Fortress Investment Group LLC (FIG) was named lead bidder for the mortgage business of bankrupt Residential Capital LLC, beating out Berkshire Hathaway Inc. (BRK/A), the holding company run by billionaire Warren Buffett.
Fortress last night increased its original offer of $2.4 billion by $125 million, topping Berkshire Hathaway’s bid, ResCap attorney Larren M. Nashelsky told U.S. Bankruptcy Judge Martin Glenn today in Manhattan. Glenn approved New York-based Fortress’ Nationstar Mortgage Holdings Inc. (NSM) as the so-called stalking-horse for the auction of ResCap’s most valuable asset, its loan origination and servicing business.
“You had very robust bidding that raised the stalking- horse bidding considerably,” Glenn said.
ResCap, based in New York, filed for bankruptcy May 14 with plans to name Fortress as lead bidder at a court-supervised auction. Omaha, Nebraska-based Berkshire Hathaway challenged Fortress for the right to be the stalking-horse.
Berkshire Hathaway was named stalking-horse for another ResCap auction, involving a portfolio of loans. That auction will begin with Berkshire Hathaway’s offer of $1.45 billion and includes a $10 million breakup fee should the company lose the auction. Berkshire Hathaway can also bid for the mortgage unit.
The auctions may take place in October, said Marshall Murphy, head of investor relations for Nationstar. Under terms of the bankruptcy financing agreement, the sales must close by April 15, Kenneth H. Eckstein, an attorney for the main committee of ResCap’s unsecured creditors, said in court.
ResCap is owned by Ally Financial Inc. (ALLY), a Detroit-based auto lender majority-owned by U.S. taxpayers. Ally supported the decision by ResCap’s board to file bankruptcy because it may help Ally distance itself from the mortgage lender’s losses and help repay a 2008 bailout following the U.S. housing crash and credit crisis.
Ally offered to be the lead bidder for the loan portfolio for $1.4 billion to raise as much money as possible for ResCap, Gina Proia, a spokeswoman for Ally, said in an e-mail today.
“We continue to be optimistic about the ultimate value ResCap will achieve in the auction process,” Proia said.
Days before ResCap filed for bankruptcy, Berkshire Hathaway offered to buy the company from Ally for $1 and an assumption of all its debts, R. Ted Weschler, a Berkshire Hathaway investment manager, said yesterday in court.
Berkshire Hathaway also offered to split any legal liability Ally might face from lawsuits related to flawed mortgage loans ResCap originated, with Ally paying the first $1 billion, Weschler said.
Berkshire Hathaway has been preparing for a turnaround in the housing market by buying a brick maker, expanding its real estate brokerage and wagering on commercial property through a company jointly owned with Leucadia National Corp. (LUK) The venture, called Berkadia Commercial Mortgage LLC, was formed from a loan- servicing and mortgage business purchased out of bankruptcy in 2009 and once owned by ResCap’s parent.
Stalking Horse Advantages
The stalking-horse bidder in a bankruptcy auction has advantages over other bidders that include being entitled to a breakup fee and expense reimbursement should another party win the auction.
The court can require subsequent offers to exceed the stalking-horse bid by a specific amount, often high enough to ward off other potential buyers. The agreements also require the stalking-horse to buy the property in the absence of other offers.
ResCap, Berkshire Hathaway and Fortress were in court yesterday arguing about who should make the first offer for the mortgage business at the auction of the mortgage business.
Berkshire Hathaway was also competing with Ally to be the stalking-horse for the loan portfolio.
Before it filed for bankruptcy, ResCap signed a stalking- horse agreement with Fortress that would have given the company a $72 million breakup fee in the event it lost the auction and reimbursed as much as $10 million in expenses.
Berkshire Hathaway countered on June 11 with the same purchase price, a $24 million breakup fee and no expense reimbursement.
When yesterday’s hearing broke for lunch, Fortress raised its offer by $50 million. After lunch, Weschler, the Berkshire Hathaway investment manager, testified that his company would top the Fortress offer by $10 million and cut the breakup fee to $12 million.
When Fortress tried to counter, Glenn declined to hear the offer. Instead he asked the companies to file their final offers with ResCap last night. This morning, ResCap announced that Berkshire Hathaway had increased its offer to $100 million more than its original offer, or about $2.5 billion, and Fortress had boosted its original bid by $125 million.
Glenn agreed with ResCap’s directors that Fortress should be the stalking horse. Fortress was granted a $24 million breakup fee should it lose the auction.
After today’s ruling, ResCap’s 6.5 percent bonds that mature next year rose 4.4 percent to 24 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.