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Fare Thee Warned Distressed Debt Investors: WaMu Ruling Stirs the Bee's Nest


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Rejecting the company’s Chapter 11 plan, Walrath yanked the rug out from under bondholders who thought they had cut a straight-up deal with the company to get the contract rate of interest on billions in debt. Instead, she found the federal judgment rate of interest should apply in the case, which grew out of the biggest banking collapse in U.S history, that of Washington Mutual Bank, or WaMu.


In Washington Mutual’s Chapter 11 case—which began almost three years ago—this just means holders of a class of debt called PIERS might have to kick back something to holders of top-ranking debt, according to Kevin Starke, an analyst with CRT Capital Group, which makes a market in Washington Mutual securities.






Washington Mutual Inc. failed for the second time to win approval for its plan to pay creditors more than $7 billion as a bankruptcy judge sided with opponents.


The company's 5.375 percent preferred securities, convertible into common stock until 2041, plunged more than 70 percent today because they may suffer most from the ruling, said Kevin Starke, a senior analyst with CRT Capital Group in Stamford, Connecticut.


U.S. Bankruptcy Judge Mary Walrath in Wilmington, Delaware, said in a decision yesterday that she was "concerned that the case will devolve into a litigation morass" and ordered the two sides into mediation.

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