Residential Capital LLC, the bankrupt mortgage unit of Ally Financial Inc., will start talks with creditors on a new reorganization plan next month, one day after a group of bondholders dropped support for the old plan.
ResCap and creditors worked out a process to negotiate a new plan after U.S. Bankruptcy Judge Martin Glenn on Sept. 11 threatened to end the company’s exclusive control of its reorganization.
“Until the parties begin speaking with each other, there won’t be any progress,” Glenn said today in U.S. Bankruptcy Court in Manhattan. “There are a lot of difficult issues.”
Last night ResCap confirmed that a group of secured bondholders had ended their agreement to support the company’s reorganization plan. ResCap, based in New York, filed for bankruptcy in May with plans to sell most of its assets and resolve legal claims related to residential mortgage-backed securities.
ResCap is also trying to resolve potential objections to an auction of its mortgage-servicing unit, which is scheduled for next month. The so-called stalking-horse, or lead, bidder is a unit of Fortress Investment Group LLC, which has agreed to buy the mortgage business for more than $2.4 billion, unless outbid at the auction.
Ally had said it had support for ResCap’s reorganization plan from a group of the junior secured noteholders. As of June, noteholders included Axa SA’s Alliance Bernstein unit, Appaloosa Management LP and Marathon Asset Management LP, according to a court filing.
That support deal came after some ResCap bondholders including John Paulson’s Paulson & Co. and David Tepper’s Appaloosa Management hired law firm White & Case LLP in January to oppose a bankruptcy.
Bondholder attorney Christopher Shore told Glenn that the investors he represents will participate in creditor talks.
The bondholders “are looking to renegotiate their deal,” said Kirk Ludtke, an analyst at CRT Capital Group LLC, the Stamford, Connecticut-based broker-dealer. Ending the agreement may also allow the investors to sell the securities and lock in profits, he said.
“This development shows that the strategy to use bankruptcy to fix the ResCap liabilities may not be as easy as the Geithner Treasury and Ally management supposed,” Chris Whalen, a senior managing director at Tangent Capital Partners LLC in New York, said in an e-mail.
The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).