Residential Capital LLC, the unprofitable mortgage company whose parent Ally Financial Inc. 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.
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 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 will provide $1.45 billion in financing to ResCap while the company is under court protection, Marano said.
The financing arranged by London-based Barclays will have three parts: a $200 million revolving loan with an interest rate 4 percentage points above the London interbank rate, a term loan of $1.05 billion with the same interest rate, and a second term loan of $200 million with a rate of 6 percentage points above Libor.
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. ResCap was involved in 22 securities lawsuits, Carpenter said in November.
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.
A group of 17 institutional investors reached an agreement that will give them an $8.7 billion allowed claim related to 392 residential mortgage-backed securities trusts issued by ResCap affiliates from 2004 to 2008, according to a statement from Gibbs & Bruns LLP, a law firm representing the investors with Ropes & Gray LLP.
A separate group of investors represented by law firm Talcott Franklin PC also agreed to settle their claims against ResCap over mortgage-backed securities sponsored by the company. The firm will recommend that all of its clients with MBS claims against ResCap settle with the bankrupt company, Talcott Franklin said in a statement today.
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.
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. Assets at ResCap, once one of the largest subprime mortgage originators, have dwindled from more than $130 billion in 2006.
Morrison & Foerster LLP is the law firm handling the bankruptcy case. Centerview Partners LLC and FTI Consulting Inc. are ResCap’s financial advisers.
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.
The bankruptcy plan received conditional approval from the Treasury, an Obama administration official said in early May.
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.
ResCap’s 6.5 percent bonds due next year fell to 30 cents on the dollar from 35 cents on May 10, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).