For shareholders in the new Washington Mutual, the wait continues. After enduring 42 months of bankruptcy, holders of the remnant company, WMI Holdings (WMIH), are in for yet another prolonged period of financial purgatory. Having previously traded under the ticker WAMUQ.PK, shareholders received new common shares in the bank's holding company late March in exchange for a settlement agreement dropping colorable claims of insider trading by hedge funds trading WaMu's stocks and bonds during the bankruptcy process. Since then relatively little new information has been released by the company in the past four months, leading some to wonder what future, if any, there is for the new WaMu. A press release late last week spiked shares up 13% on news that Blackstone LP Group was being retained to assist in a possible acquisition or new business start-up but further details remain greatly limited.
Since the settlement's announcement individuals have been attempting to pin down a value of the reorganized Washington Mutual, which consists of a subsidiary reinsurance company, WWMRC, and the holding company, WMI. The reinsurance company is expected to be managed in a run-off state thru 2018, collecting its share of insurance premiums and paying out claims without writing any future contracts. In its disclosure statement, WaMu projects that the reinsurance company will never be profitable due to projected reinsurance losses and a 13% interest rate due on Runoff Notes issued to senior creditors. What remains then for shareholders are the company's known cash assets and its more ambiguous net operating losses (NOLs).
The bankruptcy court valued WMI at $210M or $1.05 a share based in part on expert testimony from Steven Zelin of Blackstone Advisory Partners, L.P. Zelin reported it was his opinion that the company was worth closer to $150M and the company's billions in NOLs had little value, approximately $15 to $25 million in a best-case scenario. The judge however ultimately ruled the NOLs at $50M after the shareholder's counsel argued they could be much more valuable were the new company properly capitalized and engaged in future business. This evaluation was seconded by the inclusion of a debt-for-equity swap in the reorganization plan that allowed senior creditors to trade up to $10 million of debt for 5% of WMIH's new common shares. Under this arrangement, the reorganized company reaches a value of $200 million.
Shares in WMIH initially traded at the $200M valuation when they were relisted on the pink sheets, reaching a high of $1.14 before plummeting to a low of $.40 in the following months, likely attributable to the information drought. While the 65% price decline might indicate serious new shortcomings for the company, the reality is that WaMu's pre-reorganization preferred shares traded at the then-equivalent price of $.50. With this in mind and no meaningful changes in the company or its outlook since March WMIH is priced where it should be.
The reason for the much lower share price is that the $200M court valuation is misleading, in part because WMI has $140M of its assets tied up in its reinsurance arm against $140M of debt paying 13%. While the arrangement is non-recourse, meaning that WMIH will not have to fulfill the $140M of debt should its subsidiary not be able to pay both the principle and the approximate $62M in accrued interest, WMIH's true value is currently just its cash assets of $75M or $.38/share. Consequently the $.40 52-week low is accurately reflective of this.
It's All About the NOLs
What remains of WMIH besides its cash are its ambiguous and highly IRS restricted NOLs. Under Graham's principles of security analysis NOLs are generally assigned a value of $0, however both Zelin and the court agreed they had some value. Pending no change in business, WMIH's balance sheet projections provided during testimony indicate that WMIH would be liable for $22.4 to $29.5 million of income tax expenses thru 2018, all of which would be avoided utilizing its NOLs. Whether or not these savings would remain with shareholders or be passed down to service WWMRC debt remains unclear at this time, but the savings could potentially add $.13/share to WMIH's book value, a total of $.50 when including its cash.
While the NOLs are arguably WMIH's greatest asset, few can agree upon how to assign a value given they are a gamble upon an unknown future. While not directly monetizable, the NOLs can be carried forward for up to 20 years to offset paying income taxes. However without a profitable arm to generate something to offset, WMIH is left to figure out how to grow in order to capture them. WMIH could also possibly sit on its hands for the next two years, a period after which it is less restricted by IRS limitations regarding mergers and acquisitions. Should WMIH decide to move ahead sooner, the company has a $125 million dollar line of credit available at 7% that it can tap to better achieve usage of the NOLs. This brings its total readily accessible purchasing power to $200M. Some shareholders have questioned the interest rate; however, looking at the rates many companies with similar financial forecasts pay under the Barclays Capital High Yield Bond (JNK) umbrella, a 7% rate is favorable.
As for the size of the NOLs, that too has not been fully detailed. In one of the equity committee's rare reports it stated the total at "over $6 billion." The debtors confirmed this amount more specifically to $6.5B, however, due to the annual limitation imposed by section 382 of the IRC and the company's effective date of March 19, only $4.9B of this NOL will be readily usable. The remainder will be subject to an imposed $6 million annual limitation, which effectively makes it worthless. There is a possibility the NOLs could be higher pending how payments to creditors post-reorganization are handled, but for now the $6.5B attributable to stock abandonment in Washington Mutual Bank appears to be the most supported number to work with.
At a 35% tax rate, the NOLs could be worth up to $1.7B in tax savings for shareholders; however this requires that there are adequate taxable profits to offset. Currently WMIH has no meaningful business with which to achieve this. A merger or acquisition with another corporation could possibility achieve this in whole, however WMIH is more likely to be a target than an acquirer. Consequently the NOLs would likely be discounted by 25% to 35% for transaction risk were the company merged in an all-stock transaction with another entity, lowering the maximum value to $1.1B or $5.50/share. Given the IRS two-year restriction, the earliest WMIH could seek to capture this value would be March 2014, however given the time for deals to actually close, it would take at least six to 12 additional months, if not longer for that value to be realized by WMIH's shareholders.
It remains yet to be seen what WMIH will do with itself. All shareholders can do is hope that management has their best interests in mind and will work to try to harness as much of the NOLs as possible, helping investors better recover who otherwise are out some 99.97% on their WaMu investment from the heydays of 2007. The next two months should remain as quiet as the last four, up until the company has its first shareholders meeting which, based upon its March 19 effective date, should be scheduled to be in mid-September. Washington state law requires that corporate shareholder meetings be publicly announced no earlier than 60 days out and no later than 10 days prior. Given that the 60-day window has been reached, WMIH's next action should be announcing its meeting. However given its restraint on information so far, one would expect the announcement to be closer to the 10 days rather than the 60. Consequently, until shareholders are made privy to the company's situation, share prices won't likely appreciate any time soon.
Disclosure: I am long WMIH.