TPG loses remaining $1.3bn stake in WaMu collapse(2)

The biggest bank failure in US history is also one of the biggest publicly disclosed private equity losses in history. TPG has stressed that the investment represented only a small portion of its diversified assets.

Washington Mutual

TPG effectively lost its remaining $1.3 billion (€900 million) stake in Washington Mutual yesterday when the US savings and loan was seized by federal regulators and then sold it deposits and loan portfolio assets to JPMorgan.

The private equity firm in April invested $2 billion into WaMu, whose shares are now worthless.

While noting its supreme disappointment TPG also stressed in a statement that “this investment represented a very small portion of our assets”.

Still, the bank’s failure appears to be one the biggest – and one of the most rapid – losses in private equity history that has been publicly disclosed. It is second in terms of size only to New York buyout firm Forstmann Little’s $1.5 billion write-down on its deals for XO Communications and McLeodUSA, investments which were made between 1999 and 2001.

Obviously, we are dissatisfied with the loss to our partners from our investment in Washington Mutual.

TPG spokesman

“Obviously, we are dissatisfied with the loss to our partners from our investment in Washington Mutual. The unprecedented turmoil in global financial markets and resulting macro crisis of confidence has radically changed the dynamics for all financial institutions, and has led to widespread losses among investors throughout the sector,” a spokesman for TPG said in a statement.

At the time of TPG’s original investment in Seattle-based WaMu, the firm bought 822,000 common shares of WaMu stock at $8.75 per share – a 33 percent discount to the market price. That investment totaled about $7 million; the remaining $1.9 billion of TPG’s investment came in the form of convertible preferred stock.

Both holdings came with anti-dilution protections such as full ratchet adjustments, which help the firm lower its cost basis in the event of future stock issues below its entry price. The firm gained one board seat, held by TPG founder David Bonderman, and a board observer as part of the deal.

WaMu management opted for the deal over JPMorgan Chase’s $4 per takeover offer, made in March, which valued the firm at approximately $7 billion.

Markets initially greeted the TPG investment as a sign of confidence in the bank. Its common shares rallied, topping out at $13.15 per share at the time of the deal’s announcement.

By 30 April, the firm had exercised its right to convert much of its preferred stock as its common holdings had swelled to over one billion shares. WaMu was trading at $12.29 at the time. And on 30 June the firm converted additional preferreds to get 228 million more common shares, which at the time stood at $4.93.

Over the same period, the firm also reduced the book value of its WaMu holdings from $2 billion to $1.3 billion, sources confirmed.

By mid-September, though, WaMu’s problems became even more pronounced after ratings agency Standard & Poor’s cut its counterparty credit rating, which already stood at the cusp of the investment grade cutoff at BBB-/A-3, down to BB-/B. Shares plummeted, closing at $2 and a massive outflow of deposits began, reaching $16.7 billion at press time.

“It increasingly appears that market conditions could overtake credit fundamentals and leave the company with greatly diminished financial flexibility,” S&P credit analyst Victoria Wagner wrote at the time.

Two days later, acting “to maximise the bank's flexibility in this difficult environment,” TPG waived price reset payment provisions in its private placement contract with WaMu. The provisions would have given it the right to be made whole on its holdings of WaMu's common shares should the bank raise more than $500 million of additional capital or sell itself for a price below TPG's $8.75 entry price. Analysts interviewed by PEO at the time saw this as a last-ditch effort for TPG to help the firm avoid bankruptcy.

The waiver came as WaMu was in the thick of negotiations to sell itself, but various potential buyers, including JPMorgan Chase, Citi and Wells Fargo walked away from a potential transaction.

With a sale to a strategic buyer no longer an option, WaMu reportedly approached The Blackstone Group and The Carlyle Group regarding a potential take-private. It is unclear where those negotiations led, but with a final deadline of 6pm on Wednesday for bids, it became clear that no one was willing to buy the thrift until it failed. 

Twenty-four hours later, the Office of Thrift Supervision, the regulatory body for WaMu, announced that it had closed the institution and appointed the Federal Deposit Insurance Corporation as receiver for the bank and auctioned off its banking operations.

JPMorgan agreed to pay the government $1.9 billion for WaMu’s assets, loan portfolio and banking operations, which will vault the bank into first place nationally in terms of deposits. WaMu shares, meanwhile, dropped to $0.

Earlier this month PEO learned that the firm had closed its sixth global buyout fund on $19.8 billion, a $6 billion financial services/distresed credit fund and a $4 billion Asian fund.