WaMu Slides on Terms of $7 Billion Infusion

Updated from 2:53 p.m. EDT

Washington MutualWM shares sank as much as 13% Tuesday after announcing that a consortium of investors led by private equity firm TPG would invest $7 billion into the struggling Seattle thrift.

The bank plans a sale of equities to an investment vehicle managed by TPG Capital and other large WaMu shareholders. TPG's investment vehicle will purchase $2 billion of newly-issued WaMu securities. The Fort Worth, Texas-based private equity firm, led by founder and ex-WaMu board member David Bonderman, was rumored to be in discussions with WaMu regarding a capital injection.

WaMu also forecast a first-quarter loss and slashed its quarterly dividend once again to 1 cent a share from 15 cents a share. The company said the move will preserve roughly $490 million of capital.

WaMu sold approximately 176 million shares of common stock at a purchase price of $8.75 a share. The company also offered 55,000 shares of convertible, perpetual non-cumulative preferred stock at a purchase price and liquidation preference of $100,000 a share. The convertible will convert into common stock at an initial exercise price of $8.75 a share, it said.

Cramer: WaMu Deal Removes a Hazard

The size of the deal is enormous compared to WaMu's current $11.6 billion market cap, according to Thomson Financial.

Shares fell as low as $11.41 Tuesday as investors became disheartened by the company's forecast of a first-quarter loss and the seemingly advantageous terms of the deal for TPG and its consortium. The stock most recently was trading down $1.32 to $11.83.

Fred Cannon, the associate director of research and chief equity strategist at Keefe, Bruyette & Woods, downgraded Washington Mutual to the equivalent of a sell rating after the stock surged roughly 30% on Monday following reports that a capital injection was close. The stock had surpassed his 12-month price target of $10 a share, he wrote in a note.

Cannon said that a capital injection (originally thought to be $2 billion less) would create "significant dilution to both future earnings and book value," according to the note.

UBS analyst Eric Wasserstrom is "supportive of the company's capital position in the near term," given the sale of $1.5 billion of common stock and the issuance of $5.5 billion of preferred stock, he writes in a note issued after the WaMu deal was announced. Still "the size of the transaction ... reflects uncertainty surrounding WaMu's future credit costs, which continue to accelerate."

"We expect credit deterioration to continue, and do not expect the company to return to profitability until late 2010 or later," Wasserstrom writes. He has a neutral rating on the company.

Moody's Investor Service, however, changed its outlook on WaMu and its bank subsidiary to stable from negative. The ratings agency said that the outlook improvement is based on the $7 billion capital raise, which provides "sufficient cushion for the company to maintain capital ratios which are greater than 100 basis points above the regulatory well capitalized minimums," it says in a note.

"Moody's expects this to hold throughout the current credit cycle despite the large credit provisions WaMu will need to take in 2008 and 2009," it adds.

WaMu expects its capital ratios to remain "well above" its target levels over the next two years, despite elevated credit costs associated with the housing decline and subprime mortgage meltdown. WaMu, along with Countrywide FinancialCFC, had been one of the worst-hit lenders as the credit downturn deepened into loans besides subprime mortgages and the secondary market for mortgage-backed securities dried up.

Countrywide agreed in January to be sold to Bank of AmericaBAC. WaMu had been rumored to be in discussions about a sale, possibly to JPMorgan ChaseJPM, prior to the TPG-led capital injection.