ResCap files bankruptcy to complete sale of substantially all assets

By Caroline Salls

Pittsburgh, May 14 - Ally Financial Inc. subsidiary Residential Capital LLC filed for Chapter 11 bankruptcy On May 14 in the U.S. Bankruptcy Court for the Southern District of New York, according to a ResCap news release.

The filing also includes 50 of ResCap's subsidiaries. The company said the mortgage origination, servicing and other business activities conducted through its subsidiaries, including GMAC Mortgage, will continue to operate during the Chapter 11 process.

The company said the Chapter 11 filings are intended to facilitate the sale of substantially all of its assets.

Specifically, ResCap said it has agreed to sell its mortgage origination and servicing businesses to Nationstar Mortgage LLC and its legacy portfolio, consisting mainly of mortgage loans and other residual financial assets, to Ally Financial.

Together, the asset sales are expected to generate roughly $4 billion in proceeds.

In the unlikely event that it does not obtain confirmation of its proposed reorganization plan, ResCap said it will still seek to close the sales to Nationstar and Ally Financial.

In another release, Nationstar Mortgage Holdings said its cash purchase price for the mortgage servicing rights and subservicing contracts would be about $700 million, and the cash purchase price of related servicing advance receivables would be $180 million, net of financing.

Nationstar said it expects to enter into $1.6 billion of advance financing facilities to fund the balance of the related servicing advance receivables. Roughly 68% of loans in the total portfolio are owned, insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, the release said.

Nationstar said it will fund up to $450 million of the MSR purchase price and cash purchase price for advances. Remaining funding is expected from proceeds of a co-investment by Newcastle Investment Corp. and other Fortress-affiliated entities, whereby Nationstar will sell the right to receive 65% of the excess MSRs after receipt of a fixed basic servicing fee per loan.

Nationstar said it will retain 35% of the excess MSRs and all ancillary income associated with servicing the loans.

Nationstar said its agreement contains customary bid procedures and stalking horse protections, including a $72 million break-up fee and reimbursement of up to $10 million of transaction-related expenses to be paid to Nationstar if it is not the successful bidder in the auction process.

Meanwhile, Newcastle said in a release that it expects to invest $150 million to $300 million to acquire an interest in excess MSRs related to Nationstar's proposed acquisition of primary mortgage servicing rights.

DIP financing

In conjunction with the bankruptcy filing, ResCap has secured $1.45 billion of debtor-in-possession financing from Barclays Bank plc as sole lead arranger and administrative agent on behalf of a syndicate of lenders.

The DIP facility includes a $200 million revolving facility, a $1.05 term A-1 loan facility and a $200 million term A-2 loan.

Interest on the revolver and term A-1 loan will be Libor plus 400 basis points, and interest on the A-2 term loan will be Libor plus 600 bps. The term loans both include a 1.25% Libor floor.

The DIP facility will mature on the earliest of 18 months from closing, 45 days after the interim order if the final order has not been entered, the effective date of a plan of reorganization and acceleration and termination of the loans as a result of an event of default.

ResCap said it believes that this financing will give it enough liquidity to complete the proposed asset sales.

Ally involvement

As part of Ally Financial's support for the Chapter 11 cases and the restructuring plan, ResCap said it has reached a global settlement of potential claims with Ally Financial. The settlement will provide ResCap with substantial value, the release said.

Ally Financial said in a separate release that key strategic actions have been taken to strengthen its longer-term financial profile and accelerate repayment of the U.S. Treasury's investment, including the decision by the subsidiaries to make the Chapter 11 filings and the decision by Ally to launch a process to explore strategic alternatives for its international operations.

Ally said these actions will enable it to further invest in and grow its automotive services and direct banking franchises and be best positioned to return additional capital to the U.S. taxpayer by year-end.

"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 in the release.

Ally said it has paid $5.5 billion to the U.S. Treasury, enabling taxpayers to recover about one-third of the investment made in the company. Upon successful completion of the announced strategic initiatives, Ally said it expects to have returned a total of two-thirds of the taxpayer's investment.

According to the Ally release, a key feature of ResCap's prearranged Chapter 11 plan is proposed settlements that provide for the release of all existing and potential claims between Ally and ResCap, as well as a release of all existing or potential causes of action against Ally by third parties.

Ally said the settlements also contain milestones for ResCap to emerge from Chapter 11 by the end of the year.

Ally said steps it has taken to support ResCap's stability and its leading mortgage servicing platform during the Chapter 11 cases include

• Making a $750 million cash contribution to the ResCap Chapter 11 estate upon confirmation of the plan;

• Making a stalking horse bid for up to $1.6 billion of ResCap-owned mortgages;

• Providing ResCap a $150 million debtor-in-possession financing facility; and

• Supporting ResCap's consumer lending originations during the process.

As a result of the Chapter 11 filing, Ally said ResCap will be deconsolidated from Ally's financial statements, and Ally's equity interest in ResCap will be written down to zero.

Also, Ally said it will explore strategic alternatives for all of its international operations, including auto finance, insurance and banking and deposit operations in Canada, Mexico, Europe, the United Kingdom and South America.

Other support

Additionally, ResCap said it has obtained support for a sale-based restructuring plan from holders of a significant amount of its junior secured notes.

The company said institutional investors holding more than 25% of at least one class in each of 290 securitizations have also agreed to support the reorganization. These 290 securitizations have a total original principal balance of about $164 billion.

Given the support of Ally Financial, the debtholders, and other constituencies, ResCap said it hopes to obtain approval of its restructuring plan by the fourth quarter of 2012.

ResCap expects to file its plan within 30 days, according to court documents.

Investor agreement

According to a release from Gibbs & Bruns LLP, 17 institutional investors represented by Gibbs & Bruns and Ropes & Gray LLP have reached an agreement with the ResCap debtors to grant an $8.7 billion allowed claim to 392 residential mortgage-backed securities trusts issued by the debtors' affiliates from 2004 to 2008.

Under the proposed settlement, the allowed claim will settle claims related to breaches of representations and warranties in the origination and securitization of residential mortgage loans in the covered trusts.

Gibbs & Bruns said the RMBS holders will support the debtors' plan as long as specified other settlements are included, and, where possible, the RMBS holders will direct the indenture trustees for the covered trusts to accept the settlement.

The settlement will not take effect for a trust unless it is accepted by the indenture trustee for that trust, and the settlement must be approved by the bankruptcy court.

Debt details

According to court documents, ResCap had $15.68 billion in total assets and $15.28 billion in total debt as of March 31.

The company's largest unsecured creditor is Deutsche Bank Trust Co. Americas of Summit, N.J., with a $473.42 million 8½% senior unsecured April 2013 notes claim, a $127.67 million 7 1/8% May 2012 notes claim, a $112.23 million 8 7/8% June 2015 senior unsecured notes claim, a $103.74 million 9 7/8% July 2014 notes claim, a $79.88 million 8½% June 2012 senior unsecured notes claim and a $59.38 million 8 3/8% May 2013 notes claim.

GMAC Mortgage Group LLC owns 100% of the company's equity securities.

Centerview Partners LLC and FTI Consulting are acting as financial advisers to ResCap. Morrison & Foerster LLP is acting as legal adviser to ResCap. Morrison Cohen LLP is advising ResCap's independent directors.

Residential Capital is a New York-based real estate finance company. The case number is 12-12020.

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