Washington Mutual Inc.'s agreement with shareholders, aimed at ending opposition to the company's reorganization proposal of more than $7 billion, has fallen apart, three people with direct knowledge of the negotiations said.
The talks broke down over how to split up ownership of the only WaMu unit that will survive the collapse of the company, which is the former owner of the country's biggest bank failure, one person with knowledge of the negotiations said.
Creditors, the company and shareholders were trying to complete a contract based on the outline of a settlement that would have given a stake in the unit, a reinsurance company, to shareholders.
WaMu and a committee of shareholders tried to give both common and preferred shareholders a stake in the reinsurance company. They were opposed by a group of preferred holders, who were concerned about anything being given to holders of the common stock, the person said.
"The equity committee and the debtors were trying to provide for a distribution to both," the person said. "The debtor was hard set on giving something to the commons."
WaMu, in Seattle, filed for bankruptcy on Sept. 26, 2008, the day after its banking unit was taken over by regulators and sold to JPMorgan Chase & Co. for $1.9 billion.
WaMu owned Washington Mutual Bank, the biggest bank to fail in U.S. history, with more than 2,200 branches and $188 billion of deposits.
Black Horse Capital LP of Charlotte, N.C., Guggenheim Portfolio Co. VII LLC of New York, Paige Opportunity Partners LP of New York, Pandora Select Partners LP of Minneapolis and Scoggin Capital Management II LLC of New York are among the holders of WaMu preferred shares, known as the "trust-preferred holders," according to a filing last year by their law firm, Brown Rudnick LLP.
One class of preferred shares has fallen since reaching $41 on May 31, their highest price of the year, one week after WaMu confirmed the outlines of an agreement with shareholders. They traded at $31.50 at noon Thursday in New York.
The securities carry a dividend of 7.75% and are convertible to WaMu common shares until 2049. They jumped more than 86% on May 20, to $30, after Bloomberg News reported the outlines of the agreement, citing people familiar with the negotiations.
Days later the company confirmed the accord during a court hearing and said the parties were working on final wording.
Should shareholders get nothing from a reorganization, there may be more money available to pay WaMu's noteholders. According to payment priorities in bankruptcy, preferred holders must be paid in full before common shareholders get anything.
The collapse means that WaMu will move forward with its sixth version of a reorganization plan that proposes to give nothing to shareholders.
U.S. Bankruptcy Judge Mary Walrath said in a hearing earlier this month that should the agreement fall apart, the parties would return to court on July 5 to begin a battle on whether to approve the sixth amended plan.
Robert Stark, a Brown Rudnick attorney who represents some preferred shareholders, did not comment.
