Distressed Debt: Rescap

Yesterday, May 14th, 2012, Rescap filed for bankruptcy in the Southern District of New York (Case No. 12-12020). The Honorable Judge Martin Glenn will be overseeing the proceedings. Currently the markets on Rescap look like this:

  • Recovery: 22-23.5
  • CDS: 76.5-77.5
  • 9.625% Bonds: 95-96
  • Senior Unsecured Bonds: 22-24
For those interested in tracking the docket, you can find it here:

Rescap has been a name debated and discussed in distressed circles for as long as I can remember. I remember investment banks talking about it at their distressed conferences before the crisis. It has an interesting history that we will get to shortly. The good ole days when GMAC was called GMAC.

Rescap is the 5th largest servicer of residential mortgage loans in the United States behind the likes of BofA, JPM, Wells, and CitiMortgage. Rescap and non debtor but affiliated Ally (AFI) are the 10th largest originator or mortgages in the country. The bankruptcy plans lays it out pretty clearly: They will be selling down the assets and the assets they cannot sell will be run-off/wound down over time. 

The corporate structure chart here is simply fantastic. It spans 6 pages which I've reproduced, into one Frankenstein sort of job with my MS Paint skills:

Exhibit 7 in the First Day Affidavit shows the history of Rescap and Ally Financial, now 74% owned by the U.S. government, from 2007 until the petition date. Its a fascinating read. Interesting fact: "Since January 1, 2007, AFI has made capital contributions of approximately $10.3 billion to ResCap."

For those that have not seen the Houlihan Valuation here are the salient components.  First the assets that are pledged to the Ally Secured Facility the the Junior Secured Notes:

And the waterfall with footprints in text below:

The takeaway: According to this analysis, Total recovery to the 3rd lien notes is 105% with 12 points coming from an unsecured deficiency claim which is based on an assumption of:
  • $600M admin and priority claims
  • $9B of contingent liability claims (reps and warranties) -> Higher than the market was thinking
  • $1.4B of other general unsecured claims
Bloomberg reports that noteholders of the the 3rd lien include Paulson & Co and Appaloosa Management. It has also been reported that Berkshire owns a substantial amount of Rescap debt across the structure and over the past few years, many reports have surfaced that Berkshire was interested in purchasing parts (or possibly all) of ResCap.  

On the Ally conference call today, Ally CEO Michael Carpenter stated:
In addition, ResCap entered into a comprehensive settlement agreement between Ally and ResCap that is subject to confirmation by the bankruptcy court. I'll get into it in a bit more detail in a minute, but importantly it contains provisions to release Ally both from theoretical claims from ResCap and third-party claims. 
For years people have been talking about the ability for Rescap to bring down Ally (in fact the GMAC ring fence originially was designed to protect Rescap from GMAC believe it or not).  Carpenter goes on to say:
The settlement agreement, which is subject to court approval, what it provides for Ally is first of all, the release of all claims between Ally and ResCap. Let me touch on that for a minute. Those of you who've heard me talk about two or three times have heard me repeatedly say, Ally and ResCap are two separate companies. 
And ResCap's separability is ensured by the fact that historically it's been an SEC registrant, and the disclosures associated with that, but it has the Board of Directors with independent member. There are operating agreements that the various contractual contracts between, having to do with the servicing business are clearly contracts with ResCap not with Ally. And for all these and many other reasons, we believe that the liabilities of ResCap do not penetrate to Ally.
A number of questions followed on the legacy liability issues and how it relates to Ally. 

What I think you'll see here is the unsecured bonds continue to leak after technical with the CDS auction and funds unwinding their basis packages (long protection, long cash) correct themselves and then you'll get litigation focused funds coming in (if they already not have) and trying to buy as many bonds as possible in a Tribune like trade. Think the argument goes, Rescap sold Ally these assets:
  • Health Care Finance Business
  • Resort Finance Business
  • Canadian Lending Operation
  • IB Finance
  • US and UK broker-deal operations
And Cerberus these assets:
  • Model Home Finance Business
  • Securities backed from Freddie / Fannie
as well as its ownership of Ally Bank moving to AFI.  And in exchange it didn't get reasonably equivalent value. The look back period might be the only thing saving AFI here. I remember quite often the term coercive exchange being thrown around as well which can't really help anyone's case.

Let's think about the incentives here: Ally wants to do its IPO for various reasons. US Gov't wants to get paid back. Minority equity holders want liquidity. Management is probably getting a bonus if they do it. The discovery process to investigate these claims going back a number of years will take lots and lots and lots of time and money.  And given that that class is ~$1 billion a 10 point tip would only be $100M relative to Ally's balance sheet which is many many times larger. 

The unsecured bonds here have always been illiquid with legacy holders that did not participate in the coervice exchanges as well as basis package players. The bonds traded at 50 +/- 10 points at the beginning of the year.  At 10 point tip there is only a 20% boost. A 10 point tip on a bond priced in the teens / 20 is much more appealing. In addition, you have the optionality in the reps and warranties claim coming in markedly lower than being forecasted today.  

I've been asking around to see if any of the unsecured bond holders have started organizing or talking; if you hear anything, let me know. 


John,  5/24/2012  

If you don't mind, where did you find the HL valuation?

Financialpolicy 5/28/2012  

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About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.