In re Washington Mutual, Inc., et al. Case No. 08-12229 (MFW) |
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NOTES TO MOR-2 and MOR-3
Note 1: Plan of Reorganization and Settlement Agreement
On March 26, 2010, the Debtors filed a proposed plan of reorganization pursuant to chapter 11 of the Bankruptcy Code and related disclosure statement, which were subsequently amended.
Most recently, on October 6, 2010, the Debtors filed their Sixth Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the Bankruptcy Code [D.I. 5548] (as it has been and may be amended, the “Plan”) and related Disclosure Statement [D.I. 5549] (the “Disclosure Statement”) with the Bankruptcy Court. The Plan is premised upon implementation of an Amended and Restated Settlement Agreement (as further amended, modified or supplemented, the “Settlement Agreement”), which represents a compromise of certain disputes among the Debtors, JPMorgan, the FDIC (as receiver for WMB and in its corporate capacity), the Creditors’ Committee and certain other parties-in-interest. By order, dated October 21, 2010, the Court approved the adequacy of the information contained in the Disclosure Statement, authorized the commencement of the solicitation of acceptances and rejections to the Plan and established December 1, 2010 for the commencement of the hearing to consider confirmation of the Plan. The Plan will become effective upon confirmation by the Court and the satisfaction of other conditions contained therein.
The Settlement Agreement is an integral part of the Plan and is subject to confirmation of the Plan. On the basis of the foregoing, the balance sheet and operating statement in this monthly operating report do not reflect any of the financial arrangements or settlements set forth in the Settlement Agreement.
The foregoing notwithstanding, aspects of the Plan are referred to in the Notes to MOR 2 and MOR 3 herein; however, users of this monthly operating report should refer to the Plan, Disclosure Statement, Settlement Agreement and related documents directly for complete information.
Note 2: Washington Mutual Preferred Funding
On September 25, 2008, the Office of Thrift Supervision concluded that an “Exchange Event” had occurred with respect to the following securities (the “Securities”):
| · | Washington Mutual Preferred Funding Trust I Fixed-to-Floating Rate Perpetual Non-cumulative Trust Securities (to be exchanged into depositary shares representing Series I Perpetual Non-Cumulative Fixed-to-Floating Rate Preferred Stock of WMI); |
| · | Washington Mutual Preferred (Cayman) I Ltd. 7.25% Perpetual Non-cumulative Preferred Securities, Series A-1 (to be exchanged into depositary shares representing Series J Perpetual Non-Cumulative Fixed Rate Preferred Stock of Washington Mutual, Inc. (“WMI”)); |
| · | Washington Mutual Preferred (Cayman) I Ltd. 7.25% Perpetual Non-cumulative Preferred Securities, Series A-2 (to be exchanged into depositary shares representing Series J Perpetual Non-Cumulative Fixed Rate Preferred Stock of WMI); |
| · | Washington Mutual Preferred Funding Trust II Fixed-to-Floating Rate Perpetual Non-cumulative Trust Securities (to be exchanged into depositary shares representing Series L Perpetual Non-Cumulative Fixed Rate Preferred Stock of WMI); |
| · | Washington Mutual Preferred Funding Trust III Fixed-to-Floating Rate Perpetual Non-cumulative Trust Securities (to be exchanged into depositary shares representing Series M Perpetual Non-Cumulative Fixed Rate Preferred Stock of WMI); and |
| · | Washington Mutual Preferred Funding Trust IV Fixed-to-Floating Rate Perpetual Non-cumulative Trust Securities (to be exchanged into depositary shares representing Series N Perpetual Non-Cumulative Fixed-to-Floating Rate Preferred Stock of WMI). |
In accordance with the terms of the documents governing the Securities, the Conditional Exchange (as defined in the disclosure materials related to the Securities) of the Securities occurred on Friday, September 26, 2008 at 8:00 A.M. (New York time). The documentation governing the Securities contemplates that at the time of the Conditional Exchange, each outstanding Security wa s intended to be exchanged automatically for a like amount of newly issued Fixed Rate Depositary Shares or newly issued Fixed-to-Floating Rate Depositary Shares, as applicable, each representing a 1/1000th interest in one share of the applicable series of preferred stock of WMI. If and until such depositary receipts are delivered or in the event such depositary receipts are not delivered, any certificates previously representing Securities are deemed for all purposes, effective as of 8:00 AM (New York time) on September 26, 2008, to represent Fixed Rate Depositary Shares or Fixed-to-Floating Rate Depositary Shares, as applicable.
WMI and its advisors currently are assessing a number of legal, accounting and tax issues related to the Securities and the transactions related to the Conditional Exchange. Because of these unresolved issues, WMI has not yet reflected the Conditional Exchange and/or its attendant transactions on its financial statements, including any possible interests (direct or indirect, con tingent or otherwise) in the Securities and the assets, as the case may be, of Washington Mutual Preferred Funding LLC.
Assuming that the Conditional Exchange had been completed in accordance with the terms of the relevant documentation, on a pro forma basis, WMI’s financial statements would reflect (a) a credit to shareholders’ equity of approximately $3.9 billion upon issuance of the new classes of preferred stock; (b) an investment in s ubsidiary (i.e. WMB) of approximately $3.9 billion upon contribution of the Preferred Securities by WMI to WMB; and (c) an immediate and corresponding write-down of such investment in subsidiary.
Pursuant to the terms of the Settlement Agreement, upon consummation of the Plan, WMI and relevant third parties will complete the ministerial actions attendant to the Conditional Exchange.
