ResCap Chapter 11: Enter The Mediator

ResCap Chapter 11: Enter The Mediator

A mediator was appointed to assist in the plan negotiation process in the Chapter 11 cases of Residential Capital, LLC.  The appointment came seven months after ResCap, a subsidiary of ALLY FINANCIAL, INC. (PINK:ALFI), sought protection under Chapter 11, after becoming a victim to the collapse of the residential market that rocked the country some years ago. Prior to filing for bankruptcy, ResCap was the fifth largest servicer of residential mortgage loans in the United States, servicing approximately $374 billion of domestic residential mortgage loans and working with more than 2.4 million homeowners across the country.

ResCap filed for bankruptcy in order to sell all or substantially all of its assets, including its mortgage loan origination and servicing business, and its “legacy” portfolio consisting mainly of mortgage loans and other residual financial assets. The company was already in talks with potential buyers of its assets prior to filing for bankruptcy. From May until November this year, the sale process was robust, with the initial buyers being overbid and the initial bids increasing as a result of the competitive sale process. Finally, in late November, the bankruptcy court overseeing ResCap’s Chapter 11 case approved the sale of the mortgage loan origination and servicing business to Ocwen Loan Servicing, LLC and Walter Investment Management Corporation for $3 billion, and the sale of the legacy loan portfolio to Berkshire Hathaway for $1.5 billion. The asset sales, which are subject to the satisfaction of closing customary conditions, are expected to close in the first quarter of 2013.

The appointment of a mediator was a welcome development in ResCap’s case as almost all parties-in-interest are at odds with each other, especially with respect to the pre-bankruptcy plan support agreement ResCap entered into with its parent and a select group of creditors. Some unsecured creditors complained that the pre-bankruptcy support agreement does not provide adequate resolution on allegations that ALLY FINANCIAL, INC. (PINK:ALFI) stripped ResCap of its valuable assets. This contention is being investigated by an examiner appointed earlier in ResCap’s case. The examiner was appointed at the behest of Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), who, in court papers, disclosed that it holds more than 50% of ResCap’s outstanding unsecured bonds and more than 40% of the company’s junior secured bonds.

When ResCap filed for bankruptcy, its assets were valued at $15.7 billion, with $612.5 million and $275.5 million in unrestricted and restricted cash, respectively, as of its May 14 Petition Date. ResCap and its affiliates were also issuers of $2.1 billion of secured and $972.2 million of unsecured publicly traded U.S. dollar, Euro and U.K. Sterling-denominated notes. In May, analysts were positive that hedge fund investors, including Paulson & Co. and David Tepper’s Appaloosa Management, will recover up to 100 cents on the dollar under ResCap’s assets sales.  Both Paulson and Appaloosa owned ResCap junior secured bonds. Paulson and David Tepper’s Appaloosa have also teamed up with other investors, including Silver Point Capital, LP, and Davidson Kempner, to form an ad hoc group of noteholders. Analysts likened ResCap to Washington Mutual and Nortel Networks, who were able to pay off distressed investors despite their bankruptcy cases.


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