After spending 38 months adrift in the turbulent waters of bankruptcy court, the prospect of a new Washington Mutual (WAMUQ.PK) is now rapidly steaming "all ahead". Confirmation of the company's third plan of reorganization is set for February 16th and finally has the blessing of the company's equity committee after months of mediation over insider trading charges against four hedge funds which hold positions in the company's debt securities. The charges, considered "colorable" by the bankruptcy court, have been agreed to be dropped in exchange for a $75 million cash infusion into the reorganized company. The agreement also includes wide releases of any possible wrongdoing by multiple parties involved in the case, including JP Morgan (NYSE:JPM) and the FDIC.
While the $75 million is not WaMu's only asset, it is certainly the most easily valued. The new WaMu will also have at least $6 billion in net operating losses attributable to the seizure of its core banking operation, according to an IRS private letter ruling. While the NOLs have some value, they are extremely difficult to monetize because, as it stands now, upon emergence the new WaMu will lack ongoing operations to use its tax losses against other than a run off reinsurance business. Under Graham's principles of security analysis NOLs are generally assigned a value of $0, however the bankruptcy court determined their value at $50 million under the advisement of expert opinion (.pdf).
WaMu's current plan of reorganization also features a debt-for-equity swap to trade up to $10 million for 5% of its new common shares. Under this arrangement, the reorganized company reaches a value of $200 million, however it has yet to be seen how much of the swap actually occurs. Upon approval of the plan of reorganization, current common shareholders can expect up 30% of the new company, WaMu's preferred shareholders (OTC:WAMKQ) up to 70%. Below is a table which summarizes stock values based upon these three possible forms of valuation. The table assumes a full 5% swap subscription, an 8.77% reserve for the Dime Savings Bank of New York (OTC:DIMEQ) warrant holder settlement, and a 99% release election for distribution. Click to enlarge
Regardless of the reorganized company value, in order to receive their pro-rata share of the company's new common equity, current shareholders must make their release elections by February 28th in order to receive their shares. Failure to do so will result in no distribution to them. Washington Mutual shares go ex-date on February 9th meaning sales of shares from the 10th until their eventual cancellation will have no right to a distribution and consequently will be worthless.
Disclosure: I am long (OTC:WAMKQ).