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Subject:  Reviewing a Chapter 11 Situation Date:  4/26/2011  4:25 PM
Author:  charliebonds Number:  32761 of 36649

Washington Mutual filed for Chapter 11 protection on Sept 27, 08, putting my position in five of their 5.25’s of 09/15/17 in jeopardy. I don’t remember now. But I doubt they made the coupon-payment due on September 15th. Therefore, from my entry date of 11/09/07 to the filing, I probably collected just one coupon, meaning, at best, if the court made note-holders whole up to today, I would be owed approximately $809 in accrued-interest. For some time now, WAMU’s bonds have been trading at a premium to par, implying a favorable court settlement of both a return of principal as well as accrued interest, which is unusual. That has happened to me only once before, i.e., with World Airlines bonds, the first junk bond I bought and a 35% winner out of sheer beginner’s luck.

The ballot for the reorg is intimidating. The instruction are confusing. The handling-agent isn’t helpful. And I had gotten tired of the uncertainty. I just wanted out. So I broached the idea of hitting the bid to my broker, asking what I could get. My position was being marked to market in my account at 112, which can often be an unrealistically high estimate of marketable worth, especially since FINRA was showing 110.5 as the last trade, with 108.334 as the most recent sale. Per my expectations, the best bid he was able to get for me was 108.150, which I accepted.

This is how the numbers turn out. It cost me $39.95 to do a broker-assisted trade, meaning my net per bond was 107.351 compared with my 79.921 entry price. Throwing in the implied coupons I received, or about $91 bucks, adds another 1.8 points per bond to my gains. Prorating that total over my holding-period of 3.47 years, gives me an effective YTM of 9.40%.

In one sense, that’s pretty thin gruel for the grief of having suffered through yet another bankruptcy. OTOH, a profitable settlement is a profitable settlement, and I’m glad to be out, so I can deal with the other WAMU bonds I’m holding at IB, two of WAMU’s Senior 4’s of ’09 and one of their Senior subordinate 8.25’s of ’10. IB won’t let me hit the bids for them. So I’m going to have to use the paperwork routine for settlement, which I haven’t yet received from the broker but which the handling agent for the reorg assures me I’m eligible. So, eventually, I’ll get them settled, too, and make a few more bucks.

Possible lessons learned: The fact that I owned five bonds, and not my customary one or two, made it easier to exit the position. The fact that I owned five bonds, not my customary one or two, would have magnified my losses if this position had moved against me (as it did from owning more of Lehman’s debt than I should have) So, that’s one consideration that has to be made with every purchase: How big can the position be before the losses, if they happen, exceed reasonable size? How small can the position be before the gains, if they happen, aren’t worth pursuing? In general, the more assured a favorable outcome is, the larger the position can be and the closer to par (or even above) your entry can be. The more likely an unfavorable outcome, the smaller a position has to be and the closer to a Chapter 11 workout-price your entry had better be. In this case, with an 80 entry, I wasn’t getting in as low I should have been. But the 20-point discount was a step in the right direction, and it was what saved my butt in this instance. With my two positions at IB, I got in at just under par. So making money there will depend on getting the most favorable treatment possible from the courts and the reason why I should do the paperwork route even if I could cash out now at a discount to the current 120 bids for the bonds.

Gees, the learning never ceases. But I can’t imagine doing anything else in the investing world than what, years ago, I stumbled into and found to be a generally low-stress way to make a few bucks. The bond market has been kind to me.

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