Washington Mutual Inc. (WMI) Bankruptcy: Cash at HoldCo vs. Bank
Volmanac Volmanac - Oct 31, 2016
WMI Holdco Bankruptcy Cash Research
We specialize in discovering market moving information through the use of technology and big-data at Volmanac. However, discovering market moving information does not always have to be a complicated process, and can sometimes be discovered with a simple phone call.
Washington Mutual Inc. (WMI) filed for bankruptcy on September 26th, 2008, one day after JP Morgan bought most of the banking operations of Washington Mutual from FDIC receivership. The debt profiles (holdco and bank) at the time of the filing were as follows:
Holdco (WMI): $6.9BN unsecured debt. $4.1BN unsecured, $1.6BN subordinated, $1.2BN jr. subs
Sep. 26th trading levels: ~42pts unsecured, 2pts subs
Bank (WMB): $22.7BN of debt claims. $14.8BN unsecured, $7.9BN subordinated
Sep. 26th trading levels: ~11 unsecured, 0.25 subs
On September 25th the Office of Thrift Supervision (OTS) released a Fact Sheet which proved confusing to the market as to the location of the $7BN in capital provided by TPG and other investors earlier in April. OTS stated:
In April 2008, WMI received $7.0 billion of new capital from the issuance of common stock. Since December 2007, WMI infused $6.5 billion into WMB.”
However, these statements did not match up with earlier information from WAMU and JP Morgan. For example, JP Morgan announced it was purchasing $296 billion of tangible assets of WMB, however the latest WM 10Q showed $301.8bn of tangible assets (after subtracting $7.2bn of Goodwill), leaving $5.8BN of assets “missing”. We suspected these missing assets may be cash at the Hold Co.
Nevertheless, most investors believed the cash had been downstreamed from the Holdco to WMB, and the trading prices of the two structures reflected this. However, if the cash was left at the Holdco, bond recoveries on unsecured and subordinated debt at the Holdco could be in excess of par.
We simply called the WAMU treasurer and asked where the cash was located (at the bank or holdco level, and how much had been downstreamed). WM indicated that the OTS report was misleading and that most of the cash was still at the Hold co. The market price of 42 cents of Hold co unsecured bonds assumed ~2bn of cash at the Hold Co., with $5bn the unsecured should be trading above par and there would be real value in the subs as well.[color=red][/color]
Later bankruptcy docket filings would confirm this cash number and the unsecureds and subs for WMI ended up recovering over par. Acquiring information which creates asymmetric risk/return situations does not always have to come from technology/large data sets, however the methods and data pipelines we have built at Volmanac allow for more repeatable processes and therefore create more asymmetric situations in which to deploy capital.
