August 18, 2008 / 9:04 PM / 11 years ago

US CREDIT-WaMu debt distressed on funding concerns

 By Karen Brettell
 NEW YORK, Aug 18 (Reuters) - Washington Mutual Inc’s (WM.N) debt is likely to remain distressed in the near term on concerns the largest U.S. savings and loan would be challenged to access new capital if it is needed to cover losses from bad mortgage loans.
 While WaMu is considered adequately capitalized for losses it is expected to take from mortgage and other debt, if its volume of bad loans increases the company may struggle to raise new funds due to its plunging share price and rising bond yields.
 Credit default swaps on WaMu’s debt have surged to 1,222 basis points from 758 basis points before it reported on July 22 a $3.33 billion loss for the second quarter.
 “I think they have a couple of quarters to either demonstrate that they can get these losses behind them or find new capital,” said Ricardo Kleinbaum, analyst at BNP Paribas in New York.
 WaMu said in its results statement that losses through 2011 in its one-family residential mortgage portfolio would probably be toward the high end of its prior forecast of $12 billion to $19 billion.
 Moody’s Investors Service, which placed the company’s unsecured debt on review for downgrade into junk territory on the earnings, has a stress loss estimate of $30 billion, which includes $23.6 billion of losses from residential mortgages.
 “WaMu may need to raise additional capital, if — due to greater housing price declines and/or a more severe than expected slowdown in the U.S. — ultimate losses approach or exceed Moody’s $30 billion stress loss estimate,” Michael Love and Chris Lam, analysts in the credit strategy group at Moody’s, said in a report.
 “Specifically, it will be expensive for the firm to raise capital, owing to its depressed share price and a make-whole agreement with TPG for its prior $7 billion convertible preferred share offering on April,” they said.
 WaMu, which in April received a $7.2 billion capital injection from private equity firm TPG Inc and other investors, would be required to cover any dilution TPG suffers if the thrift were to raise another $500 million of equity at less than $8.75 per share within 18 months.
 The company’s stock price lost 7.5 percent to $4.21 on Monday, down from around $12 in April, while its cost of funding in the unsecured debt market has surged. WaMu’s 6.875 percent bond due 2011 is now yielding almost 20 percent, compared with around 9 percent in April, according to MarketAxess.
 Moody’s cited WaMu’s diminished financial flexibility as a cause of concern in its downgrade review, and if WaMu is cut into junk, its capital raising ability may be constrained even further.
 “A potential downgrade of its debt rating to junk status would further dampen its ability to raise new capital in the debt markets and could have a negative impact on its ability to attract deposits,” said Moody’s analysts Love and Lam in the report.
 “We believe WaMu’s bonds and credit default swaps will continue to trade at distressed levels until the specter of a potential capital shortfall is removed,” they added.  (Additional reporting by Jonathan Stempel; Editing by Leslie Adler)                

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