Deals could signal a rebound

Financial-house acquisitions could prop up credit markets, or vultures may just feast

NEW YORK -- Investors are hoping that a possible $5 billion cash deal for Washington Mutual and other recent financing moves are signals that credit is finally loosening up again. But what looks like easier credit may just be vulture investors picking over the wounded among the nation's big corporate names.

Major financial institutions such as WaMu have sold big stakes in their companies to private equity firms and funds controlled by foreign governments. Such investors are sinking cash into other troubled industries, such as retail, they aren't willing to gamble on more distressed sectors.

For major private equity funds, which in many cases use debt as a currency to make acquisitions, these kinds of deals are too good to pass up. If the Washington Mutual deal comes through, TPG -- a Forth Worth, Texas, buyout firm -- will get a big stake in the country's largest savings and loan at a time when shares are trading at multiyear lows.

"I think the biggest credit problems have started to abate a bit, and these kind of deals are getting done," said Peter Dunay, chief investment strategy at Meridian Equity Partners in New York. "It shows investors are out there to step in. But what they want in return becomes very large."

Indeed, the investment would give TPG a mix of common and preferred stock totaling less than 25 percent of Washington Mutual's outstanding shares. TPG, formerly Texas Pacific Group, would also get a seat on the board.

Shares of Washington Mutual, a Seattle thrift, have come under heavy fire as problems in the housing and credit markets have deepened. The company's stock shed nearly 70 percent of its value last year, and the sinking value of its mortgage portfolio and soaring loan-loss provisions -- the amount it socks away to cover bad loans -- led to a $1.87 billion fourth-quarter loss.

Shareholders' interest

This kind of deal would have been hard to approve during the stock's peak without drawing the ire of shareholders, whose investments would be diluted in the stock offering. Though the big private equity-backed acquisitions of 2007 have dried up, the recent capital infusions indicate that deals are possible when the right opportunity comes along.

Private equity dollars have been pumped into financial houses on the belief that the Federal Reserve will help protect the institutions from collapse. There are no such assurances in the airline sector: Three carriers declared bankruptcy in as many weeks. Martin Fridson, CEO of research firm FridsonVision in New York, said the big financial deals should not be mistaken for any kind of credit market recovery.

"The tone is certainly better, but I don't see this as any kind of inflection point," said Fridson. "These deals aren't anything the individual investor can get in on, and there's no signs credit is easily available to most businesses."

Further, these capital infusions have been happening steadily for months.

Swiss bank UBS -- which reported write-downs of $37.4 billion for the past nine months -- approved an emergency capital infusion last week. Rivals such as Citigroup and Merrill Lynch have made similar moves. Before Bear Stearns was bailed out by the Fed and JPMorgan Chase, it also received a capital injection.

There has been limited evidence in other sectors. Borders Group said Monday that it reached a revised financing agreement with its largest shareholder to boost liquidity. Pershing Square Capital Partners agreed to lower the interest it is charging the bookseller in a bid to keep it out of further financial trouble.

Banks are willing to extend loans to those with good credit ratings. NYSE Euronext, the operator of the New York Stock Exchange, has entered into a $1 billion credit agreement with JPMorgan Chase, according to a regulatory filing Monday.

"Credit is still going to be a bit tight until we find out more about corporate earnings, the economy, and how much banks write down in the first quarter," Dunay said. "Then maybe the credit market will open up."