In re Washington Mutual, Inc., et al
Case No. 08-12229 (MFW)
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.
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 amended, the “Sixth Amended Plan”) and related Disclosure Statement [D.I. 5549] (the “Prior Disclosure Statement”) with the Bankruptcy Court. The Sixth Amended Plan was premised upon implementation of an Amended and Restated Settlement Agreement (as amended on December 7, 2010, 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. After hearing testimony and argument regarding confirmation of the Sixth Amended Plan, on January 7, 2011, the Bankruptcy Court issued an opinion, pursuant to which, among other things, the Bankruptcy Court found the settlement and compromise represented by the Settlement Agreement to be fair and reasonable; however, the Bankruptcy Court nonetheless denied confirmation of the Sixth Amended Plan unless certain modifications were made thereto.
Accordingly, on February 8, 2011, the Debtors filed with the Bankruptcy Court their Modified Sixth Amended Joint Plan of Affiliated Debtors Pursuant to Chapter 11 of the United States Bankruptcy Code (as amended, the “Modified Plan”) and a related Supplemental Disclosure Statement (as amended, the “Supplemental Disclosure Statement”). The Settlement Agreement also has been amended and restated by the Second Amended and Restated Settlement Agreement, dated February 7, 2011, to conform to certain revisions reflected in the Modified Plan, or otherwise required by the Opinion, and has been extended through May 31, 2011 (as it has and may be further amended, modified or supplemented, the “Amended Settlement Agreement”). In addition, the Amended Settlement Agreement excludes certain creditors who were previously parties to the Settlement Agreement. Otherwise, the Amended Settlement Agreement’s material financial terms remain unchanged as in the Settlement Agreement. The Amended Settlement Agreement is annexed to the Modified Plan and its terms are reflected in the Modified Plan and described in the Prior Disclosure Statement and the Supplemental Disclosure Statement.
By order, dated March 30, 2011 [D.I. 7081], the Bankruptcy Court approved the adequacy of the information contained in the Supplemental Disclosure Statement, authorized the commencement of the solicitation of acceptances and rejections of the Modified Plan. May 13, 2011 was the deadline for parties to submit votes on and elections with respect to the Modified Plan. On May 19, 2011, the Debtors, with consent of the Bankruptcy Court, adjourned the hearing to consider confirmation of the Modified Plan to June 29, 2011. The Modified Plan will become effective upon confirmation by the Bankruptcy Court.
The Amended Settlement Agreement is an integral part of the Modified Plan and is subject to confirmation of the Modified 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 Amended Settlement Agreement.
The foregoing notwithstanding, aspects of the Modified Plan and Amended Settlement Agreement are referred to in the Notes to MOR 2 and MOR 3 herein; however, users of this
monthly operating report should refer to the Modified Plan, Supplemental Disclosure Statement, Prior Disclosure Statement, Amended Settlement Agreement and related documents
directly for complete information.
Note 2: Tentative Settlement with Significant Creditors and Equity Committee
On May 24, 2011, WMI announced that it has reached a tentative settlement agreement with the Creditors’ Committee, certain significant creditors and the Official Committee of Equity Security Interest Holders (the “Equity Committee”) to resolve issues raised by the Equity Committee with respect to the Modified Plan . Under terms of the tentative agreement, which remains subject to the parties executing definitive documentation memorializing the terms thereof, the parties have agreed to the following:
● | A litigation trust will be established to pursue claims and causes of action that are property of the Debtors against certain non-released third parties. This litigation trust will be funded by WMI with an initial $5 million cash contribution and additional contributions, under certain circumstances, in an amount not to exceed $25 million. The WMI Liquidating Trust contemplated by the pending plan of reorganization will be entitled to receive all proceeds realized by the litigation trust until repaid in full (other than with respect to the initial $5 million contribution); thereafter, the beneficiaries of the litigation trust will be the holders of allowed, subordinated claims, as well as preferred and common equity holders. |
| ● | Common equity in the reorganized Debtor will be distributed to holders of allowed, subordinated claims and WMI’s preferred and common equity holders. In addition, certain holders of allowed claims, other than those holding allowed claims who would have previously received common equity in the reorganized Debtor, have agreed to receive a debt instrument and a preferred equity instrument having a combined, aggregate net present value of approximately $160 million. |
| ● | Certain significant creditors will commit to provide a senior secured credit facility for reorganized WMI in an amount not to exceed $100 million. |
| ● | Upon filing of a plan consistent with these terms, the Equity Committee will stay its appeal of the Bankruptcy Court’s order, dated January 7, 2011, regarding plan confirmation. Additionally, upon confirmation of such plan, the Equity Committee will withdraw, with prejudice, such appeal. |
If the parties are unable to reach a definitive agreement that incorporates the tentative settlement, the Debtors intend to proceed with the hearing scheduled to be held on June 29, 2011 to seek confirmation of the Modified Plan.
