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ResCap Lands in Bankruptcy

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Ally Financial Inc. has been considering the possibility of throwing Residential Capital LLC into bankruptcy for three years. Today, the auto-finance giant made the plunge. Joining ResCap in bankruptcy court were several other former big names in mortgage lending.

Back in 2007, an analyst for GimmeCredit wrote that ResCap’s parent could decide to send the unit into bankruptcy.

Then-parent GMAC LLC discussed the possibility of a ResCap bankruptcy in early 2009 and how GMAC might be impacted from such an event.

On Monday, such an event took place.

ResCap filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code in U.S. Bankruptcy Court for the Southern District of New York, Ally announced.

Also filing petitions were 27 other Ally entities including former online lender ditech.com, GMAC Mortgage LLC and wholesale lender Homecomings Financial LLC, which closed down in September 2008.

The bankruptcy enabled Ally to avoid billions of dollars in support to ResCap. It will also help preserve more than 3,500 jobs.

The pre-packaged bankruptcy plan includes agreements with key creditors. In addition, Ally said it will make a cash contribution of $750 million to the ResCap Chapter 11 estate once the plan is confirmed. It will also provide a $150 million debtor-in-possession financing facility and a stalking horse bid of up to $1.6 billion on ResCap-owned mortgages that are currently marked at 45 percent of unpaid principal balances.

Ally Chief Executive Officer Michael Carpenter said in the statement that the bankruptcy, along with other strategic actions outlined in the announcement, “will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us.”

ResCap’s origination and servicing platforms are expected to operate normally during the bankruptcy process.

“A key feature of ResCap’s pre-arranged Chapter 11 plan is proposed settlements among Ally, ResCap’s Chapter 11 estates and certain of ResCap’s creditors that provide for the release of, among other things, 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,” the news release said. “The settlements also contain milestones for ResCap to emerge from Chapter 11 by year-end.”

Ally said ResCap will be “deconsolidated” from its financial statements, and equity in ResCap will be written down to zero. A $1.3 billion charge will be taken in the second quarter. The charge includes the write-down of the ResCap interest, the cash contribution and $130 million tied to the establishment of a mortgage repurchase reserve.

The bankruptcy filing, which is “aimed at strengthening [Ally’s] longer term financial profile and accelerating repayment of the U.S. Treasury’s investment,” came despite a bondholder warning in January that “a forced ResCap filing would be a big mistake and create significant litigation against Ally.” The group claimed to hold more than $800 million of secured ResCap bonds.

“ResCap has also obtained support for its prearranged Chapter 11 restructuring from the ad hoc steering committee representing ResCap’s junior secured notes, as well as other certain noteholders, and to date has affirmative support from entities holding $781 million of these notes,” today’s statement said. “In addition, institutional investors in residential mortgage-backed securities issued by ResCap’s affiliates and, at present, holding more than 25 percent of at least one class in each of 290 securitizations have agreed to support ResCap’s reorganization. These 290 securitizations (out of a total of 392 outstanding securitizations with an original principal balance of $221 billion) have an aggregate original principal balance of more than $164 billion.”

ResCap missed a semi-annual interest payment that was due April 17 on $1.75 billion in indenture notes with a remaining principal balance of approximately $473 million, according to a Form 8-K filing last month with the Securities and Exchange Commission. But the filing noted that the failure to pay interest by the interest payment date did not become an “event of default” unless it continued for at least 30 days.

Residential loan production was $56 billion last year at Ally — a far cry from the $179 billion in originations reported for 2003. First-quarter 2012 production amounted to less than $9 billion.

Ally noted that it is also exploring strategic alternatives for all of its international operations.

Ally said it has paid the Department of the Treasury $5.5 billion so far, and the strategic actions announced Monday are expected to help it eliminate two-thirds of the Treasury’s investments. As of the end of last year, the Treasury’s stake in Ally was 74 percent.

In. re. Residential Capital LLC.
Case No. 12-12020, May 14, 2012 (U.S. Bankruptcy Court for the Southern District of New York).

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