Washington Mutual settles key party disputes, proposes amended plan

By Caroline Salls

Pittsburgh, Dec. 13 - Washington Mutual, Inc. has reached a comprehensive dispute settlement with significant parties in its Chapter 11 proceedings and filed a seventh amended plan of reorganization and disclosure statement, according to a news release.

The company's official committee of equity holders was one of the key parties to the settlement.

Washington Mutual said it worked closely with all significant creditor groups and the equity committee to achieve a plan that will result in the distribution of more than $7 billion to the estate's parties in interest upon confirmation.

"The comprehensive settlement announced today represents a fair and reasonable recovery for the thousands of equity holders of the company who have been following this case closely for three years," equity committee chairman Michael Willingham said in the release.

"The equity committee and its advisors are pleased with the result and look forward to and support the swift confirmation of the plan."

Settlement terms

Under the comprehensive settlement announced Tuesday

• Washington Mutual's assets on the plan effective date will consist of its equity interests in WMI Investment Corp. and WM Mortgage Reinsurance Co., Inc.;

• The reorganized company will be funded by a $75 million contribution from some creditors, and settlement noteholders have committed to provide exit financing in the form of a $125 million senior secured, multi-draw credit facility to fund working capital, general corporate purposes and eligible originations and acquisitions;

• A majority of the common equity in the reorganized company will be distributed to current preferred and common equityholders under the plan; and

• The reorganized company's board of directors will initially be comprised of four members selected by the equity committee and one member selected by the credit agreement lenders.

Washington Mutual said the revised plan "largely mirrors" its modified sixth amended joint plan of reorganization and is still based on the second amended global settlement previously entered into with JPMorgan Chase Bank, NA and the Federal Deposit Insurance Corp.

As previously reported, the U.S. Bankruptcy Court for the Southern District of New York previously ruled that the global settlement was fair and reasonable and in the best interests of the Washington Mutual debtors' estates.

As in the modified sixth plan, the company said the seventh plan calls for establishment of a liquidating trust for the benefit of holders of allowed claims.

According to the release, the liquidating trust will be capitalized with an initial budget of $50 million to $60 million, a significant portion of which will be available to prosecute lawsuits.

Washington Mutual said the seventh plan also incorporates changes to resolve governance issues related to the liquidating trust, consistent with the court's opinion denying confirmation of the sixth amended plan.

Mediation results

According to the disclosure statement, changes to the plan resulting from mediation include the following:

• Current interest holders that elect to grant specified releases will receive reorganized common stock;

• In consideration for the releases and to avoid further delay and costly litigation, holders of allowed senior notes claims and senior subordinated notes claims will contribute 0.968% and 2.1% of the initial distributions they receive to releasing interest holders. A total of $40 million of the $75 million contribution will come from senior noteholders, and the other $35 million will come from senior subordinated noteholders;

• Subject to the reorganized company's right to obtain financing on better terms and the right of qualifying creditors and equity interest holders to become lenders, some noteholders have committed to provide a 41/2-year or five-year $125 million senior secured multi-draw term loan, which will accrue interest at 7%.

Washington Mutual will have the option to pay 1% of the interest in kind;

• Subject to availability and to the rights of holders of runoff notes, reorganized Washington Mutual will also be funded by an additional $10 million, plus interest accruing at a rate of 13%, in the form of proceeds from the runoff of WMMRC's existing portfolio, potential litigation proceeds and all distributions of runoff proceeds after all amounts due on the runoff notes have been paid in full.

Other plan changes

Meanwhile, other changes made to the plan include the following:

• The liquidating trust agreement was modified so the liquidating trustee can be removed by a majority vote of the members of a trust advisory board, which will consist of three members selected by the creditors' committee, three by the equity committee and one by the creditors' committee with the equity committee's approval;

• All liquidating trust interests that will be distributed to specified claimants and equityholders are now non-transferable and non-assignable except by will, interstate succession or operation of law. The company said the inclusion of a transferability right would cost it $11.1 million in compliance and administrative fees; and

• The liquidating trustee will be entitled to "reasonable compensation in an amount consistent with that of similar functionaries in similar roles."

No tax mechanism

Washington Mutual said it did not make a change to the plan to address the court's suggestion that it consider a means to avoid negative tax consequences to creditors tied to the receipt of liquidating trust interests.

"No reasonable change to the modified sixth amended plan could have avoided the potential that certain creditors may have taxable income," the disclosure statement said.

However, the company said the initial distributions to holders of general unsecured claims, which will include the holders of dime warrants if their claims/interests are deemed claims and not subordinated, will be a combination of cash, common stock and liquidating trust interests.

Washington Mutual said most of the distribution will be cash, meaning they would receive enough cash to pay any potential tax liability related to the distribution of liquidating trust interests.

The disclosure statement hearing is scheduled for Jan. 11.

The company said it will ask the court to schedule a hearing in mid-February to confirm the plan, and Washington Mutual hopes to emerge from bankruptcy by the end of February.

Washington Mutual, a Seattle-based savings and loan holding company, filed for bankruptcy on Sept. 26, 2008. Its Chapter 11 case number is 08-12229.

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