Residential Capital LLC, the unprofitable mortgage company whose parent Ally Financial Inc. (ALLY) is trying to repay a U.S. government bailout, filed for bankruptcy and plans to sell most of its assets to Fortress Investment Group LLC. (FIG)
ResCap listed assets of $15.7 billion and debt of $15.3 billion in a petition filed today in U.S. Bankruptcy Court in Manhattan. ResCap’s Chapter 11 filing is the biggest so far this year, based on liabilities, according to data compiled by Bloomberg.
“The action by ResCap will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us,” Ally Chief Executive Officer Michael A. Carpenter said today in a statement. Ally said it also may sell its international auto-finance and insurance operations to help repay a $17.2 billion U.S. bailout.
Ally, a Detroit-based bank that specializes in car loans, is 74 percent-owned by the U.S. Treasury after receiving the bailout. In 2010, the Treasury failed to find a buyer for ResCap, which originates and services residential mortgages. Carpenter had said an initial public offering for Ally wouldn’t happen without progress on a resolution for ResCap.
ResCap’s board voted to declare bankruptcy and arrange a sale to Fortress and Nationstar Mortgage Holdings Inc. for about $2.3 billion, ResCap Chairman and CEO Thomas Marano, 50, said in an interview. Nationstar, which is majority-owned by Fortress, will buy a portfolio of servicing assets, as well as a mortgage-origination unit, and business will continue uninterrupted, he said. Mortgage servicers handle billing, collection and foreclosures.
While in bankruptcy, ResCap will continue to originate new home loans and service its existing 2.4 million consumer mortgages, the company said. ResCap said it will try to exit bankruptcy by the fourth quarter.
Ally agreed to pay $750 million to ResCap to settle any claims against the parent company, purchase as much as $1.6 billion of securities if others don’t, and provide $150 million to help finance ResCap’s operations during bankruptcy, according to a statement. Barclays Plc (BARC) will provide $1.45 billion in financing to ResCap while the company is under court protection, Marano said.
Deutsche Bank Trust Co. Americas is listed as the top unsecured creditor, representing investors who hold six series of notes issued in dollars, pounds and euros. The total value of the claims is about $956.3 million, based on the May 11 exchange rate, ResCap said in its bankruptcy petition.
The next 32 biggest claims were all related to active or potential securities litigation. ResCap didn’t give a value for the claims and said it disputes all of them.
In the weeks leading up to the filing, ResCap negotiated with bondholders in an effort to create a so-called prepackaged bankruptcy. When a majority of creditors who hold about two-thirds of the amount of a company’s debt vote to support a reorganization plan, the bankruptcy is considered prepackaged and can win court approval quicker than normal.
ResCap’s plan has support from 37 percent of junior secured creditors, according to court papers, below the threshold needed for a prepackaged bankruptcy. Under the U.S. Bankruptcy Code, creditors holding more than one-third of any single class of ResCap’s debt can block the company’s reorganization proposal by voting against it.
ResCap missed a $20 million, semi-annual interest payment April 17 on about $473 million in 6.5 percent notes due in 2013, Ally said in a regulatory filing. The firm had 30 days before a default, according to the filing. Deutsche Bank is the trustee for the notes, according to court papers.
Carpenter 65, and Ally’s board had resisted the U.S. Treasury’s call to break up and sell ResCap, people familiar with the matter said in March. Elliott Management Corp., which owns 2.3 percent of Ally, also pressed for a sale, saying in a letter to the board that a ResCap bankruptcy filing would lead to “radical value destruction.”
Bankruptcy would last 12 to 18 months and trigger billions of dollars in so-called put-back claims, where holders of mortgage-backed securities issued by ResCap try to force the company to buy back soured loans backing the bonds, Elliott said in the letter.
The bankruptcy puts taxpayers “in a stronger position to continue recovering their investment in Ally,” U.S. Treasury Department Assistant Secretary Timothy Massad said in a statement after the filing. ResCap “has continued to struggle with losses from its old loans,” while Ally also has a profitable auto-financing business and a growing retail banking arm, he said.
ResCap has a preliminary agreement with a bondholder group represented by White & Case LLP and is negotiating with other claimants, said Marano, who also has served as CEO of Ally’s mortgage division. Between $1 billion and $1.2 billion in government-insured loans will be left in the ResCap estate as part of the reorganization, he said.
The bankruptcy plan received conditional approval from the Treasury, an Obama administration official said in early May. The U.S. concluded that addressing ResCap’s mortgage losses would put taxpayers in a better position to recoup their investment in Ally, according to the official.
Assets at ResCap, once one of the largest subprime mortgage originators, dwindled to $15.7 billion at the end of the first quarter from more than $130 billion in 2006. ResCap was involved in 22 securities lawsuits, Carpenter said in November.
That month, ResCap hired Centerview to identify concessions that would be needed from lenders to put the company on a firmer financial footing before Ally pursues an IPO, people familiar with the matter said at the time.
Ally had decided in June to postpone its planned share sale, which was intended to raise as much as $7 billion and shrink the government’s stake.
To contact the reporters on this story: Steven Church in Wilmington at firstname.lastname@example.org; Phil Milford in Wilmington, Delaware at email@example.com; Dakin Campbell in San Francisco at firstname.lastname@example.org