Note 3: Restricted Cash and Cash Equivalents
WMI’s restricted cash and cash equivalents of $91 million includes $34 million of accumulated dividends related to amounts held in escrow pertaining to that certain action styled as American Savings Bank, F.A et al. v United States, Case No 92-872C pending in the United States Court of Federal Claims, $53 million in a deposit a ccount pledged as collateral to secure prepetition intercompany transactions between WMI and WMB and $4 million held as part of a Rabbi Trust.
Pursuant to the terms of the Settlement Agreement, upon consummation of the Plan, WMI will take possession of the $53 million deposit account pledged as collateral for prepetition intercompany transactions with WMB, free and clear of any interest or liens asserted by JPMorgan.
Note 4: Investment in Subsidiaries
WMI’s investment in subsidiaries represents the book value of WMI’s subsidiaries, including WMI Investment. This balance does not represent the market value of these entities.
WMI subsidiaries hold unsecured notes receivable from WMB or JPMorgan, as the case may be, totaling approximately $181 million.
Pursuant to the terms of the Settlement Agreement, upon consummation of the Plan, JPMorgan will repay with interest the unsecured notes receivable to WMI subsidiaries.
Note 5: Funded Pension
The funded pension balance reflects the (1) the market value of assets as of December 2, 2008 less (2) the November 2008 actuarial estimated settlement value of September 25, 2008 liabilities. The value does not
reflect any recent changes in market values, interest rate assumptions and the participants since November 2008 which could materially affect the results.
Pursuant to the terms of the Settlement Agreement, upon consummation of the Plan, WMI will transfer sponsorship of the pension plan to JPMorgan, including certain related assets, and JPMorgan will assume the pension plan liabilities.
Note 6: Taxes
The tax asset and liability balances are recorded consistent with WMI’s historical accounting practices as of the Petition Date and adjusted for refunds collected. Generally, tax related claims and payables are recorded on WMI’s books and records on a consolidated basis with the other members of the consolidated tax group and have not been adjusted for any potential claims against these assets. The current recorded balances do not reflect all expected refunds or payments as these amounts are currently being reviewed. The current estimate for the total expected refunds, net of potential payments, is in the range of approximately $2.7 - $3.0 billion (including interest but excluding tax refunds attributable to the Act, as described below). Various parties claim ownership rights to these refunds and to tax refunds in the amount of $250 million received by WMI during the period from the Petition Date to the date of the Settlement Agreement. As set forth in the Settlement Agreement, upon consummation of the Plan, WMI and JPMorgan will split the above-referenced net tax refunds 20%/80%, respectively (once received).
On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 (the “Act”) was enacted into law. The Act provides, in pertinent part, that corporate taxpayers, subject to certain limitations, may elect to extend the permitted Net Operating Loss (“NOL”) carryback period from two years to five years (with s uch taxpayers only receiving half this benefit in the fifth year). Pursuant thereto, WMI elected to carry back its 2008 NOL five years. WMI currently estimates an additional expected tax refund attributable to the Act of approximately $2.8 billion, including interest, as to which there are competing claims of ownership. As set forth in the Settlement Agreement, upon consummation of the Plan, WMI and the FDIC will split the tax refunds attributable to the Act (and actually received) 69.643%/30.357%, respectively. Pursuant to the terms of the Plan and the Settlement Agreement, a certain portion of WMI’s share of such refunds will be distributed to certain holders of WMB Senior Notes in an amount equal to $335 million.
On September 7, 2010, the Bankruptcy Court approved certain settlements with the Internal Revenue Service (IRS), which settle approximately $5.2 billion (including interest) of the estimated $5.5 - $5.8 billion of expected refunds to be received. Approximately $4.6 billion of the settled refund amounts remained subject to r eview by the U.S. Congress Joint Committee on Taxation (the "Joint Committee"). The Joint Committee completed its review and on September 27, 2010 communicated to WMI that it had taken no exception to the conclusions reached by the IRS.
On October 7, 2010, the U.S. Department of Treasury paid approximately $4.77 billion of the expected refunds into a segregated escrow account that was established by WMI, JPMorgan and the FDIC, as receiver for Washington Mutual Bank, with Wells Fargo Bank, National Association, as escrow agent (the “Escrow Agent”). WMI expects that the balance of the expected refunds will be paid in the near term. The refunds, together with any interest and income relating thereto, shall remain in the escrow account until (a)(i) the effective date of the Settlement Agreement, and (ii) the receipt by the Escrow Agent of a joint written notice from an authorized officer of each of WMI, JPMorgan and the FDIC Receiver, (b) the mutual agreement of WMI, JPMorgan and the FDIC, which agreement is approved by an order of the Bankruptcy Court, or (c) entry of a final order by a court of competent jurisdiction that determines the ownership of the refunds between WMI, JPMorgan and the FDIC.
No 2010 provision or benefit from income taxes has been recorded as the NOL carry forward amounts from prior years are expected to be sufficient to offset income during the reported period. Income tax expense contains minimum taxes paid in certain states.
Note 7: Liabilities Subject to Compromise (Pre-Petition) – Payroll and Benefit Accruals
WMI’s pre-petition payroll and benefit accruals include balances reflecting WMI’s historic accounting policies related to pension accounting. Prior to the Petition Date, WMI recorded a $274 million liability in respect of such accruals and WMB recorded a $274 million asset, which amounts were netted out and eliminated on a consolidated basis. Neither balan ce was reported as an intercompany balance. WMI is analyzing these accounting entries and treatment within the context of its bankruptcy proceedings.
As set forth in the Settlement Agreement, upon consummation of the Plan, any potential liability related to this pension accounting will be waived.
