only $160 million.
Tuesday’s agreement was structured so that each side arguably would get what it claimed. The reinsurer would transfer $160 million to creditors by issuing them debt and preferred securities.
To provide capital so the reinsurer could invest and generate profits, the settlement noteholder hedge funds would lend it $100 million. Rosen said other banks could compete to provide that loan.
At Tuesday’s hearing, some lawyers were cautious about the agreement.
An attorney for the committee of unsecured creditors voiced some concerns about aspects of the deal, while an attorney for Aurelius Capital Management, one of the settlement noteholder hedge funds, made clear his client had not signed on.
Washington Mutual went through the confirmation process before, only to have Delaware Bankruptcy Judge Mary Walrath reject its plan in January.
One concern the judge cited was an allegation made by an individual investor, Nate Thoma of New Jersey, who accused the settlement noteholders of trading on information they gleaned from their seat at the negotiating table.
Rosen said those claims were investigated by the official equity committee, and no evidence was found to support Thoma’s claims.
Tuesday’s agreement also establishes a $30 million litigation trust which will pursue claims to parties who are not covered by the agreement, such as Washington Mutual’s auditors and underwriters.
The trust will seek to recover added money for creditors and shareholders.
The company’s preferred shares WAMPQ.PK were down 6.4 percent at $33.45 in pink sheet trading. The common stock was down 14 percent at 9.35 cents, also in pink sheet trading. Both stocks have doubled in recent sessions as word of a possible settlement leaked.
The case is In re Washington Mutual, U.S. Bankruptcy Court, District of Delaware, No. 08-12229.
Reporting by Tom Hals, editing by Gerald E. McCormick and Robert MacMillan