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Apr-13-2008Terms of TPG-WaMu Deal Released(topic overview)
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NEW YORK (Reuters) - Washington Mutual Inc (WM.N: Quote, Profile, Research ) may have to set aside $14 billion this year for credit losses, according to a Goldman Sachs analyst, who also took the rare step of urging investors to sell the shares short. The largest U.S. savings and loan, also known as WaMu, may lose $3.30 per share this year, and not turn a profit until 2010, analyst James Fotheringham wrote on Friday. [1] The investor group paid $8.75 per share for the WaMu offering, which is a figure that Goldman bankers certainly had a strong hand in determining. The analyst also reduced his earnings estimate for 2008 to a loss of $3.30 per share, from a loss of $1.00 per share. He expects that WaMu will not return to profitability until 2010 and he predicts the bank will need to set aside $14 billion this year to cover losses from mortgages. A Goldman spokesperson says Fotheringham's report is an example of a "pair trade" recommendation, which he says is not uncommon.[2]
Washington Mutual'''s ( WM ) shareholders must feel like they'''re sitting at the tip of an auger, ground farther down with each unremitting turn of the screw. Between WaMu'''s enormous first quarter net losses and dilutive capital raises, the stock trades at $11.81, 74% below its 52-week high of $44.66. While yesterday'''s $7.7 billion capital raise reduces the risk that this unwieldy thrift may fail, accelerating credit losses make it foolhardy to conclude that the company is past its crisis. By selling new common shares at $8.75 per share, the capital raise is highly dilutive to legacy shareholders, stripping more than 50% of their ownership interest and reducing by 25% estimated first quarter tangible book value, to $11.60 from $15.55 at year-end. Its noteworthy that David Bonderman, a founding partner of Texas Pacific Group, beat out a competing $7 billion bid from J.P. Morgan.[3] Some of the $7 billion raised came from convertible bonds, which convert at a price lower than the current share price. Goldman analyst James Fotheringham estimates that the struggling lender should trade at a value equal to its tangible common equity which they estimate at $9.84 a share; the stock is currently at $11.38 a share, down a few pennies on the day. He estimates the company has $17 billion to $23 billion of embedded losses in its mortgage portfolio of which just $3 billion has been absorbed. In the same note, Goldman credit analyst Louise Pitt suggests buying the company's bonds and credit-default swaps, saying both indicators trade at levels wider than their peers, particularly following the raise of $7 billion in capital including $5.5 billion in convertible preferred shares to shore up the balance sheet.[4]
In a highly unusual move, Goldman equity analyst James Fotheringham recommended this morning that investors not only sell their Washington Mutual shares, but sell them short. It's not enough just to unload your shares, the analyst seems to say, but there's opportunity to make money by betting they will actually fall. Even more curious, this comes just a few days after Goldman bankers acted as placement agents for WaMu in its sale of $7 billion to a group of investors led by TPG Capital.[2] April 11 (Bloomberg) -- Washington Mutual Inc.' s 2008 loss will be wider than first estimated, according to Goldman Sachs Group Inc., which recommended selling the shares short. Goldman analysts including James Fotheringham increased their estimate for Seattle-based Washington Mutual's full-year loss to $3.30 a share from $1 after the company's "highly dilutive'' share sale, the securities firm said today in a note to investors. Goldman helped arrange the $7 billion transaction earlier this week at 33 percent below the market price.[5]
Assuming all the preferred shares convert and all the warrants are exercised, TPG would end up with about a 16.1 percent stake in WaMu. Olympic would have about 34.1 percent, plus whatever its unidentified members previously owned. Friday, the prospect of wider mortgage-related losses this year for WaMu led analysts for Goldman Sachs to recommend that investors sell the stock short, positioning them to profit from a decline in the share price.[6] Given the general reticence of analysts to issue "sell" ratings on shares, suggesting that investors actively short a stock takes a negative outlook to another level. Goldman Sachs analysts today told investors they should short shares of Washington Mutual Inc.[4]
