Ally Financial Inc. (ALLY)’s mortgage unit is talking to buyout firms including Fortress Investment Group LLC (FIG) and Cerberus Capital Management LP about selling itself through a pre-packaged bankruptcy, according to people with knowledge of the matter.
The unit, Residential Capital LLC, and its financial advisers also have contacted Centerbridge Capital Partners LLC and Leucadia National Corp. (LUK) to gauge their interest, said two of the people, who declined to be identified because the discussions are private. A prearranged bankruptcy is among options being explored as Ally, ResCap and their advisers aim to craft a plan for the unit by the end of March, before ResCap encounters financing and liquidity deadlines, said the people.
Ally is seeking to limit liabilities at ResCap, which faces at least 22 mortgage-linked securities lawsuits that threaten to wipe out profit at the Detroit-based parent. A pre-packaged bankruptcy would allow ResCap to reach an agreement with creditors and other stakeholders before filing. It’s seen as the likeliest outcome inside the unit and is an option that has gained momentum in recent weeks, said the people.
ResCap, led by Chairman and Chief Executive Officer Thomas Marano, 50, will have bond coupon and interest payments in April, the people said. Potential bidders are being told that a pre-packaged bankruptcy filing would allow the buyer to leave behind liabilities such as private-label securitizations that have been the subject of litigation, said the people.
Spokesmen for Ally, Cerberus and Leucadia declined to comment, and spokesmen for Centerbridge and Fortress didn’t immediately respond to messages seeking comment. The buyout firms, all based in New York, had considered making bids in mid- 2010 in a failed auction, people familiar with the matter said at the time.
Credit-default swaps on ResCap jumped 15.5 percentage points to 57 percent upfront as of 11:47 a.m. in New York, according to broker Phoenix Partners Group. That means the upfront cost to protect $10 million of ResCap bonds from default for five years jumped to $5.7 million from $4.15 million before the report. The initial costs are in addition to $500,000 annually.
ResCap’s $2.12 billion of 9.625 percent notes due in May 2015 fell 3.3 cents to 78.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
A ResCap bondholder group representing John Paulson’s Paulson & Co., David Tepper’s Appaloosa Management LP and Boston-based Loomis Sayles & Co. called the company and its advisers to express opposition to any plan placing ResCap in bankruptcy, according to another person familiar with the talks.
The bondholder group holds $800 million in ResCap debt and has said it would resist a bankruptcy filing. It may seek to block any sale of the unit in bankruptcy by claiming that ResCap wasn’t separate from Ally and therefore can’t be split through a filing, the person said. The group also believes Ally has stripped some assets from ResCap that should have stayed with the mortgage unit, said the person.
The bondholders hired law firm White & Case LLP in January to represent them and want Ally to finance a ResCap bailout, according to a person with direct knowledge of the group’s demands. Anthony Morro, an attorney for the group, declined to comment.
Getting More Say
“If you are a ResCap bondholder, right now you want to make sure your money doesn’t go to zero,” said Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia. “They will put up as much of a fight as they can.”
A pre-packaged option may be preferable for ResCap bondholders because it gives them some say on the final solution rather than a more traditional bankruptcy where they would have less input, Lurie said.
Ally is pursuing an initial public offering to help repay $17.2 billion in bailout funds after the U.S. Treasury Department rescued the auto lender, originally known as GMAC, in 2008 because the firm was deemed crucial to the health of automakers. The U.S. now holds a 74 percent stake.
A group of investors led by Cerberus owns 8.7 percent of Ally after government bailouts diluted a 51 percent stake acquired from General Motors Corp. for $7.4 billion in 2006.
Earlier this month, Ally posted a fourth-quarter loss after absorbing a $270 million charge to cover expected penalties stemming from faulty foreclosure practices. Ally CEO Michael Carpenter, 64, said he won’t take the company public until legacy mortgage issues are resolved.
No ‘Blank Check’
“Realistically, until we’ve made some progress on the mortgage issue, we’re not going to go out into the marketplace and accept the kind of discounts that we would have to get in order to go public in this environment,” Carpenter said Feb. 2, during the company’s fourth-quarter earnings call. Ally halted the IPO process last June amid turmoil in the equity markets.
Ally has sought to distance itself from ResCap to limit liabilities it may face. That effort may have been made more difficult by the fourth-quarter charge, which caused ResCap to violate covenants on certain credit facilities and led Ally to forgive $196.5 million of debt between the firms.
“Investors should not assume there is a blank check,” said Carpenter, who added that ResCap is a separate legal entity that files its own 10-K annual report with the U.S. Securities and Exchange Commission. “It’s been an SEC registrant in its own right, with its own 10-K, tons of disclosure, its own securities. The contracts in the marketplace are contracts with ResCap, not with Ally.”
ResCap hired Centerview Partners LLP last year to advise on restructuring and negotiations with creditors, people familiar with the matter said at the time. Ally is being advised by Evercore Partners Inc. (EVR), while Lazard Ltd. (LAZ) and Perella Weinberg Partners LP are advising the Treasury.
To contact the reporters on this story: Jeffrey McCracken in New York at firstname.lastname@example.org; Dakin Campbell in San Francisco at email@example.com; Zachary R. Mider in New York at firstname.lastname@example.org