Mr Cooper Group Inc (COOP)

[SamuraiProgrammer]

Large Green,

I have been pondering the question you (and others) have posed for many months...

Why did the Underwriters fight so hard to stay in Class 19 (Preferred)?

This morning I had some inspiration and would like to share it with the group.

With respect for the due diligence, here goes...

(tldr - I believe that the additional profits made in COOP shares from a class 19 distribution are large enough to encourage the UWs to stay in class 19 for some values of BK remote recovery (proof below). Furthermore, I believe that if the recovery is in the neighborhood of $20B, the UWs would be better off in class 19 even without the extra profits in COOP. I believe the combination of these two assertions indicates that the upper limit of the UWs assumptions on the BK remote recovery can be above $20B and they would still wish to remain in class 19.)

The thrust of the argument has been that this question's answer is because the BK Remote assets of WMI will be split 75% class 19 and the remaining to commons. On the surface, it can be an interesting argument.

Digging deeper, however, there may be more to the story.

If I remember correctly, the Underwriters are in Class 19 because they were awarded $76M in PQ shares. See Post From MONICALAW

Now, if the Underwriters were forced from 19 to 21, how would that work? I'm sure it would be complicated but wouldn't it involve swapping shares of COOP as well since that was part of the resulting compensation?

Using the numbers on the header of this group's page, we can work out how many shares of COOP (nee WMIH) were received for P's & Q's

1 WAMUQ = 0.03349842 WMIH
1 WAMPQ = 19.8005825 WMIH

19.8004825 / 0.03349842 = 591.0870572

So 1 PQ received 591 times more WMIH (now COOP) shares than 1 UQ.

We need to determine the relative values of WAMPQ and WAMUQ to determine how many shares of each might have been allocated to the underwriters. If anyone has definitive information on how many Ps were allocated and or the date the deal was negotiated, please let me know. It will help to refine these estimates.

On this site Stock Market Watch, you can go to show history, play with the dates and get a chart. From that chart you can see that right after the BK, P's dropped to virtually nothing. However, from Jan 2010 to Mar 2010, they traded at and around $80. After that, they traded at and around $35 until Nov 2010.

Note: in the following paragraphs I have noted in parenthesis a code to help keep the numbers straight. A is the first time period. B is the second time period. p is for Pqs. u is for UQs.

So $76M worth of P's would be

(Ap) Jan 2010 to Mar 2010 76,000,000 / 80 = 950,000 shares of WAMPQ
(Bp) Apr 2010 to Nov 2010 76,000,000 / 35 = 2,171,428.57 shares of WAMPQ

These are only estimates

How many shares of WMIH would that represent (including the reverse split)?

(Ap) 950,000 * 19.8 = 18,810,000 / 12 = 1,567,500
(Bp) 2,171,428 * 19.8 = 42,994,274.4 / 12 = 3,582,856.2

Now, looking at the prices of WAMUQ during these timeframes (from the same website), we see that WAMUQ was trading (mostly) in a tight range from $0.15 and $0.20. The most notable exception was the spike to $0.70 on (IIRC) the court date where Rosen stated there would be nothing for escrows.

For my estimates, I will use $0.40 for the Jan 2010 to Mar 2010 Period and $0.17 for the Apr 2010 to Nov 2010 period. I think that anyone who looks at this chart will agree with this as long as the assumption is that the deal was cut right before the court date. I am not sure it was - see note in blue above.

So $76M worth of U's would be

(Au) Jan 2010 to Mar 2010 76,000,000 / 0.40 = 190,000,000 shares of WAMUQ
(Bu) Apr 2010 to Nov 2010 76,000,000 / 0.17 = 447,058,823.529 shares of WAMUQ

Again, these are only estimates

How many shares of WMIH would that represent (including the reverse split)?

(Au) 190,000,000 * 0.03349842 = 6,364,699.8 / 12 = 530,391.65
(Bu) 447,058,823.529 * 0.03349842 = 14,975,764 / 12 = 1,247,980.35

Now lets compare the situations showing the number of shares of COOP the underwriters would hold in each

If the assignment was based on prices in the Jan 2010 to Mar 2010 timeframe
(Ap) 1,567,500
(Au) 530,391.65

If the assignment was based on prices in the Apr 2010 to Nov 2010 timeframe

(Bp) 3,582,856.2
(Bu) 1,247,980.35

Extra shares if PQs Awarded
(A) 1,567,500 - 530,391 = 1,037,109
(B) 3,582,856 - 1,247,980 = 2,334,876

Since we are only working with estimates, let's do some rounding for ease of discussion

Rough amount of extra shares if PQs Awarded
(A) 1M
(B) 2.3M

Each of these numbers is also the profit in COOP per $1 gain. Remember that the original trading price of WMIH (now COOP) was less than $1. We are looking at around $40 gain recently. At the time the UWs were defending themselves, it was at least $25. As it is commonly discussed on this board, a value of $80 or $100 is expected over time.

So (periods for spacing):

Stock Gain ..............$1.........$25..........$40..........$80..........$100
(A in $millions)..........1..........25............40.............80...........100
(B in $millions).........2.3.......57.5..........92...........184...........230


So, at the time the UWs were defending their position in class 19, we can see that there were real benefits (other than escrow distribution) to being in class 19. How much those benefits are depends on the expectation of the COOP stock price in the future. Whether those benefits outweigh the bounty expected from escrow payout really depends on how much money is hiding and will be distributed.

I have maintained a spreadsheet that has my ideas of what escrows would be paid based on an assumption of the recovery amount. I am not going to go into the details here but it covers both a 75%/25% situation and an APR situation because (while I have an opinion) I don't know which will actually be in play for the BK remote values. It calculates that interest on the preferreds will be paid first and then the rest will be distributed (either 75%/25% or APR). You plug in numbers for total recover and time in years.

Note: I will not share the spreadsheet because it has my own share counts in it - please don't ask.

From that spreadsheet, I believe that if the recovery is in the neighborhood of $20B, the UWs would be better off in class 19 even without the extra profits in COOP.

I will have to construct another spreadsheet to model the profits and share counts of the UWs holdings. If I can get solid information on the price (or imputed price) of Ps and Qs when the deal was negotiated, I might do that. At the very least, it should give us an idea of the upper limit of the BK remote recovery in the opinion of the UWs.

Congratulations if you got this far... my brain is tired. :)