An equity analyst, Fotheringham references Goldman Sachs fixed income analyst Louise Pitts' view on WaMu debt to recommend that investors go long WaMu bonds, and short WaMu stock. It's not clear just how common a short sell recommendation is in the world of equity research.[2] A Goldman Sachs (NYSE: GS ) analyst -- James Fotheringham -- thinks that investors should actually short the common stock of WaMu and buy the company's bonds. It's a bold call -- but seems to make sense.[7]
Washington Mutual on Friday said that shutting down the rest of its free-standing home-loan offices and eliminating 2,600 to 3,000 workers will cost it $140 million to $180 million, before taxes. In a regulatory filing, the Seattle-based thrift also filled in more details on the massive capital raise unveiled earlier this week including the fact that if the new investors fully convert their preferred stock and warrants into WaMu common stock, they will have acquired just over 50 percent of the company for less than $7.8 billion.[6] According to documents filed with the Securities and Exchange Commission, Seattle-based WaMu raised $7.2 billion $200 million more than initially reported. It sold $1.54 billion in common stock and $5.66 billion in preferred stock to an investor group led by private-equity firm TPG, formerly Texas Pacific Group.[6]
The conversion likely will occur on June 30, since otherwise WaMu will have to pay the investors a $792 million dividend. TPG and Olympic also received warrants for 57.1 million and 11.2 million common shares, respectively, for accepting transfer restrictions on their newly acquired shares. TPG agreed not to transfer any of its shares for 18 months; Olympic agreed to lock up 100 million of its shares for nine months. The investors can exercise their warrants for $8.75 a share, the same price at which they bought their common stock. That would potentially mean another $597.6 million for WaMu.[6] TPG agreed to purchase 822,857 shares of common stock at $8.75 a share; 19,928 shares of convertible preferred stock at $100,000 a share; and warrants exercisable to purchase 57,142,857 shares of common stock at.[8]
The investors' preferred stock automatically converts into 646.5 million shares of common stock, assuming WaMu shareholders agree.[6]
Fotheringham still has a "sell" rating on WaMu shares. Perhaps this is just one more sign of the troubled times in the financial sector. Equity analysts are rewarded for helping their clients make money on their investments. It's not enough just to keep telling investors to sell as WaMu shares tumble: if they can make money instead by riding the stock on the way down, then shorting the shares is the best advice possible.[2]
Rejecting a buyout offer from JPMorgan (NYSE: JPM ) for $8 per share, WaMu has instead opted for a $7 billion capital infusion from an investor group that includes private equity maestros, TPG.[7] The infusion eased concern about the thrift's capital. WaMu also projected a first-quarter loss of $1.1 billion, or $1.40 per share, and nearly doubled its forecast for quarterly credit losses to $3.5 billion. It also plans to cut 3,000 jobs, close 186 home lending offices, and stop making mortgage loans through brokers. Goldman Sachs (GS.N: Quote, Profile, Research ) bankers were among the advisers to WaMu on its $7 billion capital-raising plan.[1] The capital infusion should be a back-stop on the bonds. There is likely to be more problems in WaMu's core business, as the economy continues its sluggish ways. Simply put, Fotheringham thinks that WaMu shares should trade at its tangible equity value, which is estimated at $9.84 per share. Plus, he thinks there will need to be about $14 billion set aside for charges on bad loans.[7]
In yesterday'''s press release, WaMu disclosed that credit losses accelerated in the first quarter. It estimates a $3.5 billion provision for loan losses (compared to $1.5 billion in fourth quarter) and $1.4 billion in net charge-offs, up from $747 million the prior quarter. The company doesn'''t say, but its large home equity ($57 billion and about 26% of outstanding loans) and subprime residential mortgage loan ($20 billion) portfolios are the likely sources.[3] Washington Mutual will set aside $3.5 billion to cover expected losses on home loans, the company said April 8 as it reported a $1.1 billion first-quarter loss.[5] Goldman's report today said the company may still face another $23 billion in mortgage-related losses. "They're in the eye of the storm in terms of the credit markets,'' said Brian Horey, president of Aurelian Management LLC, who has sold Washington Mutual short.[5]
