High-yield/macroeconomics (fka YIELD)

[DewDiligence]

WaMu to Get $5 Billion Equity Infusion

http://online.wsj.com/article/SB120753199958893909.html

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By MATTHEW KARNITSCHNIG, VALERIE BAUERLEIN and ROBIN SIDEL
April 7, 2008

Private-equity firm TPG and other investors are close to a deal to invest $5 billion in Washington Mutual Inc., people familiar with the matter said Sunday.

The injection of new capital would allow the country's largest savings and loan to ease its pressing capital requirements, the people said, amid punishing losses from the national mortgage crisis. But it would substantially dilute current WaMu shareholders, who have already lost 74% of their investment over the past year. WaMu's market capitalization on Friday was just under $9 billion, after its shares dropped 11% that day.

The planned investment marks a humbling hand-in-hat moment for the 119-year-old Seattle stalwart. Having parlayed the country's housing boom to a nationwide reputation and immense profits, it is now paying dearly for delving into subprime mortgages.

Much of the subprime focus has been trained on Wall Street's leading banks and brokerages. But the investment shows how troubles have hit such main street banks as WaMu and Cleveland's National City Corp.

TPG's effort could be viewed as an encouraging sign for the nation's ailing banking system, and Wall Street will be watching to see whether it is an indication that the worst is over. It comes as virtually every large mortgage company in the country has hit financial distress. Countrywide Financial Corp. had to seek an emergency sale to Bank of America Corp. earlier this year, while others have gone bust amid mortgage losses.

Still, an investment could expose TPG and its partners to a financial hit if the mortgage-market shakeout continues.

While banking regulators were likely apprised of WaMu's plans, the government was not directly involved in forging a deal as in the recent purchase of Bear Stearns Cos., say people familiar with the matter.

As currently envisioned, the $5 billion investment would be structured as both a common- and preferred-stock offering. The preferred stock could be converted into common shares in the future, subject to a shareholder vote. TPG -- formerly Texas Pacific Group -- is expected to maintain a "substantial minority holding" in WaMu, said one person familiar with the matter, though exact terms weren't clear. The amount is expected to fall under 25%, a threshold that would require TPG to register as a financial holding company under government rules.

TPG is also expected to get one seat on the company's current 14-member board. Other investors in the group include large current WaMu shareholders, and may also involve other buyout firms. Still, an agreement has yet to be finalized, and the talks could fall apart.

WaMu's latest plan would likely eliminate, at least for now, the potential that the thrift will be acquired by J.P. Morgan Chase & Co. or another large financial institution. J.P. Morgan executives have been poring over WaMu's books since March and made a preliminary offer, but discussions between the two firms ground to a halt last week, according to a person familiar with the situation.

As one of the nation's largest private-equity firms, TPG holds interests in everything from Harrah's casinos to phone company Alltel Corp. to the MGM movie studios. For such private investors, the current credit crisis provides a rare opportunity to pick up once-thriving financial institutions on the cheap. WaMu, for instance, trades at less than half of the book value stated in its year-end 2007 results. And unlike most independent mortgage providers, WaMu also has a nationwide, 2,500-branch banking system that allows it to gather deposits more efficiently.

But relatively cheap investments aren't a guarantee for success, either. For example, private-equity firm Warburg Pincus agreed in December to purchase $500 million of the stock of bond insurer MBIA Inc. at $31 a share. The stock closed Friday at $13.61.

And there is the remaining question of whether a $5 billion investment will be enough to cover all the thrift's capital requirements in the future, especially if the mortgage-backed-securities market continues to deteriorate.

Declines in those securities have hit WaMu hard. The thrift reported a $1.87 billion loss in the fourth quarter that was fueled by a sharp increase in the reserve for loan-related losses. The company has been exposed to some of the hardest-hit housing markets in the U.S., including California and Florida. Problems have also spread to credit cards and other types of loans, meaning WaMu has been bracing for a steep rise in loan chargeoffs.

WaMu Chief Executive Kerry Killinger, who joined the thrift in 1983 and has had the top job since 1990, is expected to remain in that position. Mr. Killinger has a close relationship with directors, who have largely brushed aside criticism of his performance and of a 2008 executive pay formula that would omit loan-loss provisions on mortgages, as well as foreclosure costs.

WaMu took steps in recent months to boost its capital by cutting its dividend, slashing 3,000 jobs and selling $3.7 billion in preferred shares. WaMu shares have been slammed by credit losses, foreclosures and bad bets in the subprime market. Shares fell $1.32 to $10.17 in New York Stock Exchange composite trading on Friday.

WaMu has made a series of strategic mistakes that put the company on increasingly shaky footing. Mr. Killinger's biggest bet was on the subprime market, as the savings and loan embraced products such as adjustable-rate mortgages and low-documentation loans for borrowers with relatively poor credit.

As recently as last year, Mr. Killinger said the subprime crisis could benefit the company, paring down competition and perhaps leading to acquisitions. But instead, losses have skyrocketed, leading WaMu to shutter much of its subprime-loan-origination business.

In 2004, when the mortgage business was booming, WaMu made bad bets in its mortgage-hedging operation that contributed to a 25% annual profit slide. Mr. Killinger shuffled the management ranks, with half of his top dozen executives joining the company in the past three years.

WaMu also pursued an unusually ambitious retail-bank expansion that fizzled in some markets, as WaMu saturated new cities with branches that were often in difficult-to-reach locations. WaMu has since closed dozens of branches it opened only two years before.

The deal also marks something of a homecoming for TPG founder David Bonderman. Mr. Bonderman was on WaMu's board between 1996 and 2002. He got there after WaMu purchased American Savings Bank, where he originally served as a director.

Mr. Bonderman's involvement with American Savings is instructive to the expected WaMu investment. Some 20 years ago, Mr. Bonderman, working for Texas billionaire Robert Bass, helped save American Savings via a special capital injection. The deal was one of the largest rescue plans of the savings-and-loan crisis then sweeping through America's banking system. With the aid of government backing, it also turned out to be incredibly lucrative. For an original $150 million equity investment, American Savings eventually returned about $910 million.
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