Ally Financial Inc. (GJM: Quote) said Monday that its troubled mortgage unit Residential Capital LLC has filed for Chapter 11 bankruptcy, paving the way for the auto lender to focus on its profitable auto finance and banking operations.
The company also said it is exploring strategic alternatives for its international business as part of strengthening its longer-term financial profile. Its international operations includes auto finance, insurance, and banking and deposit operations in Canada, Mexico, Europe, U.K. and South America.
Ally expects to record a charge of about $1.3 billion in the second quarter of 2012, related to the ResCap bankruptcy filing.
Ally, the former financing unit of automaker General Motors Co. (GM), has paid about $5.5 billion to the U.S. Treasury, enabling the taxpayer to recover about one-third of the investment made in the company.
Upon successful completion of the strategic initiatives, the company expects to have returned a total of two-thirds of the taxpayer's investment.
Ally is 74 percent owned by the U.S. government after it received a bailout of more than $17 billion during the financial crisis, as part of the government's broader rescue of the auto industry. Ally still owes about $12 billion to the U.S. Treasury.
ResCap said in connection with the filing, it has reached agreement with certain of its key creditors, including Ally, on terms of a prearranged bankruptcy plan.
Michael Carpenter, Chief Executive Officer of Ally Financial said, "The action by ResCap will enable Ally to achieve a permanent solution to its legacy mortgage risks and put these issues behind us."
Ally said that Ally Bank and all its other entities are not part of the ResCap bankruptcy filing and there will be no interruption to their business operations.
Ally said that as part of its efforts to support ResCap's stability during the Chapter 11 process, it would make cash contribution of $750 million to the ResCap estate. The company will also make a stalking horse bid for up to $1.6 billion of ResCap-owned mortgages.
Further, Ally will provide ResCap a $150 million debtor in possession or DIP financing facility and support ResCap's consumer lending originations during the bankruptcy process.
Nationstar Mortgage Holdings Inc. (NSM: Quote), a mortgage-servicing company majority owned by Fortress Investment Group LLC (FIG: Quote), will make a "stalking horse" bid valued at about $2.4 billion for ResCap assets.
ResCap has also obtained support from the ad hoc steering committee representing ResCap's junior secured notes and other noteholders representing $781 million in debt.
ResCap has also reached settlements with institutional investors who hold certain mortgage-backed securities issued by its affiliates, subject to approval by the bankruptcy court. The settlements are expected to enable ResCap to emerge from bankruptcy by year-end.
As the result of filing, ResCap will be deconsolidated from the company's financial statements and its equity interest in ResCap will be written down to zero, Ally said.
In Monday's regular session, GJM is trading at $23.07, down $0.28 or 1.20 percent on 8,663 shares.
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by RTT Staff Writer
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