Washington Mutual sold 176 million shares at $8.75 each, 33 percent below the April 7 closing price, and $5.5 billion in convertible preferred shares, the company said in a statement Tuesday.[9] Washington Mutual sold 176 million shares to investors led by Fort Worth, Texas-based TPG at $8.75 apiece, the company said.[5] Washington Mutual sold securities to a group led by David Bonderman's TPG Inc., increasing the shares outstanding by as much as 50 percent. "This wasn't a bad deal," said Boston-based David Ellison, manager of two bank mutual funds for Arlington, Va. -based Friedman, Billings, Ramsey Group Inc., overseeing more than $2 billion in assets. Investors may fare better with a recapitalization because it can be repeated and still leaves hope for a rebound, he said.[9] Washington Mutual, the biggest U.S. savings and loan, almost doubled the shares outstanding in return for capital from a group led by David Bonderman's TPG Inc. The sale helped ease investor concern that losses on subprime mortgages threatened the lender's survival.[5]
Private-equity firm TPG will receive warrants to purchase more than 57.1 million shares of Washington Mutual Inc. as part of an investor plan to recapitalize the thrift, according to a regulatory filing late Friday.[8]
WaMu said it raised $7 billion from investors led by private equity firm TPG Capital LP TPG.UL, which took a $2 billion stake.[1] Goldman Sachs is partaking in irresponsible market manipulation. Experienced traders know that analysts' recommendations tend to be self serving with respect to the firm they represent. You can bet the farm that if they recommend a stock, they will be selling into the rally. Inversely, a "Short" recommendation is a rarity, and Goldman Sach's has it's reasons for making such a recommendationvery self serving reasons. There are 2 strategies they're trying to play out. 1) They're trying to recover from their wounds from a recently taken "Short" position in the $9.50 range that crushed them when WM closed up 29% on the TPG news a few days ago. 2) With the obvious confidence a 7 billion dollar infusion into WM represents, they are now looking to take a long position in WM but at a much reduced price.[4] Fotheringham advised Goldman's clients to sell short, which is the sale of stock borrowed from shareholders. People who sell short hope to profit by repurchasing the securities later at a lower price and returning them to the holder. Goldman reiterated its "outperform'' rating on Washington Mutual bonds and credit-default swaps.[5] As a point of fact, traders can take new short positions, as long as the stock is above $5. In their favor here is the end of the "downtick rule " that prevented steep and rapid declines. What are the details of those convertible bonds ? If a company is near bankruptcy, often the bondholders and other creditors will force it, and zero out all the shareholders.[4]
The convertible shares can convert at $8.75 a share. "The $7bn of new equity capital is a clear positive for bondholders," she writes. "We expect the convertible to become common equity later this quarter, though we believe there is still a small risk that shareholders do not approve the dilution."[4] Minority shareholders are left paying for the thrift's largesse. WaMu will issue TPG and a handful of its existing large institutional shareholders $1.5 billion of new shares at $8.75 apiece -- $4.40 a share less than its outstanding shares were going for at the.[10]
Fotheringham put a 12-month price target of $10 on WaMu stock. That doesn't seem so unreasonable: its shares tumbled slightly this morning, to $11.38. Of course, if it falls much below that level, it's surely going to ruffle TPG's feathers.[2] Fotheringham previously estimated a 2008 loss of $1.00 per share. He cut his forecast for 2009 earnings to break-even from a profit of $1.10 per share. He has a "sell" rating on WaMu, and cut his price target to $10 from $12.[11]
In afternoon trading, Washington Mutual shares were down 59 cents at $10.83 on the New York Stock Exchange. [11] Washington Mutual, known as WaMu, dropped 47 cents, or 4.1 percent, to $10.95 at 4:15 p.m. in New York Stock Exchange composite trading.[5]
The company fell 36 cents to $11.45 a share in New York Stock Exchange trading.[9]
Chief Executive Officer Kerry Killinger, who had been struggling to reassure investors the lender has enough capital to stay afloat, rejected a bid by JPMorgan Chase & Co., the third- largest U.S. bank, that valued the company at about $8 a share, a person familiar with the talks said.[5] "You can always sell later, but you can only sell once." Chief Executive Officer Kerry Killinger is struggling to reassure investors the Seattle-based company has enough capital to stay afloat after losing three-quarters of its market value in 12 months.[9]