Note 3: 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-to-Floating 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-to-Floating 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 was 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.
On July 6, 2010, certain institutional investors filed an adversary proceeding captioned Black Horse Capital LP et al. v. JPMorgan Chase Bank, N.A. et al., Adv. No. 10-51387 (MFW) (the "Black Horse Litigation") against WMI and JPMorgan asserting that the Conditional Exchange did not occur due to the failure of certain alleged conditions precedent. On January 7, 2011, the Court entered an opinion and order granting summary judgment in favor of WMI and JPMC in the Black Horse Litigation, holding, among other things, that the Conditional Exchange occurred automatically on September 26, 2008, and as a result the plaintiffs in the Black Horse Litigation (and other similarly situated investors) are now deemed to be holding Fixed Rate or Fixed-to-Floating Rate Depositary Shares, as applicable, tied to the applicable series of preferred stock of WMI. On January 13, 2011, certain plaintiffs appealed the judgment to the United States District Court for the District of Delaware. Because the appeals process and confirmation of the Modified Plan are pending, WMI has not yet reflected the Conditional Exchange and/or its attendant transactions on its financial statements, including any possible interests (direct or indirect, contingent 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 subsidiary (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 Amended Settlement Agreement, upon consummation of the Modified Plan, WMI and relevant third parties will complete the ministerial actions attendant to the Conditional Exchange.
Note 4: American Savings Litigation
In April 2009, WMI recorded a receivable of $55 million on account of funds paid by the United States into the registry of the Bankruptcy Court in connection with a partial final judgment entered in that certain action styled as American Savings Bank, F.A. v. United States, Case No. 92-872C, pending in the United States Court of Federal Claims.
In conjunction with the payment of the judgment, and in accordance with that certain escrow agreement, dated December 20, 1996 (as amended, the “Escrow Agreement”) by and among The Bank of New York, as escrow agent, WMI and Keystone Holdings Partners, L.P. and Escrow Partners, L.P., WMI authorized the release of approximately 1.7 million shares of WMI common stock and $20.8 million from the escrow account maintained at The New of New York Mellon to the counterparties to the Escrow Agreement.
On April 1, 2011, the Federal Court of Claims awarded an additional $83.3 million to WMI. The award is subject to appeal by the United States and the judgment has not yet been paid to WMI or to the registry of the Bankruptcy Court. Therefore, WMI has not recorded this receivable nor has it authorized a release of WMI common stock or any amount released from the escrow account.
JPMorgan has asserted claims to proceeds resulting from the American Savings Litigation. However, pursuant to the terms of the Amended Settlement Agreement, upon consummation of the Modified Plan, WMI will take possession of the $55 million in the registry of the Bankruptcy Court and any further amounts awarded.
Note 5: Restricted Cash and Cash Equivalents
WMI’s restricted cash and cash equivalents of $88 million includes $32 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 account pledged as collateral to secure prepetition intercompany transactions between WMI and WMB and $3 million held as part of a Rabbi Trust.
Pursuant to the terms of the Amended Settlement Agreement, upon consummation of the Modified 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 6: 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 Amended Settlement Agreement, upon consummation of the Modified Plan, JPMorgan will repay with interest the unsecured notes receivable to WMI subsidiaries.
Note 7: 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 Amended Settlement Agreement, upon consummation of the Modified Plan, WMI will transfer sponsorship of the pension plan to JPMorgan, including certain related assets, and JPMorgan will assume the pension plan liabilities.
Note 8: 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 May 21, 2010. As set forth in the Amended Settlement Agreement, upon consummation of the Modified 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 such 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 Amended Settlement Agreement, upon consummation of the Modified 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 Modified Plan and the Amended 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.
As of April 30, 2011, refunds totaling approximately $5.2 billion of the estimated $5.5 - $5.8 billion in total refunds have been paid into a segregated escrow account that was established with Wells Fargo Bank, National Association, as escrow agent (the “Escrow Agent”). The refunds, together with any interest and income relating thereto, shall remain in the escrow account until (a)(i) the effective date of the Amended 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 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 9: 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 balance 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 Amended Settlement Agreement, upon consummation of the Modified Plan, any potential liability related to this pension accounting will be waived.
