By Joseph Checkler
NEW YORK--Residential Capital LLC's restructuring chief said on
Wednesday that claims between the mortgage lender's units weren't
given much thought during settlement talks with creditors and
parent Ally Financial Inc.
On the second day of court hearings on ResCap's liquidation
plan, Chief Restructuring Officer Lewis Kruger was questioned by a
lawyer representing dissident holders of junior secured bonds about
these so-called intercompany claims. The bondholders say their
holdings are secured by these claims to the point that they should
be classed as being "oversecured," which would entitle them to
hundreds of millions of dollars in interest accrued since ResCap's
May 2012 filing for Chapter 11 protection from creditors. But
ResCap's creditor payback proposal treats those claims as
worthless, mostly because of how many outside creditor
constituencies had to be considered in settlement talks.
While the hedge funds holding these bonds are expected to be
paid in full for the $1.1 billion in principal and interest accrued
before the bankruptcy filing, they're fighting for payment of
additional interest accrued after ResCap filed for Chapter 11
protection. Asked if he had any problem with the junior bondholders
being paid interest for the period following the filing, Mr. Kruger
appeared non-committal, saying just: "God bless 'em."
The Chapter 11-exit proposal from ResCap, a subsidiary of
government-controlled Ally, has the support of all the company's
major creditors except the junior secured bondholders. After they
were deemed "undersecured" and not entitled to the additonal
interest in the first phase of a trial on the matter, Judge Martin
Glenn of U.S. Bankruptcy Court in Manhattan allowed them to make
the case that their bonds are secured by claims ResCap's units have
against one another. If they prevail, they could be deemed
"oversecured," which would trigger payment of the interest accrued
post-bankruptcy.
The dissident bondholders also questioned Thomas Marano,
ResCap's former chief executive and current chairman, as well as
Ally Chief Executive Michael Carpenter.
Judge Glenn has set aside six days for hearings on the plan,
which is based largely on a settlement ResCap and most of its
creditors reached with Ally. Under the deal, Ally agreed to pay
$2.1 billion to settle claims that it had set ResCap up for
failure.
Most major objections to ResCap's Chapter 11-exit plan have been
settled, except for that from the dissident bondholder group, which
is made up mostly of hedge funds, including Aurelius Capital
Management LP and Davidson Kempner Capital Management LLC. Warren
Buffett's Berkshire Hathaway Inc. owns more than $900 million of
those same notes but isn't a part of the group fighting for the
additional interest payment, though it could benefit should the
dissidents win.
Under ResCap's restructuring plan, most unsecured creditors
would receive around 35 cents on the dollar. The junior secured
bondholders would get paid in full. Another key settlement in the
case gives holders of more than a million ResCap mortgages a $7.3
billion allowed claim, which in a best-case scenario would net them
$700 million in cash, according to court papers.
ResCap, once one of the country's largest mortgage servicers and
mortgage lenders, filed for Chapter 11 protection in May 2012 as
litigation over soured mortgage securities mounted and bond
payments loomed. The move was intended to help Ally, which isn't
part of the bankruptcy, cut its ties with ResCap and focus on
repaying the federal bailout it received during the financial
crisis.
During its bankruptcy, ResCap struck deals to sell
mortgage-servicing platforms and loan portfolios as a part of
bankruptcy auctions that generated $4.5 billion in proceeds.
When ResCap first filed for Chapter 11 protection, Ally was set
to pay $750 million to settle the ResCap claims but later agreed to
the $2.1 billion deal after a court-ordered examiner concluded that
while Ally didn't set up ResCap for failure, as some creditors have
charged, the $750 million settlement would have been too low.
When he took the stand Wednesday, Mr. Carpenter, Ally's CEO,
said he still believes the ResCap creditor claims were "very
weak."
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Joseph Checkler at joseph.checkler@wsj.com
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