There's no real reason to short, people will sell off slowly over the next few months once investors wake up to see the stock price is dead money for years.[7] A potential 300% stock price appreciation over a 20 month period would be quite rewarding for any investorretail or institutional. What's irresponsible about GS's "short" recommendation is that many novice investors who short this stock will get badly burned when the "short squeeze" begins to unravel. GS would have better served their clients to recommend selling WM, not shorting it.[4]
TPG's bouquet includes WaMu stock at a 33% discount, in-the-money securities that are convertible into stock and warrants to buy shares. [10] Shares of Washington Mutual have declined of late (WM, last 3 mos.) They offset that position by recommending buying the company's bonds.[4] Bristlecone had 714,146 Washington Mutual shares at the end of the year, according to Bloomberg data, and has since sold the entire stake, Nouzille said.[9]
Washington Mutual Inc. fell 3 percent Wednesday as shareholders resigned themselves to a $7 billion capital infusion that might dilute their holdings by half.[9] The private-equity group run by David Bonderman is getting a sweetheart deal in the $7 billion capital raising it is leading for Washington Mutual.[10]
Washington Mutual may have a $14 billion provision charge in 2008, the analysts said.[5]
Washington Mutual risks more losses on consumer lending, the Goldman analysts said. "WaMu leads its peers with respect to recent growth in credit-card delinquencies,'' they said.[5] Goldman expects mortgage- related losses between $17 billion and $23 billion, the analysts said.[5] Banks and securities firms including Citigroup Inc. and Lehman Brothers Holdings Inc. have raised $136 billion of capital after more than $232 billion of losses tied to subprime mortgages, according to data compiled by Bloomberg.[9]
If credit losses rise much beyond 4% of loans, WaMu may again find itself short of sufficient regulatory capital. The Killinger-led management team that has visited this catastrophe on WaMu'''s shareholders keeps its job, giving up remarkably little.[3] The other investors identified only as Olympic Investment Partners, a newly formed Delaware limited partnership, but described as including several of WaMu's largest institutional shareholders kicked in the remaining $5.2 billion.[6]
What is somewhat humorous is that I have a $500,000 five year interest only loan at WaMu that is due to reset next year. It is well secured.[4] WaMu's CDS currently trade at a cost of $415,000 for insurance against default for five years, according to Phoenix Partners Group.[4]
The lender also will issue 68 million warrants priced at $10, FBR analyst Paul Miller wrote in a research note Wednesday. [9] Goldman spokesman Ed Canaday said the firm has "strong barriers'' between the research division of which Fotheringham is a part and its business of managing share sales. "This proves that there are clear divisions, or clear separations, between divisions that should be separate,'' Canaday said in an interview.[5] I agree the dilution is horrible, although there's not enough downside support for a low risk/high reward to short. Shorting to win a buck per share, when some blow-hards might foolishly buy thinking WM's inflated, overvalued P/E is cheap?? That play's over. The GRMN's and CROX's of the world are still worth a good look to short, but not WM at these levels.[7] Then the company will convert bonds into new shares for a reorganized corporation, and start all over again.[4]
The lender fell 72 percent in 12 months, leaving the company with a market value of about $9.7 billion.[5]
"WaMu is most exposed to states where we forecast severe home price depreciation, and subsequent mortgage credit deterioration,'' the analysts wrote. [5] When's the worst time to raise money? Well, of course, when you desperately need it. That's the predicament for Washington Mutual Inc. (NYSE: WM ), which needs to shore up its beleaguered balance sheet.[7]
SOURCES
1. WaMu faces $14 billion losses, should be shorted: GS | Markets | Hot Stocks | Reuters
2. Goldman Takes WaMu by the Shorts - News Blog - Daily Brief - Portfolio.com
3. WaMu Capital Infusion: Now That's Dilution - Seeking Alpha
4. MarketBeat Blog - WSJ.com : Goldman: Short WaMu Stock, Buy the Bonds
5. Bloomberg.com: Worldwide
6. Business & Technology | Layoffs, closures will cost WaMu more than $140 million | Seattle Times Newspaper
7. Goldman dumps on WaMu - BloggingStocks
8. Free Preview - WSJ.com
9. WaMu drops as investors gauge impact of stock sale
10. Free Preview - WSJ.com
11. UPDATE 2-WaMu faces $14 bln losses, should be shorted-GS | Markets | Markets News | Reuters
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